Document of The World Bank PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 11.9 MILLION (US$ 15.0 MILLION EQUIVALENT) TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 11.9 MILLION (US$ 15.0 MILLION EQUIVALENT) TO THE REPUBLIC OF KENYA FOR A Report No: KE PUBLIC SECTOR MANAGEMENT TECHNICAL ASSISTANCE PROJECT July 6, 2001 AFTI2 Public Sector Reform and Capacity Building Unit Country Department 5 Africa Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 6, 2001) Currency UJnit = Kenya Shilling (KES) KES I = US$0.013 US$1 = KES FISCAL YEAR July 1-June 30 ABBREVIATIONS AND ACRONYMS AfDB AO APL BP C&AG CAS CDF CFAA CIDA CSRP DFID DPM EU GDP GOK GP GPN HFS IAPSO IC ICB ICPAK IDA IDCRP IDF IFMIS IP IPPD IPRSP IT KACA KES KIA LACI LCS LSRCC LSRP MOFP African Development Bank Authorized Officer Adaptable Program Lending Bank Procedures Controller and Auditor-General Country Assistance Strategy Comprehensive Development Frarnework Country Financial Accountability Assessment Canadian International Development Agency Civil Service Reform Programme Department for International Development Directorate of Personnel Management European Union Gross Domestic Product Government of Kenya Good Practices General Procurement Notice High Fliers' Scheme Inter-Agency Procurement Services Office of the UNDP Individual Consultants International Competitive Bidding Institute of Certified Public Accountants of Kenya International Development Association Institutional Development and Civil Service Reform Project Institutional Development Fund Integrated Financial Management Information System Implementation Progress Integrated Payroll and Personnel Data Base Interim Poverty Reduction Strategy Paper Information Technology Kenya Anti-Corruption Authority Kenya Shillings Kenya Institutite of Administration Loan Administration Change Initiative Least-Cost Selection Legal Sector Reform Coordinating Committee Legal Sector Reform Program Ministry of Finance and Planning

3 MTPBP Medium-Term Pay and Benefits Policy MTEF Medium Term Expenditure Framework NAO National Audit Office NGO Nongovernmental Organization OD Operational Directive OMS Operational Manual Statement OP Operational Policy OPN Operations Policy Note OAG Office of the Attorney General PBP Pay and Benefits Policy PCD Project Concept Document PCU Project Coordination Unit PE:OM Pay and Emoluments: Operations and Maintenance PMR Project Management Reports PPD Public Procurement Directorate PPF Project Preparation Facility PS Permanent Secretary PS/SC Permanent Secretary, Secretary to the Cabinet PSC Public Service Commission PSD Public Sector Development PSM-TAP Public Sector Reform-Technical Assistance Project PSRCU Public Sector Reform Coordinating Unit QCBS Quality- and Cost-Based Selection RFP Request for Proposal SA Special Account SASES Selected Accelerated Salary Enhancement Scheme SEPS Senior Executive and Professional Service SIDA Swedish International Development Agency SOE Statement of Expenditure SWG Sectoral Working Group TA Technical Assistance TOR Terms of Reference TTL Task Team Leader UK United Kingdom UNDB United Nations Development Business UNDP United Nations Development Program VERS Voluntary Early Retirement Scheme Vice President Country Director Sector Manager Task Team Leader Callisto Madavo Harold Wackman Brian Levy Harry Garnett

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5 KENYA Public Sector Management Technical Assistance Project CONTENTS A. Project Development Objective Project Development Objective Key Performance Indicators... 3 B. Strategic Context Sector Related Country Assistance Strategy (CAS) goal supported by the project Main Sector Issues and Government Strategy Sector Issues to be Addressed by the Project and Strategic Choices... 9 C. Project Description Scmmary Project components Key Policy and Institutional Reforms to be Sought Benefits and Target Population Institutional and Implementation Arrangements Financial Management Procurement D. Project Rationale Project Alternatives Considered and Reasons for Rejection Major Related Projects Financed by the Bank and/or other Development Agencies Lessons Learned and Reflected in Proposed Project Design Indications of Borrower Commitment and Ownership Value Added of Bank Support in this Project I E Summary Project Analysis Economic Financial Technical Institutional Environmental Social Safeguard Policies Business Policies F. Sustainability and Risks Sustainability Critical Risks Possible Controversial Aspects G. Main Loan Conditions Effectiveness Conditions H. Readiness for Implementation Compliance with Bank Policies.24 Annex 1: Project Design Summary.. 25 Annex 2: Detailed Project Description.. 30 Annex 3: Estimated Project Costs.. 42 Annex 4: Cost-Benefit Analysis Summary.. 43

6 Annex 5a: Financial Summary Annex 5b: Financial Assessment Annex 6: Procurement and Disbursement Arrangements Table A: Project Costs by Procurement Arrangements Table Al: Consultants Selection Arrangements Table B: Thresholds for Procurement Methods and Prior Review Table C: Allocation of Credit Proceeds Annex 7: Project Processing Schedule Annex 8: Documents in Project File Annex 9: Statement of Loans and Credits Annex 10: Country at a Glance Annex 11: Letter of Sector Policy from the Government of Kenya Annex 12: Lessons Learned From the Predecessor Institutional Development and Civil Service Reform Project MAP(S) IBRD 26150R

7 KENYA Public Sector Management Technical Assistance Project Project Appraisal Document Africa Regional Office AFTI2 Date: July 6, 2001 Team Leader: Harry Garnett Country Manager/Director: Harold Wackman Sector Manager/Director: Brian Levy Project ID: P Sector: Public Sector Management Lending Instrument: TA Theme(s): Capacity Building for Public Service Reform Poverty Targeted Intervention: N i 1. IDA GOK Total Commitment Closing US$ m % US$m US$m Date Date Loan/ % The Republic of Credit. Kenya Project Financing Data [] Loan [x] Credit [] Grant [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$m): 15.0 million Proposed terms: Standard Credit [ ] Multicurrency [ 3 Single currency Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5% Service charge: 0.75% $ope. 1- Fordo T-T Government IDA Total: Borrower: The Republic of Kenya Responsible agency(ies): Directorate of Personnel Management

8 -2 - Estimated disbursements TBank FY/US$M): Annual Cumulative Project implementation period: Expected effectiveness date: October 31, 2001 Expected closing date: December 31, 2004 Implementing agency: Directorate of Personnel Management Contact person: Mr. James E.O. Ongwae, Permanent Secretary, Directorate of Personnel Management Address: Office of the President, DPM, Harambee House, Nairobi Tel: (254-2) Fax: (254-2) agpsd@africaonline.co.ke

9 - 3 - A. Project Development Objective 1. Project Development Objective The principal objective of the Public Sector Management Technical Assistance Credit (PSM-TAP) is to improve governance by putting in place systems and human resources capacity that are the necessary conditions for achieving greater fiduciary responsibility and reducing corruption in the public service. 1. The project focuses on improving accountability by introducing more effective institutions and systems of accountability, and building the capacity to implement those systems. Project activities include: * implementing the Medium Term Expenditure Framework (MTEF) * strengthening government finance and accounting * improving internal auditing * strengthening the Auditor-General's Department * reforming and capacity development in procurement As a result of these systems reforms and the capacity building, a revived Kenya Anticorruption Authority (KACA), the Auditor General and the Public Accounts Committee will find it easier to track the money in their investigations and to hold responsible parties accountable. 2. By helping to link pay to performance, and, over time, laying the basis for improving pay in a sustainable way, and making recruitment and advancement more transparent, the project will help to limit patronage and reduce the incentives and opportunities for rentseeking. 3. The project is also "keeping a foot in the door" for legal and judicial reform, facilitating a continuing dialogue with the Chief Justice and the Attorney-General. 4. Finally, the project will continue to support the Change Team. However, the project will also take steps to create a much larger cadre of reformers, paid for by the national budget, through the creation of a senior executive and professionals service. This three-year project supports the second phase of a long term reform process. It will build upon progress made under the recently completed Institutional Development and Civil Service Reform Project. 2. Key Performance Indicators These indicators have been designed to be realistic and within the manageable interest of the project, as well as relevant measures of the achievement of the development objective.

10 -4 - Public Service reform * Studies to be completed on services to be privatized, contracted out or commercialized and sound exit plans prepared following completion of these studies by December, * Size of civil service reduced in accordance with such exit plans by June * Develop and begin to implement an affordable pay and benefits policy within the Medium Term Expenditure Framework by June * Integrated Payroll and Personnel Database to be fully operational in all ministries and Teaching Service by Public Financial Management * Core staff in ministries/departments trained to operate the MTEF in respective ministerial budget processes by * MTEF computer information system linked to IPPD and Integrated Financial Management Information System by * 75% of professional positions in Controller and Auditor General's (C&AG) office filled with staff trained to post-graduate level or a minimum of part li of CPA (K) professional standards by * 60% of professional accounting positions (Chief Accountant and above) across Government trained to professional standards by * Develop Internal Audit Manual by June * 30% of Internal Audit Staff to be trained on the application of Computer Assisted Audit Techniques (CAATs) by December Procurement Reform * Operations of PPD enhanced through the completion of procurement of equipment financed by the project by December * Procurement capacity of public procurement entities assessed and appropriate training programs developed by June 2002 and training programs implemented by June * Public entities to have established tender committees as per the procurement regulations by June * Procurement Regulations applied by all public entities by June * Public Procurement Complaints, Review and Appeals Board established and operational by December Legal Sector Reform * Pilot program on case management established; incidence of established number of lost files in pilot program reduced by 60% by December 2004.

11 -D5- * Average time taken from filing to disposal of commercial cases reduced from 5 years in 2000 to 2 years in the pilot program. * Revised chapters of the Laws of Kenya (those that affect public management) available on CD-ROM and in print by December * Pilot program on Recording of Court Proceedings completed by December 2004 and ready for replication throughout the country. Project Coordination and Change Management * Quarterly project reports on progress, plans, issues, finance and accounting, and procurement are submitted on time and of high quality from 2001 to end of project. * 70% of contracts signed on time, in accordance with procurement plans for whole of 2003 to end of project. B. Strategic Context Public sector reform is not new to Kenya. The country first embarked on administrative reformn following independence in The first wave of reform efforts focused on "Kenyanization" of staff of the inherited colonial administrative system. Kenyanization involved "crash" training programs for middle and senior-level managers. The Kenya Institute of Administration (KIA) played a major role in the delivery of the training activities. The subsequent waves of administrative reform in the 1970s and 1980s focused on structural reorganization, improvement of pay and conditions of service, adoption of improved management systems and procedures, and public expenditure management. Two of these reform efforts have had long lasting influence on the evolution of public sector management in the country. First, the 1971 Ndegwa Reform Commission's recommendation that allowed civil servants to also participate in business (without adequate enforcement of rules guarding against conflict of interest). This is now commonly cited as a major cause of corruption in the public service. Second, the 1982 Commission on Public Expenditure Management exposed waste and mismanagement that were the consequences of lax expenditure control systems and procedures. In the 1990s two key reform initiatives were launched - one on institutional development and civil service reform and the other on parastatal reform and privatization. Both efforts were supported by World Bank credits: Institutional Development and Civil Service Reform Project for US$ 25 million, approved in 1994 (Credit 2671-KE); and Parastatal Reform and Privatization Project for US$ 23 million, approved in 1992 (Credit 2440-KE). Both efforts achieved only modest results. As part of the Institutional and Civil Service Reform Project, Government produced a strategy document, Civil Service Reform Medium Term Strategy (CSRP 11), in April The distinguishing feature of the strategy is that it situated civil service reform within a broader and comprehensive public sector reform agenda that would include a medium term expenditure framework, public financial management, Teachers' Service reform, parastatal reform and privatization, and local government reform.

12 - 6 - In July 1999, the Government announced a major public sector reform initiative, with particular emphasis on addressing declining productivity in the civil service. The President appointed six technocrats drawn from the country's parastatal and private sectors and international organizations to leadership positions in the civil service. The position of Permanent Secretaries as accounting officers of their respective ministries was clarified. While they would work closely with ministers who are the political heads of ministries and departments, as accounting officers they would be directly responsible for the management of the resources of their respective ministries and departments to: (i) the President through the Head of the Public Service; and (ii) Parliament through the established parliamentary committees that are responsible for holding the Executive accountable. The full dimensions of the public sector reforn that was announced in July 1999 emerged at two successive workshops in October, 1999 and February, 2000 and a Consultative Forum in March A new "Strategic Plan for Public Sector Reform" was prepared by Government in January, 2000 as the background paper for the workshop of February, The Plan was updated in November, The strategic plan shows that Government is determined to take a holistic view of public sector reform. It spells out a vision of reform as well as the purpose and goals of the reform effort. The following four main elements of public sector reform are highlighted in the strategic plan: * Public Sector Management Reform * Legal Sector and Judicial Reform * Enhanced Integrity and Accountability * Interaction with Civil Society. 1. Sector Related Country Assistance Strategy (CAS) goal supported by the project Country Assistance Strategy (CAS) Report No. IDA/R Date of Discussion: September 24, The World Bank's Country Assistance Strategy notes (para ii) that, "In Kenya, poor governance has systematically undermined the independence, capacity and accountability of the public sector. This has resulted in the poor management of public resources, corruption, the weakened rule of law, and uneven implementation of policy reforms, which are all inimical to economic growth, equity and sustained development." Upon approval of the Country Assistance Strategy (CAS), the Bank expected (para 31) that reforms "will involve reducing the number and functions of ministries, commercialization, divestiture or closure of non-core functions, rationalizing staffing levels in the public sector, public sector pay reforms, aggressive and transparent privatization of major parastatal firms, and establishing appropriate regulatory structures." At about the same time, Government

13 -7 - was expressing interest in follow-on projects to be supported by the Bank in respect of both civil service reform and privatization of selected public enterprises. This project will contribute to the Bank's country assistance goal for public sector management by addressing: * public sector restructuring (component 1); * public expenditure management (component 2); and * strengthening accountability (components 2, and 3). A new CAS covering the first three years of this project is under preparation. 2. Main Sector Issues and Government Strategy An interim Poverty Reduction Strategy Paper (IPRSP [Report No. IDA/SecM ]) was discussed by the Board on August 1, The IPRSP for has five basic components and policy objectives: * to facilitate sustained economic growth * to improve governance and security * to increase the ability of the poor to raise their incomes * to improve the quality of life of the poor * to improve equity and participation The IPRSP noted that the country's macroeconomic strategy aims at progressively increasing real per capita GDP growth, while keeping inflation below five percent, gradually increasing foreign exchange reserves, and maintaining the current account deficits at sustainable levels. Government made good governance a cornerstone of the IPRSP, with a particular focus on the overall public sector reform program. Government is also committed to taking the steps necessary to improve accountability and combat corruption. These include increasing the transparency of procurement procedures and increasing the effectiveness of accounting and auditing procedures through the introduction of an Integrated Financial Management Information System (IFMIS). There is currently a much better focus in the Ministry on the supervision of public financial management than in the past. Furthermore, two bills aimed at enhancing integrity and honesty in the public service are scheduled for presentation to Parliament in July 2001: the Public Service Code of Conduct and Ethics Bill, 2001, and the Anti-corruption and Economic Crimes Bill, A constitutional amendment to give the Kenya Anti-Corruption Authority (KACA) prosecutorial powers and effective independence will also be presented. In addition, the reform program seeks to strengthen the Office of the Controller and Auditor General by rationalizing its functions and increasing its capacity. Public sector reform has been spear-headed over the last two years by the "Change Team," a small group of senior technocrats engaged on contract from the private sector and international organizations. Some members of the Team have returned recently to their

14 - 8 - parent organizations, but Government remains committed to reforming the public service. This is clear from the Letter of Sectoral Policy in Annex 11, which was signed by the Ministry of Finance. In addition, the new Head of Public Service has prepared a Cabinet Paper on "A Strategy for Performance Improvement in the Public Service." This paper embraces several key reform measures including rationalization, pay reform, resultsoriented management, service charters, improving the management of the recurrent budget, and the improvements in public financial management to be supported by PSM-TAP. Three members of the current Change Team supported by the Bank are in the Ministry of Finance, where most of the accountability improvements supported by PSM-TAP will be centered. In addition, the Permanent Secretary in the Ministry is a member of the Change Team supported by a Trust Fund. He has been responsible for this year's budget, and has led the preparation of the June 2001 PRSP, both of which are regarded by many as improvements over earlier versions. Reform of the public administration sector figures as one of the priorities in the new PRSP. Objectives include a leaner, efficient and more productive public sector, strengthening the audit of public finances, improved budgeting and public finance, and prompt accounting of Government finances. PSM-TAP will support the achievement of all of these objectives. The Government has undertaken a functional rationalization of ministries, departments and other public agencies in accordance with national and sectoral objectives. The expected staff reduction as a result of ministerial rationalization is 32,000 civil servants over the period 2000 to 2003 (This number includes both retrenchment and natural attrition). To date, over 23,000 have been retrenched. While Government intends to restore merit-based recruitment and promotion of public servants and to set service delivery targets against which good or poor performance will be linked for rewards and sanctions respectively, Government also intends to establish and implement a comprehensive, viable and motivating pay and benefits policy for its staff. Capacity building and training of public servants will be undertaken through a medium to long-term programme to re-equip the public service with knowledge and skills to fulfill its new mandates. In a bid to improve law and order and public safety, the government will undertake a number of reform actions that should lead to increased transparency in and accessibility to dispensing justice. This will include the finalization of the on-going comprehensive review of the legal sector, the Office of the Attorney-General, the Judiciary and legal education institutions. The scope of court divisions will be expanded to include well functioning civil, commercial and family divisions in key towns throughout the country. Further, Govermment will undertake legal review of those enabling acts identified during the Ministerial Rationalization Exercise as adversely affecting efficient delivery of public services. The legal review process is therefore expected to help move the rationalization process forward. A number of ministries have already initiated preliminary work towards reviewing their enabling acts.

15 Sector Issues to be Addressed by the Project and Strategic Choices The project focuses on those areas of Government's overall strategy identified in Government's Strategic Plan for Public Sector Reform and in the IPRSP. Refined through consultative processes, these priorities have been identified as: * Reform of the Public Service * Public Financial Management, including consolidation of the MTEF process * Legal Sector Reform * Enhancing Integrity and Accountability By undertaking to support the above priorities, as defined by government, the Bank will be determining strategically to support some activities under the project in full (such as the public service reform); to share the costs of some aspects with other donors (such as the public financial management component); and in some cases not to support aspects of the reform process such as support to local government. The Bank will also support the development of a decentralization and intergovernmental relations strategy and policy framework. (A separate Technical Assistance Project to support local government reform is tentatively scheduled for FY02). The components of the Bank project follow the Africa Region's public sector reform strategy by being selective and ensuring a strong technical focus on public sector management as part of an overall development agenda. C. Project Description Summary 1. Project components Component Sector Indiative % of Total Bank- % of Costs fancing Bank- (US"M (US$M) 11nanclng Public Service Reform Civil Service Reform % % Public Financial Public Financial % % Management Management Legal Sector Reformn Judicial Reform 1.7 8% 1.2 8% PSR Coordinating Unit Other Public Sector % %,Management 2 I 1 Tota % %.

16 - 10- Component 1: Public Service Reform (US$ 8.4 million)' Objective: To create a leaner and highly motivated public service, better equipped to deliver services to the public. The Project will support: the preparation of exit plans for functions to be abolished, privatized or contracted out; the establishment of benchmarks against which to measure service delivery and public service performance; the development and implementation of service delivery surveys to monitor and report on performance; the implementation of an Integrated Payroll and Personnel Database system (IPPD) in the Civil Service and the Teachers' Service; the development of a comprehensive performance based pay scheme; the preparation and initial implementation of plans to improve pay and benefits; the preparation of options for a senior executive and professional service, and a related High Flyers' Scheme; the development of a contributory pension scheme; the preparation of medical insurance options; a training needs assessment; and, the development of a national policy framework and strategy on information technology. Component 2: Public Financial Management (US$ 7.0 million) 2 Objective: To achieve more effective and efficient utilization of public resources with enhanced accountability and transparency and to improve transparency and efficiency in the procurement of goods and services. The Project will support: the implementation in full of the Medium Term Expenditure Framework (MTEF); the linking of MTEF to IPPD and the Integrated Financial Management Information System (IFMIS); the development and implementation of a comprehensive budget management system encompassing the Treasury, all line ministries and districts; the adoption of Generally Accepted Accounting Principles (GAAP) and adherence to International Accounting Standards (IAS) and value-for-money principles; capacity building and training in the offices of the Accountant General and the Controller & Auditor General (to be renamed the National Audit Office, NAO) and the Department of Internal Audit; and the development of Computer-Aided Auditing (CAA) in the NAO. The Project will support: the creation and staffing of a Public Procurement Directorate; the enactment of a new public procurement law; the development of measures to help enforce public procurement regulations; and, the preparation of enabling instruments to legalize the appointment and operationalization of the Procurement Appeals Board. The project directly supports recommendations contained in the Kenya Country Financial Accountability Assessment (CFAA). The CFAA is pending clearance from Government, but addresses government financial planning and budgeting, accounting and financial reporting, internal control, records management and auditing. ' Includes PPF and Government contributions. 2 Includes PPF and Government contributions.

17 -11 - Component 3: Legal Sector Reform (US$ 1.7 million) 3 Objective: To establish a foundation for the achievement of timely, accessible, and responsive legal and judicial systems. The project will support: the establishment of an improved records management system for the registration and retrieval of case documents; the development and application of a better system for recording court proceedings; the development of an Improved Court Management system; the revision of all chapters of the Laws of Kenya and making the same available in CD-Roms; assistance to the Legal Sector Reform Secretariat and the regular collection and dissemination of information relating to the reforms in the legal sector. Component 4: Public Sector Reform Coordinating Unit (US$ 3.4 million) 4 Objective. To provide an efficient and effective coordinating body and process that support the reform programme across the Public Sector. The Project will support the establishment and operation of a Public Sector Reform Coordinating Unit (PSRCU) in the Directorate of Personnel Management in the Office of the President. This support will comprise: the means to continue engaging for one year key members of the Change Team who are leading Kenya's broader public sector reform exercise; and, the means to hire consultants for the duration of the Project to head the PSRCU and to strengthen it through the provision of expertise in public procurement, financial management, monitoring and evaluation, as well as the development and implementation of an Information, Education and Communications strategy and action plan. 2. Key Policy and Institutional Reforms to be Sought The project itself is seeking to support institutional reforms through restructuring the public service, providing better incentives to staff, and introducing performance management. These reforms are aiming to create a service oriented public service under which the very behavior of public servants will be transformed. That said, certain policy reforms will need to be implemented for the project to achieve its objectives. These reforms are outlined in the assumptions column of the project design summary in Annex 1: financial and accounting regulations approved by Parliament, alternative dispute and small claims mechanisms agreed to by Parliament, and the passage of the Procurement Law. 3Includes Government contributions. 4 Includes PPF and Government contributions.

18 Benefits and Target Population The program is targeted at different levels of central government which it intends to reorganize, strengthen and streamline. It will address the needs and expectations of public sector customers and society by improving both the quantity and quality of public services, while increasing the standards of transparency and supporting the fight against corruption. The project responds to the direct request for donor assistance. programme are: The benefits of the * An improved quality of life of the Kenyan people through the cost effective provision of public services; * A reduction in poverty through better targeting of services and effective implementation of policies that will promote transparency and professionalism; * Public servants in Ministries/Departments motivated to perform well based on meritocracy, equity and gradually increasing salaries and benefits; * Public servants who can be held accountable for their decisions and actions; * Policy decision making and service provision that is transparent and demand-driven; 4. Institutional and Implementation Arrangements The implementation structure and responsibilities will be as follows: Cabinet Subcommittee: A Cabinet Subcommittee will oversee the reform process. The Government will provide regular briefings to Parliament. Individual Ministers will be responsible for providing policy guidance on the public sector reform programs that fall within their Ministerial purview. Permanent Secretaries/Authorized Officers Coordinating Committee (PS/AOCC): This committee, chaired by the Head of the Public Service, will be responsible for the overall development and coordination of the public sector reform programme. All Authorized Officers (AOs) will be members. The Committee will submit quarterly reports to the Cabinet. All other reform committees will report to this committee. Public Sector Management Technical Assistance Project (PSM-TAP) Subcommittee: This subcommittee of PS/AOCC will provide guidance and coordination for the project. It will be chaired by the PS/DPM and will consist of the AOs responsible for project components. PS/SC & Head of Public Service (HoPS): The PS/SC & HoPS will maintain oversight responsibility for the implementation of the project. This oversight will be exercised through the PS/AOCC, direct reporting by the Accounting Officer responsible for the Project (PS/DPM), and direct briefings by the Public Sector Reform Coordinating Unit within which the Project Coordinating Unit will operate.

19 PS/D, DPM: The PS/D, DPM will be the accounting officer for the project. As such, he will assume the responsibilities and obligations set out in Chapter 5 of the Government Financial Regulations and Procedures of the Government of Kenya (GFRP). Accordingly, he will be accountable to Parliament. He will be responsible for the project achieving the objectives set forth in the logical framework. He will issue all Authorizations to Incur Expenditure (AIEs) to other Government Ministries or departments and will thereby assume the responsibilities set out in Paragraph of the GFRP. He will submit all requests for no objection to the Bank. He will have overall responsibility for all project financial, procurement and progress reporting, and will bring to the attention of the Bank in his reports any issues that might prevent any component of the Project from delivering its planned outputs on time and within budget. Project Coordination Unit: The PS/D, DPM will be supported by a small team drawn from the Public Sector Reform Coordinating Unit. The team will consist of a coordinator and financial, procurement and monitoring and evaluation managers. The unit will help the PS/D, DPM to meet his responsibilities as the AO for the project, and will assist the task managers in the implementation agencies with procurement, financial management, reporting, and communications. PS/AOs: The PS/AOs in each of the implementing agencies will be responsible for supporting the PS/D, DPM in achieving the results for their respective components as laid out in the logical framework. As members of the PS/AOCC and PSM-TAP Subcommittee, they will also be responsible for assisting in providing guidance and coordination. Coordinators: Coordinators in each of the implementing ministries, departments or agencies will be responsible for managing the resources provided to produce the outputs required for the project to achieve its objectives. These resources are defined in the logical framework and the project implementation plan. Each implementing agency will appoint the necessary staff to support the Coordinators. Each component of the project would be implemented according to terms and conditions acceptable to the Bank. These would generally provide the basis for time-bound action plans. Training and capacity building activities will be carried out according to agreed timetables either with government training institutions or through contracts awarded through competitive bidding. A detailed implementation plan will be agreed upon between the Government and the Bank before project effectiveness. The implementation plan will be regularly updated and discussed with the Bank during project implementation. S. Fnancial Management Project records and accounts will be maintained by qualified financial officers to reflect the operations, resources and expenditures for each project activity in accordance with sound accounting practices. The accounts will be consolidated annually into financial statements for the whole project. Supporting documentation will be made available to the Bank's Task Team Leader (TTL). For expenditures incurred on the basis of a Statement of Expenditure (SOE), all records providing evidence for such expenditures will be retained by the implementing organization for at least one year after the Bank has received the audit report

20 for the fiscal year in which the last withdrawal from the Special Account (SA) was made. The control environment of implementing agencies will be assessed and appropriate accounting and reporting systems will be developed according to Operational Policy requirements through separate technical assistance (see Annex 5b on "Financial Assessment" for more details). The implementation arrangements will be revisited on a regular basis to take into account technical and political changes as well as progress within the overall public sector reform effort. Each World Bank supervision mission will review the implementation arrangements with the Government and other contributing donors to suggest improvements or changes as necessary. 6. Procurement Procurement will be carried out through the respective Government Departments and units that are directly responsible for the components and sub-components of the Project under the coordination and supervision of the Project Coordination Unit (PCU) within the Directorate of Personnel Management (DPM). The Implementing Departments and Units will be responsible for, but not limited to, the following aspects of the procurement activities and processes of their respective components and sub-components: (1) preparation of annual work plans and procurement plans; (2) development of Terms of Reference (TOR), short-lists, and Requests for Proposals (RFP) for consulting assignments, and the preparation of bidding documents, including technical specifications for goods contracts; (3) setting up a good procurement filing system, and maintaining procurement documentation; and (4) preparation of plans for annual training programs that set out the objective of the training, areas of training, and the number of trainees, cost estimate, timing and venue (e.g. local or overseas) for each training activity. The Implementing Departments and Units will clear their plans and procurement documentation with the PCU which will play a central role in: (1) consolidating the annual plans of all components and sub-components of the Project into annual plans of the whole project; (2) vetting procurement documents prepared by the Implementing Departments and Units, and providing technical advice (when necessary) to procurement staff of Implementing Departments and Units; (3) advertising contracts (where appropriate); (4) participating in the evaluation of bids and proposals submitted by invited suppliers and consultants; (5) preparing no objection letters for the PS/Director, DPM for onward transmittal to the Bank for approval; (6) advising the PS/Director, DPM on matters pertaining to the implementation of the Project; and

21 - 15- (7) maintaining a good procurement record-keeping system. D. Project Rationale I. Project Alternatives Considered and Reasons for Rejection The Country Team considered both an Adaptable Program Lending (APL) program and a traditional Technical Assistance Credit. While acknowledging the usefulness of APL as an instrument in public sector reform efforts (references were made to the examples of Ghana and Tanzania in the Africa Region and several others elsewhere), it was agreed that the proposed three-year technical assistance (TA) was more appropriate for the Kenyan situation. The attraction of the APL is that it takes a long-term perspective of institutional reform (between 8 and 15 years) and is to be implemented over successive two to four phases. Successful implementation of the activities scheduled for the first phase is a precondition for proceeding to the subsequent phases. It was decided that such long term APL-type commitment was not appropriate in Kenya's current political and economic context. The project focuses on a small number of key systems and capacity building that are needed to improve accountability and transparency in the public service. Depending on the success of this project, an APL could be considered for a successor project. The Country Team reviewed the scope of the project and judged it to be technically feasible based on their assessment of Government's current capacity for execution. 2. Major Related Projects Financed by the Bank and/or other Development Agencies While most donors have not been actively initiating major new interventions in Kenya for the past three years, donor programs in support of public sector reform are emerging. Recent World Bank projects have focused on infrastructure, early childhood development, the environment, energy, rural development and health. While some of these projects have capacity building components, most did not have significant public sector reform or governance components. RELATED PROJECTS RATING DONOR/AGENCY Public financial management; Public service reform (remuneration support of technocrats on contract appointments and possible financing of other TAs); Legal sector reform (commercial law reform, strengthening office of Attorney-General notably legislative drafting, legal aid); Capacity building and training; Analytical studies Public financial management; Legal sector reform; Public service reform (remuneration support of technocrats on contract appointments and other DFID SIDA

22 - 16- TAs); Capacity building and training; Analytical studies Public service reform (TAs); Legal sector reform; European Union Public Financial Management (Strengthening the Office of Controller and Auditor-General and the MTEF process); Capacity building and training; Analytical studies Public service reform (remuneration support of Netherlands technocrats on contract appointments) and support for the Office of the Controller and Auditor- General Public service reform (remuneration support of UNDP technocrats on contract appointments); Public financial management (modest provision of IT equipment and capacity building in the Ministry of Finance and Planning); and legal sector reform (computerization of records management and training) Strengthening parliament and its committees CIDA, USAID, WBI Economic and Public Sector Reform U*, S IDA Local Governmnent Fiscal Restructuring (Proposed) IDA U=Unsatisfactory; S=Satisfactory *This project was rated unsatisfactory because of poor procurement and financial management performance. The proposed project has, therefore, included a Project Coordination Unit in the Office of the President which will be staffed with procurement and financial managers trained in Bank procedures. 3. Lessons Learned and Reflected in Proposed Project Design Important lessons have been learned from the past several years of Bank-financed public sector reform in Kenya and elsewhere. These lessons highlight the need to: * continue to identify and further refine the core functions of government * implement recommendations on the rationalization of ministerial structures * improve the capacity of managers and professionals in the public service * ensure there is political support for reforms at the highest level. * Emphasize a participatory approach and broad-gauged ownership of the reform process. (Attention to this lesson in the preparation of this project is reflected in Government's active role in project preparation). Other lessons point to the need to establish linkages and ensure the appropriate phasing of reforms. One of the most important lessons has been the importance of having an effective senior management structure and clearly defined roles of Permanent Secretaries in guiding the implementation of reforms.

23 The lessons learned from the Implementation Completion Report for the predecessor Institutional Development and Civil Service Reforn Project were of particular value. They include: * Government commitment during project design and implementation is essential. The Bank team worked very closely with GOK in the design of the project. * Appropriate institutional arrangements are crucialfor managing the reform process. The arrangements agreed with GOK follow those recommended in a 1998 IDCRP supervision mission and reflected in the ICR * The importance of a coherent policy design should be underscored. The project design links personnel and pay policy (a linkage not present in the past project) and both with MTEF. Many of the project's components have transparency and accountability themes: MTEF, government accounting, legal and judicial, and even the integrated pay and personnel database system. * Proper sequencing is essential. Under this project, restructuring and retrenchment will go hand-in-hand. An MTEF process will be in place to guide pay policy and restructuring. For the legal and judicial sector, the project will focus on putting some basic systems in place before concentrating on major, strategic reform. * Public procurement practices are essential to projects being executed on schedule. The project will support the establishment of a Public Procurement Directorate and will introduce a streamlined procurement process for its own operations. - A long term, strategic approach to technical assistance, which is not donor-driven, is needed to achieve sustainable results. Previous projects were predominantly focused on achieving macroeconomic targets. In most cases, these efforts failed to provide enough room or sufficient time to implement a complex reformn agenda based on institutional development and capacity building. D Strong discipline for the implementation process needs to be established to ensure progress towards achieving long term objectives and a constant re-assessment of all significant project elements. Previous public sector reforn projects have failed because of insufficient control mechanisms and weak project implementation. * More attention needs to be paid to assuring frequent monitoring of technical assistance outputs to assure their quality and to measure the overall performance of a project. Performance indicators that focus more on quality, process and behavior are needed. * Local champions who know what they want and know how to operate in the given environment are important success factors. 4. Indications of Borrower Commitment and Ownership Borrower commitment has been very high at the level of the President and the top technocrats, notably the Head of Public Service, the Permanent Secretary, Treasury, and the Permanent Secretary/Director, Directorate of Personnel Management. This has been reinforced by the President making public his views on the urgent need for public service reform, with an emphasis on tackling the problems of inefficiency and corruption. Governent has shown its willingness to undertake tough measures, as the public service

24 has been reduced from 274,000 in 1993 to 215,000 by A retrenchment plan has been developed and adopted by Government (June 2000) that involves additional removal of over 32,000 civil servants from the payroll. By the end of September 2000, over 23,000 civil servants had been removed. Safety nets are provided for the retrenchees. Furthermore, Government has articulated a quality-enhancing reform program for the leaner civil service, including pay reform and capacity building. Government has also been engaging the private sector and civil society in the discussion of public sector reform. Some workshops and public consultations on public sector reform were organized with the participation of high level government officials and representatives of private sector and civil society organizations. 5. Value Added of Bank Support in this Project IDA staff have played a catalytic role in the preparation of this program through their involvement with the Institutional Development and Civil Service Reform Credit that closed in June The Bank has, in addition to financial support, drawn attention to good African and international practices and lessons learned, and provided technical expertise. The Bank also plays a facilitating role with donors in support of the public sector reform process. Likewise, Bank experience with public sector reform projects in other countries will add substantial value to the reform process in Kenya. This applies particularly to the conceptual design of different components of the program. The proposed design herewith reflects lessons learnt from other projects, in particular the need to: 3 Take a strategic, integrated approach based on a clear vision of the role, mandate and operational objectives of the reformed public sector; * Assure the appropriate timing and sequencing of the various components of the reform agenda; * Build strong stakeholder commitment during project preparation; and to? Integrate effectively the ongoing PSM activities of other donors. E. Summary Project Analysis 1. Economic The economic issues to be addressed during project preparation relate mainly to the fiscal situation, the improvements expected through the utilization of MTEF principles and the effect of retrenchment, including the payment of retrenchment packages. Both issues were addressed under the previous project. The MTEF process is to be consolidated and the retrenchment plan needs to be faithfully implemented. The savings from retrenchment need to be allocated judiciously towards improving pay and benefits, improving the ratio of pay and emoluments to operations and maintenance (PE:OM ratio) and supporting other key, high priority government concerns.

25 Financial A key theme of the project is the cost-effective provision of high-priority public services. Improved and more efficient delivery of public services, as well as the closing of lowpriority activities should improve the overall financial position of government. Furthermnore, improved financial control and accountability will ensure better value for money, improved service delivery, and less waste, theft and corruption. The budgetary impact of the public sector reform is also being addressed during project preparation with the active involvement of the Ministry of Finance and Planning. 3. Technical The PSM-TAP will utilize lessons learned in implementing other reform programs, but the overall public sector reform program incorporates some of the trends seen in other parts of the world. These include an increased emphasis on performance management, greater professionalization of the workforce, and a focus on enhancing transparency and reducing corruption across the public service. 4. Institutional 4.1 Project Management Effective project management is essential to assure the achievement of project inputs, outputs and impact, as well as providing financial accountability with due diligence, and to conduct transparent procurement procedures in the award of contracts. The institutional arrangements for managing the project and for ensuring the sustainability of results build upon experiences gained in the previous project and from earlier stages of reform. The key executing agencies have been fully involved in the design of the current reform programme and will participate in execution and management through ministerial and departmental committees and via component-specific secretariats. Project management will be coordinated by a Public Sector Reform Coordinating Unit reporting to the PS/Director of DPM who, in turn, reports to the Head of Public Service. The new Head of Public Service is committed to the reform of the public service. She played a key role in the initial establishment of the Change Team two years ago when she was Permanent Secretary of the Ministry of Foreign Affairs and, recently, at her instruction, a paper has been prepared on "A Structure for Performance Improvement in the Public Service." 4.2 Financial Management The Public Sector Reform Coordinating Unit (PSRCU) will be responsible for ensuring that the design and administration of financial management and reporting procedures for the project will be acceptable to the Bank. Under the Coordinator, the PSRCU will be responsible for the entire financial management, accounting, and disbursement functions of the project, including the management of the Project Account, processing contracts

26 and payments for goods and services. A suitably qualified and experienced project financial officer will be recruited to participate in the development of the financial management system, including a comprehensive manual of financial procedures, chart of accounts, and fully integrated project accounting structure, using an appropriate accounting software. He will also guide and direct the financial management operations of the project. The financial management system will produce project financial statements including a summary of sources and uses of funds, special account reconciliation statement, cash withdrawal statement, and cash forecast. The chart of accounts will facilitate the presentation of summary expenditures by component, activity and disbursement category. The PRSCU will maintain accounts, make payments for eligible expenditures, manage the project account to be opened for the project, and ensure high quality preparation of project financial statements and timely submission of audit reports to IDA. Overall, the project will satisfy the Bank's minimum financial management requirements. There are also organizational risks associated with adapting and elucidating existing standards and procedures to guide internal control and accounting, with clear delegation and segregation of duties. These risks may result in unintentional errors, omissions, miscalculations, late submission of financial statements, and delays in the flow of funds. Successful implementation of the financial management action plan (Annex 5b) will, however, allow the project to satisfy the Bank's minimum requirements under OP/BP Since the designated project accounting system has not been developed, there is not yet in place a financial management system that can provide the information required by the Bank for the project management report (PMR) based disbursements as stipulated in the Loan Administration Change Initiative (LACI) Handbook. Thus, in the short-term, existing disbursement procedures, outlined in the Bank's Disbursement Handbook, will be followed (i.e., direct payment, reimbursement and special commitment, if appropriate). The appointment of a reasonably qualified and experienced project financial officer, as well as the successful implementation of the financial management action plan should facilitate the introduction of PMR-based disbursements within eighteen months of effectiveness. Actions required for attaining LACI compliance have been developed and were agreed with the borrower at appraisal. A financial management review of the program should be undertaken by a Bank financial management specialist within twelve months of effectiveness to assess progress and initiate the process of conversion to PMRbased disbursement procedures. 5. Environmental Not applicable.

27 Social As with most civil service reform programmes, there will be offsetting social effects from some aspects of the project, especially retrenchment. While a number of civil servants will leave the service, a retrenchment package has been developed to minimize instances of dire poverty as a direct consequence. Likewise, the positive impact of improved service delivery, and savings from increased effectiveness and efficiency should be felt nation-wide. The reform programme includes a review of pension schemes, medical care, housing and other social benefits to ensure civil servants receive adequate remuneration, healthcare, and old-age retirement benefits. Government has involved civil society organizations and the private sector in the discussion of its public sector strategic plan at the National Consultative Forum on the IPRSP in March The retrenchment program developed by government has included strong components to ensure equity on the basis of gender and disability. 7. Safeguard Policies SAFEGUARD POLICY RISK OF NON-COMPLIANCE Environmental Assessment (OD 4.01) N/A Natural Habitats (OP/BP/GP 4.04) N/A Forestry (OP 4.36) N/A Pest Management (OP 4.09) N/A Cultural Property (OPN 11.03) N/A Indigenous Peoples (OD 4.20) N/A Involuntary Resettlements (OP 4.30) N/A Safety of Dams (OP 4.37) N/A Projects on International Waterways (OP 7.50) N/A Projects in Disputed Areas (OP 7.60) N/A 8. Business Policies BUSINESS POLICY Financing of recurrent costs (OMS 10.02) Cost sharing above country three-year average (OP/GP/BP 12.10) Retroactive financing above normal limits (OP/GB/BP 12.10) Financial Management (OP/B 10.02) Involvement of NGOs (GP 14.70) Other APPLICABLE YES NO NO YES NO NO F. Sustainability and Risks 1. Sustainability The Institutional Development and Civil Service Reform Project (Credit 2671-KE) that closed on June 30, 2000 was extended for a final nine months in September 1999 because Government was evincing a strong commitment to tackling the problems of inefficiency and corruption in its public sector institutions. Some of the actions already implemented include

28 -22 - the reduction in the number of ministries from 27 to 15; clarifying the respective roles of Ministers and of Permanent Secretaries as Accounting Officers and making Accounting Officers in ministries and departments accountable to Parliament and fully responsible for managing the finance and personnel functions in their ministries; and the removal of corrupt and/or inefficient managers from leadership positions in several ministries and parastatals. A Medium Term Expenditure Framework has been introduced to ensure that government budgets are effectively related to policy priorities over a rolling three-year time frame. Government also prepared a retrenchment plan to be implemented during FY2000/2001 and 2002/2003. Sustainability of the reform program will depend upon the continued commitment of the political and technocratic leadership teams and the cascading of support to middle management officers and throughout the entire public service. Likewise, sustainability over the longer term will be predicated on ownership of long term reforms at all levels of the machinery of government and building adequate local capacities for improved service delivery. 2. Critical Risks The project carries high risk in some areas, especially those that are closely linked to political circumstances and related to the capacity to implement a comprehensive reform prograrn. The design of the reform program reflects this overall risk assessment, particularly in the implementation arrangements, sequencing, and accountability mechanisms. In addition, the project takes account of the current uncertain policy environment by focusing on improving basic systems of accountability rather than major policy reforms. RISK RISK ~~~~RIS MIIIATION Change in Government (or key H Ensure broad ownership and "buy government officials) in" from all levels of government and civil service. Personalization of reforn program, or M Ensure meritocratic appointments components thereof and professional capacity of administrative and technical leaders. Poor capacity and failure of training H Provide sufficient support to programs public institutions involved in training and ensure access to private training. Too complex and difficult to manage M Focus on high priority components. Ensure adequate financial management and implementation arrangements.

29 Donor funding requirements will not be L On-going discussions with donors. met Reassurances as to effectiveness and implementation capacity. Good understanding of donor priorities. Fiscal/budgetary constraints restrict H Full implementation of MTEF and Government ability to "follow through" recognition of constraints, especially created by other factors such as drought, power shortages, etc. Key reforms blocked by political action H Inclusion of Cabinet and Parliament in the reform process. Commitment from highest political levels. Adverse social impact M Ensure socially responsible and affordable retrenchment packages and social safety nets for retrenchees. HIV/AIDS could undermine gains from H Faithful implementation of GOK's capacity building and training efforts national strategy on fighting HIV/AIDS could help control the spread of the pandemic. Resistance to further reforms, especially H Political support especially in the retrenchment context of forthcoming elections, staff sensitization and well managed implementation. High=High; M=Medium; L=Low 3. Possible ControversialAspects The project will be implemented in a very politically sensitive environment. There will be elections in the project's second year and a new government will be formed. Most of the project focuses on technical matters: strengthening or putting the basic systems in place for a more effective delivery of public services to all Kenyans. The majority of the policy reforms supported by the project will be introduced towards the end of the project. G. Main Loan Conditions 1. Effectiveness Conditions 1. Project coordination team in place in the Office of the Permanent Secretary/Director, Directorate of Personnel Management. These include: Coordinator, Procurement and Financial Specialist, Economist/Monitoring and Evaluation Specialist, and IEC Specialist. 2. Financial management system satisfactory to IDA. 3. Project Implementation Plan satisfactory to IDA.

30 -24 - H. Readiness for Implementation X X X 1. (a) Not applicable. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. I. Compliance with Bank Policies X I 1. This project complies with all applicable Bank policies. arnett D. Levy Harold E. ackman Team Leader -:extor Manager Country Director

31 -25 - Annex 1: Project Design Summary KENYA: Public Sector Management Technical Assistance Project Hierarchy of Objectives Key Performance Monitoring and C ritta Indicators Evauon Aaunpdoas Sector Related CAS Goal: Sector Indicators Sector/Country (Goal to Bank Reports Performance Indicators: Mission) A new CAS is being drafted. * occasional ESW * continuation of a The key issues for the next These indicators are taken reports shared CAS are summarized in from the current CAS and Government of "Kenya Country Assistance are likely to be valid for Kenya-Bank Strategy 2001." The CDF the next CAS: improved vision to fight outlined in the draft CAS delivery of public poverty identifies public administration services and human resource * improved public development as the two "high financial management focus" priorities for the Bank. * improved public sector Both are high priorities for this accountability project. * reduced corruption OUTPUT FOR EACH OUTPUT PROJECT OUTPUT TO OBJECTIVE INDICATORS REPORTS OBJECTIVE Component 1: Public Service * Studies to be * IPPD system * funds available Reform completed on services quarterly reports for increased Objective: To create a leaner to be privatized, contracted out or * Joint DPM and salaries and O+M - dependent upon and highly motivated public commercialized and Treasury re-allocation of service, better equipped to sound exit plans Budgetary reports retrenchment deliver services to the public. prepared followinggrwnecom savings and Outputs: completion of these and revenue * improved pay and benefits studies by December, * contributory superanuation * government scheme and new medical * Size of civil service * DPM annual approval of insurance scheme reduced in accordance report ministerial * integrated performance and with such exit plans by rationalization appraisal system June recommendations * rationalized services * Develop and begin to on privatization * integrated payroll and implement an and contracting personnel database affordable pay and benefits policy within out the MTEF by June 2004.

32 -26 - Sector Indicators Sector/Country (Goal to Bank. Reports Mission) * IPPD to be fully operational in all ministries and TSC by Component 2: Public * Core staff in * report reviewing Financial Management ministries/department quality of staff Objective: Objective: To s trained to operate the MTEF in achieve more effective and respective ministerial efficient utilization of public budget processes by supervision. resources with enhanced missions and accountability and * MTEF computer quarterly reports transparency and to improve information systemqurelrpot transparency and efficiency linked to IPPD and in the procurement of goods IFMIS by * report on C+AG and services. * 75% of professional staffing positions in C&AG's Outputs: office filled with staff * MTEF manual trained to post-graduate * MTEF training level or a minimum of * integrated financial part II of CPA (K) management system linked professional standards * financial and to MTEF by accounting * Internal Audit Manual * 60% of professional regulations * training for Department of accounting positions approved by Internal Audit, AG and (Chief Accountant Parliament C&AG staff and above) across * synchronized procurement Governnent trained procedures to professional * computer aided auditing standards by * Parliament passes * Generally Accepted * Develop Internal public Accounting Audit Manual by June procurement law * Procurement Directorate * capacity building for * 30% of Internal Audit procurement implementation Staffto be trained on * synchronized procedures the application of * Procurement Appeals Board Computer Assisted Audit Techniques (CAATs) by December 2004.

33 -27 - EHierarcy of Objectvies Key Performance Moitoring and Critca Indicators Evalution Assumptions Sector Indicators Sector/Country (Goal to Bank. R eports M ission) * Operations of PPD enhanced through the completion of procurement of equipment financed by the project by December * Procurement capacity of public procurement entities assessed and appropriate training programs developed by June 2002 and training programs implemented by June * Public entities to have established tender committees as per the procurement regulations by June * Procurement Regulations applied by all public entities by June * Public Procurement Complaints, Review and Appeals Board established and operational by December 2001 OUTPUT FOR EACH OUTPUT PROJECT OUTPUT TO OBJECTIVE INDICATORS REPORTS OBJECTIVE Component 3. Legal Sector * Pilot program on case * report on * staffing sufficient Reform management effectiveness of to improve established; incidence legal system services Objective: To establish a framework for the of established number * progress reports of lost files in pilot

34 -28 - Hierrchyof Obijectives key?erormanee Monft1oring and, Indicators EvauationAsmtin Crtcal... Sector Indicators Sector/Country (Goal to Bank Reports Mission) achievement of timely, program reduced by * annual statistics * Parliament accessible, and responsive 60% by December from procurement approves legal system M+E mechanisms Outputs: *Average time taken from filing to disposal * annual statistics * ease registration/ retrieval of commercial cases from procurement process reduced from 5 years M+E * law reporting in 2000 to 2 years in in 2000 to 2 years in the pilot program * annual statistics from procurement * Revised chapters of M+E the Laws of Kenya (those that affect public management) available on CD- ROM and in print by December * Pilot program on Recording of Court Proceedings completed by December 2004 and ready for replication throughout the country OUTPUT FOR EACH OUTPUT PROJECT OUTPUT TO OBJECTIVE INDICATORS REPORTS OBJECTIVE Component 4: Project * Quarterly project * supervision Coordination and Change reports on progress, reports Management for PSR plans, issues, finance Objective: To support an and accounting, and efficient and effective procurement are coordinating body and process submitted on time and that support the reform of high quality from program across the Public 2001 to end of.. Sector. project. seris Outputs: * 70% of contracts reports * project management signed on time, in * technical support/ IEC accordance with * change management team (I procurement plans for year) whole of 2003 to end of project.

35 -29 - Hriemrahy of Objectve K&y formnce X Itf Ct -Evah.n- 'Assnmpdww Sector Indicators Sector/Country (Goal to Bank Reports XM ission) PROJECT COMPONENTS INPUTS FROM PROJECT OUTPUT TO BUDGET REPORTS OBJECTIVE (US$ million) Component 1: Public Service 8.4 * quarterly project * timely Reform progress reports availability of counterpart funds Component 2: Public 7.0 * annual Financial Management disbursement reports Component 3: Legal Sector 1.7 * annual audit Systems reports Component 4: Project 3.4 Coordination TOTAL 20.5

36 -30 - Annex 2: Detailed Project Description KENYA: Public Sector Management Technical Assistance Project 1. Public Service Reform (US$ 8.4 million) 5 Objective: Creation of a leaner and highly motivated public service, better equipped to deliver services to the public. The civil service establishment burgeoned from 63,000 at independence in 1963 to 272,000 in 1992, reflecting both a greater demand for public services and Government's commitment to be the employer of last resort. By 1992 Government, having concluded that cost and affordability had to be given greater consideration, conducted a review of the structure and functions of the civil service. It was against this background that the civil service reform programme that was launched in 1993 focused essentially on staff and wage bill reduction. Staff size was reduced significantly through measures that included a Voluntary Early Retirement Scheme (VERS): from 272,000 in 1992 to 218,000 in January However, simultaneously with the cuts in civil service staff numbers, there was an increase in the number of teachers, from 226,300 in 1992 to 241,300 in Furthermore, the savings made under the VERS were offset by the significant salary increase approved for teachers in 1997/98. Over this period, little attention was paid to the performance-enhancing components of the reform programme: pay reform, personnel management and training, and financial management. In July 2000, Government decided on a comprehensive public service reform programme that would simultaneously address issues to improve governance and accountability and performance improvement issues. Consequently, this project will finance the costs of implementing reform measures focused on four broad areas: (i) ministerial rationalization; (ii) modernizing personnel establishment controls; (iii) developing and beginning implementation of a new pay and benefit policy and enhanced performance management; and (iv) developing Government training policy and instigating training needs assessments Ministerial Rationalization (US$ 3.5 million) Government has made significant progress in the redefinition and rationalization of government functions. Core functions of government have been defined and ministries and departments have carried out functional reviews. Under the Public Sector Reform Programme, the first phase of retrenchment involves some 25,000 civil servants across all grade levels as a result of over-manning reductions and abolition of functions. The civil service retrenchment programme continues into this project with phase II focusing on privatization and phase III focusing on contracting-out of government functions and an associated reduction in staff numbers. Overall, total civil service strength will be reduced by about 32,000 civil servants over the period 2000 to IDA support for this subcomponent focuses on assessing the feasibility of the privatization and contracting of services and developing and implementing exit plans for those staff leaving the service. 5Includes PPF and Government contribution.

37 Assessment and Exit Plans for Functions to be Privatized or Contracted Out As a continuation of the ministerial rationalization undertaken in the previous project and under the PPF, ten functions currently performed by government have been identified for privatization and 17 functions have been identified for contracting out. The recommendations regarding these functions will be evaluated to determine the viability for privatization and contracting out. The credit will finance feasibility assessments in each of these functional areas and support development of technically sound exit plans. IDA will fund a market study, quality control mechanisms, development of the legal framework for privatization and contracting, training for personnel audits and the reform teams in each Ministry, and management training for administration of contracted-out services. This exercise will be closely linked to the continuous functional reviews associated with the MTEF. 1.2 Establishment Control and Harmonization of Payroll and Personnel Data System (US$ 2.2 million) To ensure that the reform gains of the retrenchment exercise are sustained, strict control of establishment and staffing is to be put in place in the Public Service, underpinned by a computer-based Integrated Payroll and Personnel Database (IPPD) System. Elements of the IPPD system, developed with the support of the predecessor CSRP ( ), are already working on a pilot basis at the headquarters of four ministries (although not yet for day-today management). The full IPPD, which computerizes complement control, payroll administration, the budget for personal emoluments, the education and skills inventory, and establishment control is scheduled to be introduced in all ministries as early as December 2001 and in the Teachers' Service in 2002 (other services may easily be included later on). The project will finance a number of key activities required to achieve these objectives. The IPPD system will overcome current weaknesses in payroll and establishment management by, among others: minimizing irregular payments; introducing on-line data capture facilities to minimize delays in updating personnel data; generating timely and accurate reports in formats suitable for managers and decision-makers; and, links with budget and financial expenditure data systems. These changes will facilitate the maintenance of a 'clean' payroll, the elimination of 'ghost' workers and the prevention of fraud. To strengthen payroll control until the IPPD system is in place, DPM have established a Payroll Audit Team to monitor salary payments and investigate any extraordinary or excessive payments. 1.3 Develop and Introduce a New Pay and Benefits Policy and Performance Management (US$ 2.0 million) Pay Policy Government is fully aware that the terms and conditions of employment in the public sector are highly inadequate; that they are currently a major factor constraining the ability of

38 government to perform well and are a factor of corruption. To address this issue, Government will develop and implement, as soon as possible, a Medium-Term Pay and Benefits Policy (MTPBP) designed to motivate and increase real income for public servants within an affordable wage bill. The MTPBP, to be developed under a set of guiding principles, whilst drawing upon the work of the Harmonization Commission on Terms and Conditions of Service for Public Servants (Kipkulei Report, 1999), will include the development of the following elements with Bank assistance: i) options for the creation of a Senior Executive and Professional Service (SEPS) comprising a small elite cadre of staff who are considered essential to the functioning of ministries and departments; ii) a Selected, Accelerated Salary Enhancement Scheme (SASES) that will provide for the payment of a competitive package of emoluments to the SEPS and other essential, well-performing, senior staff; iii) a High Fliers' Scheme (HFS) oriented to the selection and grooming of midcareer public servants with an outstanding record of ability and achievement; and, iv) a jobevaluation exercise that will, in turn, provide the basis for; (v) the design of a revised remuneration structure. Non-Salary Benefits Government currently pays a range of fees, commissions and honoraria as well as meal, entertainment, vehicle, transport, housing, utilities, watchman and other allowances to many civil servants. There is a perception of considerable inequity and waste (at considerable cost to the wage bill) in the administration of several of these non-salary benefits. A new policy has been developed for housing; the project will help revise or develop policies for medical allowances and a pre-funded, contributory pension plan. To encourage transparency, equity and ease of administration, the new Pay and Benefits Policy (PBP) will undertake further rationalization to minimize the use of non-salary allowances and benefits with an immediate focus upon health care. A second major study will be financed to examine options and make recommendations for transforming the Government's pension scheme to a contributory scheme. Benchmarks for Civil Service Performance/Service Delivery Surveys Government has recognized that a high level of administrative competence is pre-requisite to high quality policy formulation and implementation, and that resources are required to monitor systematically the performance, both institutional and individual, of the public service. Accordingly, the project will assist Government to establish benchmarks for civil service performance and to measure changes in the coverage, quality and impact of service delivery through the conduct of periodic service-delivery and budget-tracking surveys. The results of these surveys will be used as an integral component of Government's approach to performance management. (See also section on Service Delivery Surveys under the subcomponent on MTEF). In order to strengthen the use of pay awards as a policy instrument, and to reward skills, experience and results objectively, the project will help Government examine options for adopting and implementing improved personnel management systems relating to the appointment, re-assignments, appraisal, pay and promotion of public servants. These will

39 -33 - include de-emphasizing seniority as a criterion in decisions on promotion, and making performance measures and an objective appraisal system the major criteria for future promotions and salary increases. In addition to the survey work described above, the project will assist Government work with ministries and agencies to devise and pilot performancebased pay schemes and to inculcate a performance-based culture related to their particular circumstances. 1.4 Training Policy and Training Needs Assessment (US$ 0.5 million) Government recognizes the need for a national training policy to guide the training activities of government agencies and ensure scarce resources are directed to effective and priority training. The activities to be financed under this sub-component are the development of a strategy to guide civil service in-service, demand-driven training, a thorough assessment of current training mechanisms and modalities, and the completion of ministerial training needs assessments. As a result, Government will be better able to mount effective and efficient training programmes that respond to identified priority needs and that are affordable and sustainable. Effective in-service training is regarded as an essential element to provide the civil service with the skills required to improve service delivery, change management practices, and provide efficient and accountable utilization of resources. 1.5 Development of a National Strategy and Policy Framework on Information Technology (US$ 0.2 million) In September 2000, Government appointed a national Coordinator for Information Technology. He is to lead the preparation of a national strategy and policy framework for IT that would cover all the sectors: public, private and civic. The project will finance the preparation of the strategy and policy framework; the costs of consultants to be hired; and the costs of running workshops through which stakeholders from the different sectors would make contributions to the preparation of the strategy. Component 2: Public Financial Management (US$ 7.0 million) 6 Objective: Enhance accountability and ensure more effective utilization ofpublic resources Implementation of MTEF (US $ 2.0 million) The MTEF was introduced and adopted in 1998 after the October 1997 Public Expenditure Review Report (PER) emphasized the need for comprehensive public sector reforms to tackle the problem posed by poor public expenditure management and specifically recommended the adoption of a Medium Term Expenditure Framework to guide the efficient and effective use of Government resources. The MTEF was considered an appropriate instrument to gradually restore institutional arrangements to support policy and 6 Includes PPF and Government contributions.

40 performance-oriented budget management. The MTEF seeks to link planning and budgeting and give budgetary content to the Government's PSRP 7 commitments within the context of an agreed macroeconomic strategy, while identifying some of the crucial systematic public sector reforms that should be undertaken if public sector policies are to succeed in accelerating social and economic progress. MTEF requires focus on three levels of budget relating to: (i) aggregate fiscal discipline; (ii) strategic resource allocation; and (iii) operational efficiency of public services and programs. Thus the MTEF seeks to restrain the aggregate cost of policy initiatives to what is affordable. It will force policy makers to make strategic choices on policy and program priorities through an institutionally appropriate forum, and will ensure operational efficiency in the delivery of public services and programmes through appropriate monitoring and accountability mechanisms. An MTEF programme was officially initiated in November 1999 with the establishment of an MTEF Secretariat and Sectoral Working Groups (SWGs) to coordinate the MTEF activities. Working closely with line ministries, the Secretariat prepared the 2000/01 budget and two-year forward estimates on the basis of MTEF principles. The process will be further refined during the implementation of the new public sector reform agenda and the PRSP. Since its adoption the following have been achieved: resource estimation through consultation of various stakeholders and an effort to develop a macro economic forecasting model; a sectoral approach to policy prioritization including resource allocation; publication of an annual budget with two-year forward estimates consistent with government policy priorities and commitments; publication of an Interim Poverty Reduction Strategy Paper. It is envisaged that implementation of the MTEF process and principles in full will occur over a longer time period of up to 10 years as policy and institutional linkages are developed and consolidated across the various sectors, and as the process is fully internalized in the entire public service sector. Some of the key components that come first in MTEF implementation are covered in this Project. In order to fully institutionalize the MTEF process, the following are the areas that require to be developed and strengthened over the Project time span. The actions below follow directly from the Kenya Country Financial Accountability Assessment Develop a Comprehensive MTEF Implementation Manual The current budget process will need to be documented. The purpose of such documenting will be to get a wide understanding on the part of practitioners of the whole process of budget preparation, for efficient process and for general institutionalization. In this latter connection, the manual will form the background document for training and future reference. The manual will be as comprehensive as possible and reviewed regularly. Institutional Capacity Building The first MTEF had to be completed within seven months. Consequently, those charged with the duty of preparing it had to use the little knowledge gained in the few workshops held locally on the MTEF process. In the next three years capacity will be built in Treasury 7 Subject to a joint World Bank/IMF staff assessment.

41 -35 - and in line ministries by training officers both locally and overseas on the various areas of MTEF. In addition there will be study tours to countries that have also adopted MTEF so that Kenyan practitioners may learn from their experiences. Workshops and training will be conducted for capacity building on decentralization and rolling out the MTEF process to the districts. Development and Implementation of a Comprehensive Budget Management System with Monitoring and Evaluation capabilities Government is currently using several computer information systems to allocate and track expenditure. The system used to compile and produce the printed budget estimates is based on an outdated database program. The computerized budget system requires overhauling to link it with the IPPD and the Integrated Financial Management Information System (IFMS) currently being developed. In addition, the current classification of expenditures will be modified to facilitate rapid and appropriate analysis of the budget. The funds will be utilized to develop the budget computer system at Treasury and the line ministries-based budget preparation programs into a modern, user-friendly budget program; train users and conduct capacity building on the new budgeting system, and purchase equipment for installation in line Ministries for use by MTEF Ministry-based teams. Public Expenditure Reviews and Service Delivery Surveys In order to assess whether the resources are being utilized efficiently and effectively to deliver the desired services, periodic expenditure tracking surveys will be carried out. These surveys will complement those being carried out to report on service delivery. The expenditure tracking surveys will address thematic areas. For example, the first one will focus on budget implementation, particularly on the delivery of health and basic education services with a focus on the poor. 2.2 Strengthening Government Finance and Accounting (US$ 1.2 million) 8 The weakness of the Kenya Government finance and accounting system as a key explanatory factor of limited financial accountability was identified through an analytical study of the systems in place across a sample of key ministries and a number of districts in 1996/97. The study was managed by the Accountant General's Department with the assistance of consultants. The World Bank, UK/DflD and SIDA since then have been working closely with the Accountant General supporting the entire process with financial resources and technical advice. The initial support from the World Bank was through the now closed Institutional Development and Civil Service Reform Credit (Cr KE). This project supported the purchase of computers, while DflD and SIDA provided support for consultants' services and training respectively. The activity has progressed well, though slowly. A number of outputs envisaged at the beginning have been delivered, while work is on-going to deliver on others. In 1999/2000, 8 Includes PPF and Government contributions.

42 -36 - new areas that require attention emerged and additional resource needs were identified. In view of their importance and implication for the achievement of the main objective, it was agreed to continue providing Bank support through the proposed Public Sector Management Technical Assistance Credit. To this end, the Project Preparation Facility (PPF) resources for this Credit are already being used to meet some of the initial requirements. The Bank and Government have jointly identified areas that need to be supported under the Credit. The ongoing Task Force work of reviewing the relevant financial legislation is at an advanced state of producing a draft report. The Task Force will require Technical Assistance to take the process to the next step of developing draft financial procedures and regulations for the central government at the levels of line ministries and the Districts, taking into account the integrated financial management framework. The Task Force will also require assistance in drafting new legislation (Bill) that will eventually become the new law for regulating the financial management and accounting of public resources. One specific gain expected from this process will be a new flow-of-funds framework that will facilitate direct accessibility of donor funds by the project implementing entities which have the primary accountability and responsibility for use of project funds and performance. Further assistance will be required for a financial management consultant to help the Accountant General adopt a modified accrual based accounting system that will technically bring the subject of public assets inventory and management under control. The Task Force that the department has put in place for this task should work within this framework. Additional office and communication equipment will be required to provide districts and sub-districts with adequate facilities to ensure adherence to timely processing and reporting requirements. This is particularly critical now that the flow of funds to line ministries and districts is expected to improve and be sustained. The Accountant General will pursue the training agenda by developing an overall training plan, supported by SIDA assistance. He will also be required to review and revise the scheme of service for government accounting staff that is specific to the needs of public sector accounting. 2.3 Internal Auditing ( US$ 1.0 million) 9 Given the importance of the internal audit function as a management tool for the purpose of strengthening accountability, it is essential to include internal auditing as an integral part of the financial management framework in the public sector. As outlined in the Kenya Country Financial Accountability Assessment, the existing Department of Internal Audit in the Ministry of Finance and Planning has failed for many years to functionally exploit its full potential for a variety of reasons. To assist the department refocus its resources and energies to fulfill its mandated responsibility, it is necessary to restructure the Department. In this regard, technical assistance will be provided under the project to help the Department review its operations and develop a new strategy that will guide it in its effort to deliver. In addition, the Department will work in close collaboration with the Accountant General and the Directorate of Personnel Management (DPM) in the development of a suitable scheme of service for public sector internal auditors, based on the business needs of the central government. 9 Includes Government contributions.

43 -37 - Capacity Building has also been identified as crucial for the internal audit function to attain and maintain high professional standards in its operations. To this end, a variety of appropriate training initiatives will be organized for the internal auditors. The project will finance consultants to help build the required capacity. Finally, there is need to provide equipment and vehicles that would be required for special operations and investigations. 2.4 Strengthening of the Auditor General's Department (US$ 1.7 million)' 0 A credible public audit system can be measured by the predictability and consistency of its operations and reports as an institution of accountability. The auditing role in the public sector for some time (since 1984) has been performed by two auditing institutions. The Auditor General (Corporations) was a creation hived off from the constitutional Office of the Controller and Auditor General, with the specific mandate of auditing State Corporations (parastatals). As part of the streamlining of functions of government, and restructuring, Government has decided to merge the two audit institutions back into one, for greater efficiency and effectiveness. It is also envisaged that the merged departments will assume a new structure with greater autonomy, underpinned by a new Audit Act that would result from a review of the relevant legislation. The plan is to constitute the merged departments into a National Audit Office, similar to the one established in South Africa in the late 1 990s. This process will be supported under this project. The Auditor General will require consultants' help to develop a new business plan and an appropriate scheme of service for the office, on the basis of which staffing will be determined. The Kenya CFAA provides nine recommendations for improvement which serve as the basis of support under the project. Quality and timeliness of the office's deliverables are important. Training and access to information are some of the building blocks that the office will require to ensure timely reporting to the legislature and other stake holders. Modalities for this will include the development of an in-house information resource center (library), a sufficiently equipped computer laboratory, a well-equipped in-house training center, and training in local and regional institutions to meet professional and managerial training needs. It is also envisaged that consultant trainers will be needed especially in common courses where a large number of staff is involved. In the area of office technology, computers would be required to enable the office network across the 25 branches based in Nairobi where there are Accounting Units, in the provinces for the central government, as well as for the local authorities. Similarly, arrangements would be required for the large parastatals. Given the operational nature of auditing, staff will require laptop computers for use while in the field to facilitate timely reporting and effectiveness. Finally, to enable the National Audit Office to deliver services with efficiency and effectiveness, it would need a good and reliable communication and transport system. In this regard, functional vehicles will be provided under the project. To ensure that the NAO achieves and maintains a high standard of professionalism, the office will use peers to Includes Government contributions.

44 -38 - regularly review its tool kits and audit quality-review arrangement from time to time. The office also plans to subscribe to the international information highway to access information and share its experiences with counterparts in other countries within the region and globally, e.g. INTOSAI. The main assumption for the activities proposed under this sub-component is that Government will approve the restructuring proposal, that a new Audit Act will be enacted, and that Treasury will avail the Department with its budgetary requirements in full and in time. The office is hesitant to charge fees to all its clients at the moment in view of the experience it has had with large bad debts due to failure by parastatals and local authorities to pay for even nominal audit fees. 2.5 Procurement Reform (US$ 1.1 million)ll In 1998 the Government embarked on a public procurement reform exercise with World Bank financial support through an IDF grant. Government has restructured the composition of the Central Tender Board with representation from the private sector. Procurement regulations were prepared by consultants and were accepted by the Government. These regulations were gazetted on 30th March 2000 and implementation began in April The consultants have also drafted a procurement bill, which will be presented to parliament for debate. Enactment is expected by December 31, In addition, a capacity building program has been prepared by the consultants and implementation is envisaged to commence after the proposed Public Procurement Directorate (PPD) becomes operational. For effective enforcement of the new regulatory instruments that have been formulated under the on-going Public Procurement Reform Project, a Public Procurement Directorate whose Director has already been appointed will be established. This entity will be staffed with adequate and qualified manpower and equipped with the capacity and institutional mandate to oversee and direct the implementation of the public procurement regulation. The Public Procurement Regulations were gazetted as a legal notice No. 51 on 30 March The Public Procurement Director will broadly have responsibilities which will include: (1) to oversee the new Public Procurement Regulations ensuring that they are complied with by all public entities; (2) to ensure that the appropriate tender committees are formed in all procuring entities; (3) to develop and implement training programs for public procurement officers; (4) to provide technical advice to procuring entities as necessary; and (5) to provide secretariat services to the Public Procurement Appeals Board. Consultants financed under the PPF of this project will assist in working out the detailed structure, staffing and mandate of the PPD. The project will also support the PPD in the following areas: Procurement of vehicles, and office equipment and furniture The Project will provide PPD with the basic logistical capacity that will lay the foundation for the PPD to evolve into an efficient and credible entity. Specifically the project proceeds will finance procurement of vehicles, computer hard- and software and accessories, and office furniture. I l Includes PPF and Govemrnment contributions.

45 -39 - Technical Assistance and Training The Project will also finance the fees of technical experts and consultants that PPD will require for the preparation of plans for procurement training programs and IT requirements, and establishment of MIS. Under this sub-component, PPD will recruit consultants to carry out implementation of the training plans that the consultants will develop and production of IEC materials. Other Training Costs Expenditures relating to PPD operations in: (1) producing; (2) printing; (3) distribution and presentation of publicity materials and programs through the media; (4) organizing training workshops, and PR fora on the new public procurement regulations/law; and (5) other training costs related to these activities will be funded under the Project. 3. Legal Sector Reform (US $1.7 million)1 2 Objective: To provide a framework for the achievement of fair, accessible, timely, and responsive legal and judicial systems. The weakness of the Kenyan justice system is linked to the constraints on the independence of the judiciary, poor enforcement of the rule of law, inadequate staff strength, and lack of integrity in the legal sector, from the lowest levels to the highest. Other manifestations include huge case backlogs and poor handling of legal issues relating to debt recovery, land administration, and the maintenance of law and order. Government acknowledges strong linkages between the reform of the justice system and the broader Public Sector Reforms, including the IPRSP and the MTEF. In 1998, the GOK appointed the Legal Sector Reform Coordinating Committee (LSRCC) to comprehensively review the sector. The LSRCC's output is the Legal Sector Reform Program (LSRP), developed through a participatory approach involving, among others, two stakeholder workshops and a pilot judicial service delivery survey. Additionally, the recommendations of the Kwach Report on the Administration of Justice (1999) were wholly adopted by the stakeholders, at the said workshops. Further discussions with key persons in the Office of the Attorney General, the Judiciary, the LSRCC secretariat, and legal training institutions, were unanimous that accessibility, predictability and expediency were critical pillars to the reform process. In tandem with the IPRSP the project will address issues that are specifically related to expediting legal processes through pilot initiatives. The successful completion of these pilots will then lead to replications. A condition precedent to the implementation of records management/it systems and recording of court proceedings, is that the GOK will have in place requisite infrastructure. Discussions with other development partners indicate that DFID has earmarked 3 million Pounds Sterling, over the next 3 years, EU has earmarked 6,000,000 Euros. 12 Includes Government contributions.

46 Record Management and IT systems The focal point for this action will be the registry systems. They provide essential services as they are the hubs of legal information. Since independence, the legal sector's collection of documents has experienced tremendous growth, without a commensurate growth in the capacity to handle the same. To date, legal registries use manual systems for registration, storage and retrieval. Matters are further compounded by lack of space. As a result most legal registries have become inaccessible to the users, due to perennial loss of files and inability to retrieve data and information. The project will therefore seek to modernize record management systems, including through automation as well as microfilming of archival data. In order to take full advantage of the project budgetary allocations for this component, the project will concentrate on three pilot registries at the Mombasa and Machakos Law Courts and the Civil Litigation registry in the Office of the Attorney General. Machakos offers a good model for a medium sized court that serves both an urban and rural population, whereas Mombasa offers a model for a very commercially active station that has registries serving right from the Court of Appeal to the Magistrates' courts. The choice of civil litigation is based on the pivotal role that it plays in commercial disputes involving the GOK. The pilot will later on be rolled out starting with the Nairobi Law Courts, other High Court stations, and other registries in the OAG. Recording of court proceedings A major criticism of the Kenyan judicial process has been its slow and unpredictable pace. Similar to the wider public sector, the judiciary suffers from understaffing especially in the professional cadres as well as being steeped in a traditional and sometimes archaic manner of doing things. An area in which a combination of these factors converges to bog down the judicial process is that of court recording. The already overburdened judicial officers are required to take down court proceedings in long hand and their record is the official record. Additionally, issue has been raised with the objectivity of such proceedings, especially when it comes to appeals. It is further estimated that 40-50% of the delays and the backlog in the disposal of cases is attributable to the current manual system. The project will therefore intervene through the introduction of sound court recording systems and capacity building. This intervention will be carried out through pilots in the Court of Appeal, the Commercial Court and the Disciplinary Committee of the Complaints Commission, in the Office of the Attorney General. Case management Case management includes the supervision or management of time and events involved in he movement of a case through the court system from the point of initiation to disposal, regardless of the type of disposal. Case management emphasizes the sequencing and timing of such events to enable expedient disposal while maintaining the courts ultimate authority in the resolution of legal disputes. Kenyan courts have come under heavy criticism on the case backlogs that plagues both the subordinate and the superior courts. From the onset it is very important to acknowledge that a functional case management system and strategy must bring in all the parties, i.e. the advocates, the prosecution, and the litigants. However underpinning a successful strategy is the need for strong judicial commitment to, leadership

47 -41 - for, and supervision of the process. The objective of this intervention will be to develop systems and policies, that will ensure the equal treatment of all litigants before the courts, and the timely disposal of each case consistent with the circumstances of the individual case. In coming up with the strategy a consultative process involving the Judiciary, the Litigation and Prosecution Departments of the Office of the Attorney General and Advocates will be employed. Law Review The Legal Sector Reform Programme identifies the application of obsolete and sometimes poorly conceived and designed laws as an impediment to justice. Under current law, all Kenyan laws should be subject to periodic review. The Office of the Attorney General, which is charged with the responsibility of law review, has not been able to undertake this activity on a timely basis due to constraints on human and infrastructure capacity. Project funds will be utilized to engage technical assistance to review the CAPs of the Laws of Kenya, to procure ten computers and provide support to research organizations to enable them to provide expertise for a number of specific law reviews. It is proposed that priority will be given to reviewing those laws that directly impinge upon the operations of the public sector and for which change is required to facilitate the implementation of the reform programme. Legal Sector Reform Secretariat The rationale for establishing the Legal Sector Reform Programme Technical Committee is to enable a comprehensive set of reforms to be implemented that encompasses a wide range of agencies within and without the public service. If it is to operate efficiently and effectively, the Technical Committee requires a full-time Secretariat. The project will support the operations of a small Secretariat. This will include finance to re-employ a suitably qualified Secretary to head the unit and an economist to provide additional expertise. A small amount of equipment for the Secretariat will also be procured under the project. 4. Public Sector Reform Coordinating Unit (US$ 3.4 million) 13 Objective: To provide an efficient and effective coordinating body and process that support the reform programme across ministries. The Project will support the establishment and operation of a Public Sector Reform Coordinating Unit (PSRCU) in the Directorate of Personnel Management in the Office of the President. This support will provide the means to hire consultants for the duration of the Project to head the PSRCU and to strengthen it through the provision of expertise in public procurement, financial management, monitoring and evaluation, as well as the development and implementation of an Information, Education and Communications (IEC) strategy and action plan responsible for the Information, Education and Communication component of the project. 13 Includes PPF and Government contributions.

48 -42 - Annex 3: Estimated Project Costs KENYA: Public Sector Management Technical Assistance Project (US$ million) i Pr#jec iuponeut t!i;;; ;; plotal4 4ir;: F i : Total; :00 Public Service Reform Public Financial Management Legal Sector Reform PSR Coordinating Unit Total Baseline Cost Physical & Price Contingency Total Project Costs Note: Amounts shown across each component excludes physical and price contingencies 3~sbur~epi~zi %Zaite.rrn oc~7 Tota Goods Services Training Operating Costs Total Project Costs

49 Annex 4: Cost-Benefit Analysis Summary KENYA: Public Sector Management Technical Assistance Project NOT APPLICABLE

50 -44 - Annex 5a: Financial Summary KENYA: Public Sector Management Technical Assistance Project FY FY 2003 FY 2004 Total Project Costs (US$ million) Investment Costs Recurrent Costs Total Financing Sources (% of Total) IDA 77% 71% 70% 73% Government 23% 29% 30% 27% Total 100% 100% 100% 100%

51 -45 - Annex 5b: Financial Assessment KENYA: Public Sector Management Technical Assistance Project Project management. The Public Sector Reform Coordinating Unit (PSRCU), under the Directorate of Personnel Management, Office of the President, will be responsible for overall project management, including: (i) monitoring the progress of the project; (ii) coordinating project activities; (iii) establishing and maintaining financial management and procurement systems; (iv) Project Management Reports (PMR), including physical, qualitative, financial, and procurement implementation progress, and (v) liaison with the World Bank and other development partners. The PSRS has been implementing a Bank funded Civil Service Reform project, and has gained experience in World Bank procedures on disbursements, processing contracts and payments for goods and services. The project has maintained a reasonably good manual accounting system that produces reliable annual project financial statements. The project has submitted acceptable audit reports to the Bank, although the reports have not been submitted on time. Staffing. To monitor resources and expenditure, maintain the accounts and prepare the required financial statements for the project, the PSRCU should have available adequate number and mix of skilled and experienced staff who understand the relevant accounting concepts and government financial regulations. The Project Financial Officer/Accountant should have appropriately sound credentials and experience in accounting to make good judgment on the maintenance of the books of accounts and on the production of financial information. He/she should have clear understanding of government accounting systems, regulations and requirements, and exposure to international accounting practices and standards. The Accountant will work closely with the Coordinator, the Head of Accounting Unit (DPM), as well as component coordinators and the various implementing ministries and other partner agencies, to provide project financial management, and other core services. The project financial management system. Effective project management is essential to monitor the achievement of project inputs, outputs, and impact, as well as to provide financial accountability with due diligence to economy and efficiency, and to conduct transparent procurement procedures in the award of contracts. The PSRCU head, in conjunction with the Project Finance Officer (and in consultation with the Head of Accounting Unit, DPM), will be responsible for ensuring that financial management and reporting procedures for the project will be acceptable to the Bank. The Project Finance Officer will be responsible for the entire financial management, accounting, and disbursement functions of the project, including payments through the Special Account, maintain accounts and make payments for eligible expenditures. Successful implementation of the financial management action plan (below) will allow the project to satisfy the Bank's minimum requirements under OP/BP The financial management system would be able to produce a Project Financial Statement, including Summary of Sources and Uses of Funds, Uses of Funds by Project Component, Project Account Reconciliation Statement, Cash Withdrawal Statement, and Cash Forecast. The

52 Chart of Accounts would facilitate presentation of summary expenditures by Component, Activity and Disbursement Category. Project Accounting System. The PSRCU will develop a viable financial management system including comprehensive manual of financial procedures, Chart of Accounts, and a fully integrated project accounting structure, using appropriate accounting software. The accounting system will provide data to measure performance when linked to the output of the project. The Chart of Accounts will ensure availability of information required and consistency in account classification. The Chart of accounts should be developed in a way that allows project costs to be directly related to specific work activities and outputs of the project, and consistency with expenditure categories in the Credit Agreement. As part of actions required to meet requirements for PMR-based disbursement a dedicated project accounting system to be used by the project will be developed, initially on spreadsheet, and later using an appropriate accounting software. The project accounting structure should be fully integrated to reflect the type of project, sources of funds, and the relevant expense accounts, broken down into various types of expenditures for the project. Internal Control. The internal control system should be able to ensure that financial records are reliable and complete. It should ensure adherence to management policies, orderly and efficient conduct and implementation of the project, and proper recording and safeguarding of assets and resources. Specifically, systems of internal control for the project should be designed to ensure that: - every transaction that should have been entered into the accounting system is recorded; * no unauthorized transactions are recorded; * those transactions that are entered are analyzed and posted correctly; * source program, which control the operation of the accounting system (original entry and subsequent analysis and postings), cannot be tampered with; * unauthorized access is denied; * assets of the project are neither misappropriated nor used in an uneconomical or inefficient fashion; * management policies (in budgets, forecasts etc.) are complied with; * deviations from plans are noted, investigated and timely responses made; * financial information is communicated in the most effective way so that those entitled to it may maximize their use of it; and * the financial statements show a true and fair view. Manual of financial procedures. The project financial management system will be documented in the Manual of Financial Procedures, covering Financial Policies and Procedures, Accounting and Internal Control Systems, Budgeting System, Procurement and Contract Administration and Monitoring System, Financial Reporting, Flow of Funds, and Auditing Arrangements. The Manual should contain statements and explanations of the project's budgetary policies and procedures; describing responsibilities for budget

53 -47 - preparation, adoption, execution, monitoring and reporting. In addition, the manual should include a description of internal control and accounting system, management and flow of funds, documentation and reporting requirements and formats, process, procurement procedures, etc., for use by project management and other stakeholders. The manual, to be based on the outline provided, and the chart of accounts was presented at Negotiations. Disbursements, Replenishments and Documentation. Although it is desirable to have PMR-based disbursement from the beginning of the Project, there is not in place a financial management system that can provide the information required by the World Bank for the LACI-Based Project Management Reporting (PMR) disbursement mechanism. Thus, in the short-term, existing disbursement procedures, as outlined in the World Bank's Disbursement Handbook, i.e. Direct Payment, Reimbursement and Special Commitment (if appropriate), will be followed. A financial management action plan has been discussed and agreed with the PSRCU/DPM. Successful implementation of the action plan will ensure that the Bank's minimum financial management requirements will be met; and facilitate the introduction of PMR-based Disbursement within 18 months of Credit effectiveness. During the transition period disbursement of funds would be made against Withdrawal Applications with full documentation or against Statements of Expenditure (SOEs) submitted by the Borrower. Interim PMRs will, however, be produced, but will not be used for disbursement purposes. Flow of Funds. To facilitate the flow of funds to the Project the Borrower will open bank accounts as follows: - A Special Account in US Dollars for IDA funds (to be managed by MoFP). - Project Account in KES for Counterpart funds and eligible local expenditures. Transfers from the Special Account will be deposited in the project account in accordance with project objectives. Transfers from the Special Account to other implementing ministries will be made from this account and will be through the imprest system, on the basis of Sub-AlEs issued by the DPM/PSRCU, following submission of request for funds based on approved work plans, together with accountability for previous advances, if any. Once the necessary documentation is reviewed and approved by the Project Coordinator, funds will be transferred from the Project Account to the implementing ministries/agencies by issuing a check or bank transfer. Details on surrender of imprests issued to the implementing ministries/agencies and accountability of the funds will be included in the Manual of Financial Procedures. The DPM/PSRCU has made progress in the implementation of the Treasury Circular No. 3 of March 2000 by opening a project account for the PPF. Special Exchequer requisitions have been submitted to MoFP, based on the workplans, to trigger transfer of funds from the off-shore Special Account, in accordance with the Treasury Circular. These funds will be accounted for through submission of Statements of Expenditures (SOEs) on a monthly basis. The completion of a reimbursement cycle, from the time funds are transferred from the offshore Special Accounts to the replenishment of the Special Accounts, should not take more than 90 days; and DPM/PSRCU should develop a tracking system to ensure flow of funds is closely monitored and delays minimized.

54 -48 - Financial Reporting. Formats of the various periodic financial reports to be generated from the financial management system should be developed; with clear linkages between the information in these reports and the Chart of Accounts. The main reports should include financial statements (e.g. sources and application of funds; expenditure classified by project components and activities, disbursement categories, expenditure types, and comparison with budgets; short-term forecasts of expenditure; etc.). The financial reports should be designed to provide high quality and timely information to project management, implementing agency, and various stakeholders on project performance. Annual Financial Statements and Annexes for the Project will be subject to audit by independent auditors, and submitted to the Bank within six months after the end of the fiscal year. The Project Financial Officer/Accountant, in consultation with the Coordinator and DPM Head of Accounting Unit, will be responsible for preparing the project's quarterly and annual program financial statements (cash forecasts and budgets). The quarterly cash flow forecast (required under LACI) will be modeled on the suggested format of presentation contained in the World Bank Loan Administration Change Initiative (LACI) Handbook, September NB: Under the World Bank's Loan Administration Change Initiative (LACI), reports produced on a quarterly basis to support requests for replenishment of the Special Account should include the following: * Financial Statements: To provide information on the sources and uses of funds by loan category and by project activity, forecasts of expenditure, amount of disbursement requested and a reconciliation of the Special Account. * Project Progress Reports: To provide information on project implementation progress in physical and financial terms using monitoring indicators, including identifying deviations from plan and explaining reasons for such variations., Procurement Management Reports: To indicate the status of procurement and contract commitments and expenditure including source of supply data for contracts subject to the Bank's prior review, as well as post-review contracts above a certain threshold. Audit Arrangements. In order to comply with Bank reporting requirements, annual Financial Statements and Annexes for the project will be subject to audit by independent auditors, and submitted to the Bank within six months after the end of the fiscal year. Annual audits will cover the Bank requirements for audit of the project accounts and review of internal control systems, inter-alia, for reliability of PMRs; as well as review of Statements of Expenditure. Audit reports on project financial statements, will include separate audit opinion on the Special Account and Statements of Expenditure/Project Management Reports, as well as a Management Letter, giving observations and comments, and providing recommendations for improvement of accounting records, systems, controls and compliance with financial covenants in the Development Credit Agreement.

55 Financial Management Action Plan Issue/Problem Remedial Action Due Date 1 Project Project implementation arrangement By Credit implementation refined and documented. Core Project Effectiveness arrangements. Management Team on board. 2 (i) Staffing Suitably qualified and experienced By Credit accounting staff should be deployed, and Effectiveness, and retained throughout the life of the project, throughout project to monitor the expenditures, maintain the implementation accounts and prepare required financial statements for the project. (ii) Training and Training program to be developed for By Credit Development project staff - emphasis on financial Effectiveness management and accounting, information systems and computer applications. 3 (i) Dedicated project Project accounting system to be developed By Credit accounting system to produce financial reports that show Effectiveness budgeted and actual costs, capable of providing financial data to measure performance and monitor expenditure: -Initially spreadsheet-based, and later using an appropriate accounting software Within 12 months of effectiveness By Credit Effectiveness A Chart of Accounts should be developed, (ii) Chart of Accounts to provide information that reflects type of project, sources of funds, and the relevant expense accounts that is consistent with Expenditure Categories in the Credit Agreement, Project components and Subcomponents, and project activities. 4 Manual of Financial Procedures Comprehensive Manual of Financial Procedures to be developed, describing By Credit Effectiveness accounting systems and procedures for the project. Manual to include standards and guidance for internal control and accounting, with clear delegation and segregation of duties; funds flow processes; etc. 5 (i) Reporting arrangements - A reporting package for internal and external reporting should be developed in By Credit Effectiveness Internal Reporting Procedures not in place line with LACI/FINMI requirements, and documented in the Manual of Financial Procedures. (ii) Validity of financial Arrangements in place to ensure that By Credit reports accounting records are maintained on Effectiveness timely basis, self balancing, and all accounts reconciled at all times to ensure accuracy and reliability.

56 IssuelProblem Remedial Action Due Date 6 (i) Disbursement Adequate financial management systems to By Credit Procedures: be developed. Existing disbursement Effectiveness Current financial procedures to be used. management system not suitable for PMR- Based Disbursement mechanism (ii) Conversion to PMRbased disbursement A fully integrated system developed, to Within 18 months keep track, collect and provide information after effectiveness on procurement, expenditure, source of funds and outputs, measured by monitoring indicators. Project Management Further assessment to be carried out by Within 12 months Reports FMS to determine readiness for PMR- Based Disbursement. of effectiveness Format of PMR to be agreed. By Credit Effectiveness 7 (i) Flow of funds to be Successful implementation of Treasury By Credit streamlined. Circular No. 3/2000. Benchmarks set for Effectiveness processing reimbursement claims to be monitored and reported on. (ii) AlEs not received on Treasury to issue AlEs on time, based on time, thus affecting printed estimates. Sub-AlEs to line During implementation of ministries to be released on time, based on implementation work plans. approved work plans. (iii) Monitoring & Strict financial discipline required, with Evaluation monitoring arrangements and clear Continuous remedies for non-compliance with process established procedures. during project implementation 8 (i) Budgeting and Written statements and explanations of By Effectiveness planning budgetary policies and procedures to be included in the Manual of Financial Procedures. Quarterly and annual program financial statements (budgets) to be prepared as basis for spending funds. During project implementation (ii) Budgetary Control. Format and content of monthly, quarterly, By Effectiveness and annual financial reporting should be documented. Variance Analysis, with explanations for During project significant variations, to be part of periodic implementation management reports.

57 Issue/Problem Remedial Action ldue Date 9 Audit Arrangements - DPM/PSRCU to ensure quality preparation October 31, 2000 past audit reports and early submission of draft project under the closed CSR financial statements for audit. Form and project submitted to content to be in line with revised formats the Bank late issued by MoFP. Audited project financial statements under December 31, CSRP to be submitted to the Bank, and Future audit immediate action taken to resolve any audit reports due six queries. months after end of fiscal year. 10 Late payments to A payment tracking system should be By Credit suppliers & developed to track payments through all Effectiveness consultants, and stages to ensure efficiency of the payment delayed accounting of system. Clear benchmarks on surrender of advances to line advances issued to line ministries included ministries in the Manual of Financial Procedures.

58 Procurement Annex 6: Procurement and Disbursement Arrangements KENYA: Public Sector Management Technical Assistance Project Preparation of procurement documentation will be carried out by the respective government departments and units that are directly responsible for the components and sub-components of the Project, and will be finalized under the coordination and supervision of the Public Sector Reform Coordinating Unit (PSRCU) created within the Directorate of Personnel Management (DPM). The responsibilities of the Implementing Departments and Units visa-vis the role of the Project Coordination Unit in the procurement activities are defined under para 6 of the Institutional Arrangements section of the PAD. Procurement methods (Table A) Procurement of goods and works for all IDA-financed components will be carried out in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995 and revised in January and August 1996, September 1997 and January 1999). Consulting services by firm or individuals financed by IDA will be awarded in accordance with the Bank's Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised in September 1977 and January 1999). The appropriate World Bank standard bidding documents will be used for all International Competitive Bidding (ICB), and the World Bank's standard Request for Proposals (RFP) for the selection of consultants. Advertising Two General Procurement Notices (GPN), one for consulting services and one for goods and works, will be prepared for the PSRCU and published in the United Nations Development Business (UNDB). The GPNs will be updated at least once a year and submitted to IDA for review. GPNs will describe all outstanding ICB for goods and works as well as consulting assignments. Procurement Plan A procurement plan has been prepared by the Borrower. The plan includes relevant information on goods and consulting services under the Project as well as the timing of each milestone in the procurement process. The procurement schedule will be updated every quarter and reviewed by IDA at each supervision mission.

59 Goods The total cost of goods is estimated at US$3.3 million for the Project. Procurement will be bulked where feasible into contract packages valued at US$ 100,000 equivalent or more and will be procured through ICB procedures. Goods estimated to cost less than US$ 100,000 equivalent per contract up to an aggregate amount of US$ 0.45 million equivalent will be procured through NCB procedures. Goods that are estimated to cost less than US$ 30,000 equivalent per contract, up to an aggregate of US$ 0.19 million equivalent, may be procured through (International or National) Shopping procedures in accordance with the Bank Guidelines, and/or through the Inter-Agency Procurement Services Office of the UNDP (IAPSO). Services The total cost of IDA-financed consultant services and technical assistance is estimated at US$ 7.9 million equivalent for the entire Project. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality- and Cost-Based Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost less than US$ 50,000 equivalent per contract, up to an aggregate of US$ 200,000 equivalent, will be selected through Least Cost Selection (LCS) method. In exceptional cases when selection of consultants through competitive process is not practicable, the borrower may, upon prior clearance with the Bank, hire consultants through the single-source selection method stipulated in paras of the Guidelines. Consultants for services meeting the requirements of Section V of the Consultant Guidelines will be selected under the provisions for the Selection of Individual Consultants (IC) method. Individual Consultants will be selected through comparison of job description requirements against the qualifications of those expressing interest in the assignment or those approached directly. To ensure that priority is given to the identification of suitable and qualified national consultants, short-list for contracts estimated under US$ 200,000 equivalent per contract may be comprised entirely of national consultants (in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines), provided that a sufficient number of qualified firms (at least three) are available. However, if foreign firms have expressed interest, they will not be excluded from consideration. The RFP as developed by the Bank will be used for requesting proposals, and for selection and appointment of consultants. Simplified contracts will be used for short-term assignments - simple missions of standard nature (i.e., those not exceeding six months) carried out by individuals consultants or firms.

60 Bank Reviews Procurement of IDA-financed civil works and goods contracts estimated to cost US$ 100,000 equivalent or more as well as consulting contracts of US$ 100,000 equivalent or more for firms and US$ 50,000 equivalent or more for individual consultants will be subject to prior review by IDA. However, the first two goods or works contracts and the first two consultancy contracts, irrespective of their value will be subject to IDA's prior review. Post reviews of contracts awarded below the above threshold levels will be carried out selectively by IDA during supervision missions and/or by an independent procurement auditor. Terms of Reference (TOR) for all consultancy contracts as well as all single source selections, irrespective of the contract value, will be subject to prior review. Table A: Project Costs by Procurement Arrangements (US$ Million) Exe,idit C.g ;<.g} ::;;' i'- l;4;cb; NS I' Others Tota t hib" dng Goods, Equipment & Vehicles (3.1) (0.2) - (3.3) Consultant Services (7.9) (7.9) Training (3.3) (3.3) Operating Costs (0.5) (0.5) Total Project Costs of which Funded by IDA (3.1) (0.2) (11.7) (15.0)

61 Table Al: Consultants Selection Arrangements (US$ Million) Consultant Services Expenditure Selection Method Total Category _ IC QCBSLC Others A. Firms (4.3) - (4.3) B. Individuals (3.1) - (0.4) (3.6) Total (3.1) (4.3) (0.4) (7.9) Figures in parenthesis are the amounts to be financed by the IDA Credit. QCBS = Quality- and Cost-Based Selection LC = Least-Cost Selection IC = Individual Consultants Others = Selection of individual consultants (per Section V of Consultants' Guidelines), Commercial Practices, Educational Institutions, etc.

62 Table B: Thresholds for Procurement Methods and Prior Review (US$ Million) " xpenditure-s Contrac Vau (Trsod); PlrocuemntMethd Contlractsel Categoiy ~~~~~~~~~~~Subject to, P ri o R e,vi,e w 1. Goods > US$100,000 ICB Prior review Less than US$100,000 NCB Post review Less than US$30,000 NIS Post Review 2. Services Firms: > US$100,000 QCBS Prior review Below US$ 100,000 QCBS/LC/Other Post Review Individuals: >US$50,000 IC Prior review Less than US$50,000 IC Post review Overall Procurement Risk Assessment High Average, Low Frequency of procurement supervision missions proposed: One every six months (including special procurement supervision for post-review/audits). An assessment of DPM's procurement capacity has been conducted, and a report has been prepared. The report indicates "High" risk - unless a procurement consultant is engaged - based on: (i) weaknesses in the current institutional and legal framework of GOK procurement; (ii) the non-existence of procurement proficient staff at DPM; (iii) lessons learned from the poor performance in procurement management under the recently closed Institutional Development & Civil Service Reform Project; and (iv) conditions conducive to corruption in procurement practices in the public sector. However, the assessment concludes that the employment of a procurement consultant as well as the enforcement of the GOK new regulatory and institutional arrangements for public procurement will reduce the procurement risk for this project to "average". The current capacity of DPM without outside support would be inadequate to handle the procurement activities workload under the project. Therefore, it was agreed during appraisal that a qualified procurement consultant would be hired. The responsibilities of procurement consultant would include supervision of all procurement activities under the project and provision of guidance to and capacity building within DPM and other implementing agencies of the project components.

63 The procurement process of all goods and works contracts, and the selection of all consultants under the project as well as the evaluation process of received bids and proposals, will be carried out by the PCU and other project implementing agencies under the direct supervision of the procurement consultant. This arrangement will mitigate the procurement risk at the individual implementing agencies. Many of the system-wide weaknesses revealed by the procurement capacity assessment and listed above are being addressed under the on-going Procurement Reformn Program, including: (i) enforcement of new, national public-procurement regulations together with standard government bidding documents; (ii) the enactment of a comprehensive public procurement law; (iii) staffing and operationalization of a newly approved Public Procurement Department to oversee the implementation of public procurement and to conduct procurement audits; and (iv) legalization of the appointment of a Procurement Appeals Board. Finally, the Kenya Anti-Corruption Authority (KACA), as well as the anti- Corruption and Economic Crimes Bill and the Public Service Code of Conduct and Ethics, which are both currently before Parliament for debate and enactment are expected to increase accountability in the area of procurement. Table C: Allocation of Credit Proceeds Expenditure Category Ainount Fimanuiing Percentage US$ million 1. Goods, Equipment & Vehicles % of Foreig & 90% of local 2. Consultant Services & Training % 3. Operating Costs % until June 30, 2002; 4. Refunding of PPF Unallocated 1.0 TOTAL % until June 30, 3003; and 60% thereafter

64 Annex 7: Project Processing Schedule KENYA: Public Sector Management Technical Assistance Project Project Schedule Planned Actual Time taken to prepare the project (months) 6 months 12 months First Bank mission (identification) 3-Jul Jul-2000 Appraisal mission departure 9-Sept Nov-2000 Negotiations 22-Mar Apr-2001 Planned Date of Effectiveness 31-Oct-2001 A. Bank Staff who worked on the Project included: Name Bank Unit Speciality Harry Garnett AFTI2 Task Team Leader Rob Floyd AFTI2 Operations Officer Rey Castro AFTI2 Operations Analyst Jack Titsworth WBIGF Consultant Florence Simbiri-Jaoko Consultant Legal Specialist Said Al-Habsy LEGOP Chief Counsel Pascale Helene Dubois LEGOP Senior Counsel Kenneth Miller LOAG2 Sr. Disbursement Officer Dahir Warsame AFC05 Procurement Specialist John Nyaga AFC05 Sr. Financial Management Specialist John Ogallo AFC05 Financial Management Specialist Lucas Ojiambo AFC05 Economist Margaret Olale AFC05 Disbursement Assistant Lucie Muchekehu AFCO5 Program Assistant B. Project Preparation Activities : *0~P 000:;;00000 Key Prepred Outpts By Respqnimliiy esponsiility ; Cst cost Apprisal APt ;Tr=iD Target Date. : ::0 _ ; f:0:: Requirement Feasibility Strategic Plan for Government _ NO Completed Studies Public Sector Reform Social Pilot Service Government NO Completed Assessment Delivery Survey Institutional (a) Pilot Service Government/ NO Completed Assessment Delivery Survey Bank (b) Pilot Public Officials Survey Project Draft to be prepared YES Completed Implementation during appraisal Plan (PIP) Environment Not applicable Assessment _

65 Annex 8: Documents in Project File KENYA: Public Sector Management Technical Assistance Project * Interim Poverty Reduction Strategy Paper June 2000 * A Case for Digital Modernization of Government Services * The Acceptance & Implementation of the Recommendations of the Harmonization on Terms and Conditions of Service for Public Servants, Sessional Paper May 2000 * Public Service Management and Employment Policy - June 1998 * Staff Retrenchment in the Civil Service - 23 rd June, 2000 * Pilot Public Officials Survey, Final Report (Vol. 1) - The Executive Summary *The Service Commissions Act (Chapter 185) - Revised Edition 1985 * Strategy for Public Sector Reform, Draft - November 2000 * Report of the Harmonization Commission on Terms and Conditions of Service for Public Servants 1998/ September, 1999 * Review of Proposals in the Draft Sessional paper on Recommendations of the Committees to Review the Terms and Conditions for Civil Service and Uniformed Services X The High Fliers' Scheme in the Civil Service of Kenya (Vol. III) - October, 1998 * Memorandum of the President of the International Development Association to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Republic of Kenya (Report No KE) - September 2, 1998 * Kenya Country Assistance Strategy 2001 * Implementation Completion Report on a Credit in the amount of SDRs 17.2 Million to the Government of the Republic of Kenya for an Institutional Development and Civil Service Reform Project (IDA-26710, Report No ) - November 16, 2000

66 Annex 9: Statement of Loans and Credits KENYA: Public Sector Management Technical Assistance Project May-2001 Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P Emergencyenergycredit P HIVIAIDS Project (Umbrella) P Regional Trade Fac. Proj - Kenya P Economic&PublicSectorReforn P Decentralized Repr. Health and HIV/AIDS P EMERGENCY INFRAS.REHAB P EARLY CHILDHOOD DEV P LAKE VICTORIA ENV P LAKE VICTORIA ENV P TANA RIVER PROJECT PW ENERGY SECTOR REFORM P NARP II P ARID LANDS P NAIROBI MOMBASA ROAD P URBAN TRANSPORT S P SEXUALLY TRANSMITTED P MICRO & SMALL ENTERP D TOTAL

67 KENYA STATEMENT OF IFC's Held and Disbursed Portfolio May-2001 In Millions US Dollars Committed IFC IFC Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2000 AEF AAA Growers AEF AAR Clinic AEF Bawan Roses AEF Capital Fish AEF Ceres AEF Deras Ltd AEF Equitea AEF Future Hotel AEF K-Rep Bank AEF Landmark AEF Lesiolo AEF Locland AEFMagana AEF Makini AEF Meru Ltd AEF Multi Hauler AEF Redhill Firs AEF Transenergy ANSPAR CFC /83/98 DBK Diamond Trust /99 EARC GBHL IPS(K) IPS(K)-Allpack IPS(K)-Frigoken IPS(K)-PremFood Intl Hotels-Ken K-Rep Bank Kenya Comm. Bank LIK /91 Mabati Magadi Soda Co Panafrican /74/77/79/81/88/89 TPS (Kenya) Tsavo Power Total Portfolio Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 AEF Celinico AEF Eustoma Ltd AEF Greenland AEF Liki River AEF Twin Leaves CDSC Kenya KCB NIC Total Pending Commitment

68 Annex 10: Country at a Glance Sub- POVERTY and SOCIAL Saharan Low- Kenva Africa Income Development diamond' 1999 Pooulation. mid-vear (millions) Life expectancy GNP oercaoita (Atlas method. USS) GNP (Atlas method. USS billions) T Averaae annual arowth PoDulation I%) Labor force (%) GNP Gross Most recent estimate flatest vear available ) per capita primary enroliment Povertv (% of oodulatlon below national Dovertv line) Urban Dooulation 1% of total DoDulationl Life exoectancv at birth (vears) Infant mortalitv (Der live births) Child malnutrition (% of children under Access to safe water Access to imoroved water source I% of oooulation) Illiteracv t% of DoDulation aae 15+) Gross orimarv enrollment (% of school-aae oodulation) Kenya Low-income group Male Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS E _ - Economic ratios- GOP russ billions) Gross domestic investment/gdp Trade Exoorts of ooods and services/gdp Gross domestic savinaslgdp Gross national savinas/gdp Current account balance/gop '1 Dome Interest oavments/gdp Domestc \ Investment Total debtgdp Savings Total debt servicelexoorts Present value of debtgdp Present value of debt/exoorts Indebtedness (averaoe annual orowth) GDP GNP oer cadita Kenya Low-income group Exoorts oi ooods and services STRUCTURE of the ECONOMY Growth of investment and GDP() 1% of GDP) 20 Aoriculture Industrv Manufacturina Services Private consumdtion General oovemment consumdtion G01 GDP ImDorts of ooods and services Growth of exports and imports (%) (averaae annual arowthl Aoriculture Industrv Manufacturino Services Private consumotion General oovemment consumotion Gross domestic investment Imoorts of ooods and services Exports 'Imports Gross national Droduct Note: 1999 data are preliminary estimates. The diamonds show four kev indicators in the countrv (in bold) comdared with its income-orouo averaoe. If data are missina. the diamond will be incomdlete.

69 PRICES and GOVERNMENT FINANCE S Inflation (%) Domestic prices (% change) Consumer prices Implicft GDP deflator t Government finance zo- _ (% of GDP, includes current grants) 0 Current revenue Current budget balance GDP deflator CPI Overall surplus/deficit TRADE (US$ millions) Export and import levels (USS mill.) Total exports (fob) 1, ,012 1,755 4,000 - Fuel Coffee Manufactures Total imports (cif) Food 1, , , , ,000 iiiu,d Fuel and energy Capital goods Exoort pnce index (1995=1o0) ImDort Dnce index (1995=100) *Exports *Imports Termsoftrade(1995=100) BALANCE of PAYMENTS (US$ millions) Current account balance to GDP (% Exports of goods and services 1,571 1,905 2,849 2,600 3 T Imports of goods and services 1,922 2,417 3,737 3,313 Resource balance Net income Netcurrenttransfers Current account balance Financing items (net) Changes in net reserves M^emo: Reserves indudino oold /USS millions) Conversion rate (DEC. localwssi EXTERNAL DEBT and RESOURCE FLOWS (US5 millions) Composition of 1999 debt (USS mill.) Total debt outstanding and disbursed 2,718 5,862 6,724 6,894 IBRD A: 91 IDA ,198 2,200 G.85 Total debt service a 20 IBRD : 2,200 IDA F: 857 Composiion of net resource flows Officialgrants Official creditors Private creditors CW c: 135 Foreign direct investment E:2, Portfolio equity D.752 World Bank program Commitments A-IBRD E-ailateral Disbursements B - IDA D - Other multlateral F - Private Principal repayments C - IMF G - Short-term Net flows Interest payments Net transfers Development Economics 9/9100

70 Annex 11: Letter of Sector Policy from the Government of Kenya REPLU3UCOF KENYA Ci A IO: [ I MINISTRY OF FINANCE*eA N N - Tekic Ad s THE ~~~~~~~~~~~~~~~~~~~~~~ TREASURY, Telegraphi Addes rbox 3000;.') NAIROAT "FINANCE", Nai rcaobwi Telephone: ~'1'- When rplying isc qc1 Rc.f N Z.~71/01 l <c s z -n o - Fts 8"' May, Mr. James Wolfensohn, President World Bank Washington DC USA Dear d11 4 REPUBLIC OF KENYA LETTER OF SECTORAL POLICY: PUBLIC SEC2TOR REFORM i. Government is determined to reverse the rising trend in the incidence of poverty and significantly reduce the number of Kenyans living below the poverty-line. A prerequisite in achieving Ihis is the restoration of sustained rapid economic growth. Government is actively recasting its policy framework to address the root problems of poor economic performance and to provide a positive environment for private-sector development. These reforms provide the foundations for the Poverty Reduction Strategy Paper, which sets out a medium-term framework for poverty-focused national development and renewed growth. A major, integral component of this Strategy is comprehensive public sector reform to restore appropriate, effective and efficient public service delivery to the people of Kenya. 2. The goals of public sector reform are to implement policy priorities and core functions. These activities are intended to: a) Rationalize and reshape the public sector: b) Restore efficiency and effectiveness, together with probity and integrity to the public service; c) Provide an equitable, accessible and efficient rule of law. d) Enhance accountability, strengthen the governance framework, and increase participation through joint ventures between different levels of government and apportion responsibilities accordingly. 3. The public sector will concentrate on 'core' functions that best facilitate private sector economic development, direct resources to reducing poverty, and provide for the basic social needs of society, particularly the poor. The quality and productivity of expenditures and investment will be improved to ensure cost-effectiveness and value-for-money.

71 The public sector will concentrate on 'core' functions that best facilitate private sector economic development, direct resources to reducing poverty, and provide for the basic social needs of society, particularly the poor. The quality and productivity of expenditures and investment will be improved to ensure cost-effectiveness and value-for-money. THE FOUNDATIONS FOR PUBLIC SECTOR REFORM 4. Since the commencement of the public sector reform program, considerable progress has been achieved in reversing impropriety and improving govemance in the public service. Significant steps have been taken to create more transparent public procurement procedures and financial controls have been tightened throughout the service. Government has declared and is actively implementing a policy of zero tolerance for corruption. 5. Financial planning and budgeting processes are undergoing major changes through the introduction of the MTEF to impose discipline into the planning and financial management of public resources. At the same time, the public service reform programme to rationalize the service is gathering pace. The first phase of staff reductions, involving 23,300 civil servants, has been implemented and actions to improve performance are about to be introduced. The Parastatal Reform and Privatization programme is undergoing revision with a major policy shift that seeks to promote public-private partnership in the running of major public infrastructure services. Local authority financial standing is being stabilized through the transfer of central government tax revenues. These, and other such activities, are transforming the government's policy and operational environment. 6. The preparation and publication of the Poverty Reduction Strategy Paper represents a watershed in development strategy. Not only is the focus for development now firmly on reducing poverty but the manner in which the strategy is being developed marks Govemment's commitment to engage civic society in meaningful dialogue when formulating policy. Both the policies themselves and the on-going dialogue and consultation have significant implications for public sector reforms and represent a catalyst for change. The articulation of the Strategy defines Government's core activities and policy priorities providing the framework against which organizational rationalization can be meaningfully implemented. 7. Government is committed to sustaining the implementation of the reform programme. In this regard, necessary financial and technical support will be sought from our development partners. The World Bank funded Public Sector Management Technical Assistance Project is one critical element of this support. It will provide additional resources to enable Government to implement priority reform policies and programmes. Considerable financial support for the on-going Civil Service retrenchment programme has been obtained while discussions are underway on additional support for wider Public Service reforms. Several multi- and bi-lateral development panners have indicated their willingness to support areas of reform, including public enterprise and privatization, local government, legal and judicial sectors as well as public service and budget and expenditure management. 2

72 REFORM PRIORITIES 8. The main thrusts of the reform programme are described below. Alongside these reforms, Government will maintain prudent macro-economic management to (a) maintain a stable fiscal and monetary stance (b) reduce the tax burden and (c) reduce the share of public expenditures relative to GDP while maintaining real expenditure at current levels. Primary budget surpluses will reduce domestic debt and provide favorable interest rates. 9. To improve public service delivery through the reform of the structure and organization of the public service together with improved management and enhanced productivity, the Public Service Reform will: a) Rationalize the public service to reflect well-defined core functions: i) Rationalize Statutory Boards; ii) Prepare and implement exit plans for all functions to be divested from public service through abolition, privatization and contracting-out; iii) Undertake necessary staff reductions through natural attrition and other staff rationalization initiatives. b) Develop strategies to implement the Kipkulei Harmonisation Report recommendations to increase real incomes for public servants within an affordable wage bill: i) Pay structure to attract and retain well qualified and motivated staff; ii) Remuneration linked to qualification, skills and performance; iii) Merit-based appointment and promotion; iv) Consider options for accelerated enhancement for critical managerial, professional and technical cadre; and v) Introduction of a performance-based appraisal and compensation scheme. c) Implement an effective Integrated Personnel and Payroll Data system throughout the civil service and teachers service to provide timely and effective staff control and management mechanism. It is expected that once the IPPD is fully operational, it will be linked to the Integrated Financial Management system and other computer-based accounting and audit systems. d) Modernize personnel policy and management through the introduction of results-oriented management to improve staff productivity and service delivery through results-oriented management. e) Develop and implement a comprehensive plan for capacity building and training to re-equip the civil service with increased capacities to implement core functions and provide senior staff with managerial skills. 10. Based on lessons learned, the Government is committed to extend the reforms to the whole public sector, while ensuring that service provision is not compromised. Savings from a reduced workforce, more efficient operations and lower running costs will be matched against increased staff 3

73 remuneration, allocations to operations and maintenance, expansion of basic services and public capital investment. It. To impose discipline into the planning and management of public resources by establishing strong links between resource availability and policy priorities with budget allocations and expenditures, the Budgeting and Financial Management Reforms will: a) Consolidate and institutionalize the Medium Term Expenditure Framework through: i) Improving macro-economic forecasting leading to better fiscal strategies; ii) Strengthening the operation of Sectoral Working Groups to develop sectoral and ministerial priorities within hard ceilings; iii) Ensuring expenditure allocations are justified by measurable outputs, cost norms and performance benchmarks; iv) Ensuring all public expenditures are on-budget; v) Building a comprehensive, integrated budget management system with continual monitoring mechanisms that is linked to IFMS and IPPD; vi) Undertaking necessary training and capacity building in Treasury and line-ministries vii)undertaking regular Public Expenditure Reviews to provide analysis of expenditure patterns and improve resource management. b) Enhance accounting and audit procedures for all public expenditures through: i) The review of the legislative framework to refine financial management procedures; ii) Installation of the Integrated Financial Management System in line ministries and districts; iii) Enhancing fiduciary transparency, improving the quality and timeliness of audit reports and the extension of the auditing role of C&AG to all public agencies; iv) Increased autonomy of C&AG's office and merger of external audit functions of Government into a National Audit Office with appointment of appropriate professional staff; v) Developing and implementing comprehensive training and capacity building for accounting staff, auditing staff and financial managers. vi) Establishment of ministerial audits committees. 12. Government is committed to deepening and accelerating its Public Enterprise Reform and Privatization programme. Government recognizes that this will be best realized by seeking Public- Private Partnerships to develop infrastructure services. The timing of disposals and share flotation will take cognizance of the absorptive capacity of the local financial markets. In addition, Govemment recognizes that there have been concems about the transparency of the implementation of the Programme to-date. Steps have already been put in place to publicize future privatizations and their tendering procedures. 13. Ensuring a predictable and impartial justice system able to operate a timely, accessible and responsive legal service will be pursued through the Legal Sector and Judicial Reform programme. Main elements include: a) Judicial Reforms; b) Implement recommendations on modernizing Companies Registry; c) Undertaking the review of a wide range of legislation, including company and commercial law; 4

74 -68 - d) Establishing Alternative Disputes Resolution mechanisms, including commercial arbitration systems and Small Claims Court; e) Establishing additional Divisions of the High Court; f) Improving courts record management by installing computerized records systems in the AG's Chamber and developing case flow management systems and strategies; g) Improved and expanded court facilities and infrastructure; h) Develop and implement training and capacity building programmes for all legal sector institutions and strengthening initial and continuing legal education initiatives; i) Develop and implement legal and paralegal capacity building programmes in the office of the Attorney General, particularly in the legislative drafting department; j) Acting upon the recommendations of the Commission into the Land Law System to provide an efficient and equitable land law framework. 14. Enhanced economy, integrity, transparency and accountability of public procurement will be promoted through improved procedures for the procurement of public goods including: a) Public Procurement Act in force b) Establishment of a Public Procurement Directorate c) Revised procurement regulations d) Establishment of an appeals process 15. A central requirement identified in all components of the Reform Programme is building capacities and training to equip the Public Service with the technical and managerial skills required in a modem service. In this regard, Government intends to strengthen the capacity of the Kenya Instilute of Administration to provide high quality management training for the public service. Where necessary, Government will seek assistance from Kenyan experts and our development partners to develop courses and upgrade the teaching faculty. Other local institutions and resources will also be employed to build technical and specialist capacities within Government. 16. In the drive towards operational efficiency, full advantage must be taken of the opportunities provided by electronic information and data handing technology. In order to do so, there is need for co-ordination, compatibility and a degree of standardization between systems, equipment and user training requirements throughout the public service. Therefore, Government will prepare and adopt an Information Technology Strategy to provide the technical framework, institutional arrangements and necessary integration of computer and other electronic hardware and software. 17. In order to generate wider participation, there is need to mount a sustained and effective strategy for Information, Education and Communication. Such a strategy would seek to inform and educate the general public on the goals, justification, implementation programmes and progress of the reforms themselves. The full range of public media would be utilized. The strategy would also have an important role to pay in extending knowledge and awareness among those responsible for implementing the reforms and so reinforcing co-ordination between components. 18. Further development and implementation of the various reform components requires careful co-ordination if integration and the potential benefits of synergy are to be reaped. A sub-committee of Cabinet provides policy direction and guidance to the reform process. Responsibility for overall 5

75 co-ordination lies with the Co-ordinating Committee of Permanent Secretaries and Authorized Officers, chaired by the H-ead of Public Service. Day-to-day working level co-ordination between reform 'streams' will be undertaken by the recently established Public Sector Reform Co-ordinating Unit (PSRCU). Appropriate technical secretariats or units have been set up in the relevant Ministries and departments to oversee the reform programme within each component. The Public Sector Management Technical Assistance Project will be implemented within this institutional framework. The Permanent Secretary/Director, Directorate of Personnel Management, reporting to the Head of Public Service, has been designated the Accounting Officer for the project. A Project Steering Committee made up of those Accounting Officers with immediate responsibility for the project's components will ensure overall coordination while a dedicated professional team will be created in the DPM to provide support to Component Co-ordinators, monitor implementation, and ensure adherence to financial and procurement procedures. CONCLUSION 19. While the Government is fully committed to the implementation of the policies and actions outlined in this letter, the collaboration and continued support of our development partners will be essential. Thus, the Government is appreciative of the joint initiative with the World Bank to establish a line of credit to facilitate the implementation of the activities contained in the Public Sector Management Technical Assistance Project. Available funds will be drawn upon judiciously, and in accordance with the Project documentation, to obtain the expertise and equipment required to move the reform programme forward. The Government looks forward to continued cooperation and collaboration with the World Bank and other development partners so that the vital reforms to our public sector can be carried out in a considered but expeditious manner. Yours ms f. Hon. Chrysanthus Okemo MINISTER FOR FItCE m 6

76 Annex 12: Lessons Learned From the Predecessor Institutional Development and Civil Service Reform Project KENYA: Public Sector Management Technical Assistance Project Numerous lessons could be drawn from the experience gained from this project but five stand out and the first four are closely linked: i) the importance of Government commitment and leadership to see such projects through to a successful completion; ii) the importance of the institutional arrangements for managing the reform process, of which the project is but a part; iii) the importance of a comprehensive policy design that embraces all the elements or functions of governnent that are germane to the attainment of the key objectives; and iv) proper sequencing to ensure that reform is planned and implemented in a logical order with as little counter-productive activity as possible. The fifth is the importance of ensuring the adequacy of the procurement structure and practices that are an essential pre-requisite to timely and effective project execution. The rest of this section will elaborate on these five points. Government commitment during project design and implementation is essential. Its importance cannot be overstated, and commitment should be manifest in several respects. Insufficient commitment was a major factor underlying the implementing of policies (e.g., increasing the size of the Teachers' Service and awarding a high pay rise to teachers) that contradicted the essential purpose of the project-to achieve cost containment through the reduction of the govermnent wage bill in order to facilitate the cost-effective delivery of services to the public. The Project thus contributed little in this respect. It should be evident early on, who, at the political level, are the champions responsible for projects with such wide-ranging political ramifications. Then the overall managerial responsibility for the project should be assigned to someone who clearly has the political backing, the authority, the stature and the means to carry it out. Furthermore, one must ensure that the key institutional players are involved in and committed to the process from the beginning (the Presidency including the Department of Personnel Management (DPM) and the Civil Service Reform Secretariat (CSRS), the Ministry of Finance and others). Given the wideranging scope and the consequences of a project such as this, it should be entrusted only to the most senior and competent of managers, within the right institutional setting, and with the authority and influence to see it through. Vested interests should be excluded from the design of reform, i.e., people are unlikely of their own volition to reform themselves out of a job. Appropriate institutional arrangements are crucial for managing the reform process. Experience in Kenya and internationally demonstrate the crucial importance of the institutional arrangements for managing the reform process. "Reform does not happen on its own. It requires drive from individual champions, supported by appropriate co-coordinating arrangements that broaden the base of reform by involving the key players. The quality of the arrangements has important consequences at every stage of the reform process: design and adoption, implementation, monitoring and evaluation. It also influences significantly both the continued ownership of, and commitment to, reform. Reform activities should be mainstreamed from the beginning- involving all the players from the highest political

77 level, through senior public service management, to the professional and technical levels."'1 4 In Kenya, "the key economic reformers have been confined largely to the Finance and Planning Ministries and the Central Bank of Kenya. It is much easier for this group to handle reforms in their own areas- fiscal and monetary policy, financial sector management, public debt, price controls, exchange and trade policies- than it is to deal with structural issues... or institutional capacity-building across government. For success in these areas, they require sustained support from counterparts in other Ministries and Departments. And this support did not develop as hoped for,...the political class within government appears to have preferred guarding its options and not lining up squarely behind the reforrns. One reason may be the inadequate consultation process; another may be the fact that sector Ministers and their staff seldom see the direct benefits of donor support in the form of additional resources for their own Ministries.... Other times the lenders or donors may have aligned themselves with well-intentioned technocrats who wished to achieve the results contracted for but lacked the political support to do so. It is our view, therefore, that donor aid can have an influence on the form of agreement reached, and on the agreed timetable for implementation, but whether implementation is carried out depends in the end much more on domestic political and economic factors than on donor money."' 5 The Bank's supervision mission in October 1998 understood well these dynamics in Kenya and, drawing upon international best practice, proposed the establishment of a four-tier institutional arrangement for the management of public sector reform in Kenya: 1. A Cabinet Committee on Public Sector Reform to provide strategic leadership and direction, to make recommendations on the key reform measures across the entire public sector to the full Cabinet, and to monitor progress with reform implementation (it was understood that such systematic and continuous involvement of a significant number of Cabinet Ministers with the main thrust of reform, including decisions on rewards and sanctions for good and bad performance, would send a powerful message of strong govemment ownership and commitment) A National Steering Committee on PSR: This Conmmittee already exists; it is at the permanent secretary level and is chaired by the Secretary to the Cabinet and Head of the Public Service. It has hitherto focused almost exclusively on civil service reform. Its remit should be expanded to cover other PSR programmes that would not report directly to the Cabinet Committee. 3. Refonn Secretariats: Each distinct reform programme, such as MTEF, should have an inter-ministerial secretariat to provide technical direction and guidance, and ensure effective co-ordination of reform efforts. 4. Reform Implementation Committees or Performance Improvement Teams: Should be established at the levels of ministries, departmnents, provinces and districts with functions and composition determined in accordance with the current medium-term strategy. 14 World Bank Aide Memoire for the October 1998 supervision mission for the Project. 15 F.S. O'Brien and T.C.I. Ryan, Aid and Reform in Africa: Kenya Case Study, August 27, In Kenya, there exists a Cabinet Committee entitled the "Economic Consultative Forum,' chaired by His Excellency the President. Perhaps it could play the suggested role although, during the life of the Project, it did not.

78 If such a structure had been in place and working in the early 1990s, with clearly demarcated responsibilities and accountabilities, and with a transparent and effective means of monitoring and reporting results to the public, it might well have assured a more coherent and effective implementation of public sector reforms over the last decade. The importance of a coherent policy design should be underscored The Civil Service Reform Programme (1993/97) (CSRP) was initially implemented as a stand-alone programme with weak links to longer-term expenditure planning. Given that containing growth of the wage bill was critical for consolidating fiscal and financial stability as well as improving the management of public resources and redirecting support to non-wage activities in the social sectors, the design of the reforms could have been more effective in capturing the main factors affecting the government wage bill. For example, the staff reduction and pay reform content of the civil service reform programme excluded teachers who are under the personnel policies of the Teachers' Service Commission. Thus, while Civil Service numbers were being reduced, the numbers of teachers being hired, and their pay, were being increased. Civil service numbers fell by 21.4 per cent whilst the Teachers' Service numbers rose by 21.8 per cent between 1992/93 and 1997/98. Thus the gains from reducing the size of the civil service were offset by increases in the wage bill for the teachers. A coherent (politically supported) personnel and pay policy covering all public sector employees would have avoided this conflict. Proper sequencing is essential. The project was prepared in support of the overall, 1992, CSRP and Action Plan, the implementation of which had already begun when the project became effective. Under the CSRP's Voluntary Early Retirement Scheme (VERS) some 30,000 staff in the lower grades exited the Service and about 1 3,000 from the same grades had left through natural attrition by The VERS was carried out rather well from an administrative point of view, but its voluntary nature led to retrenchment's depriving some ministries of critical skills or services. For example, the Ministry of Health has had to reemploy some 3000 personnel. Optimum staffing levels were not determined in advance nor were critical skills identified, and the decision was taken not to "ring-fence" critical personnel. Then the rationalization programme initially progressed very slowly for want of incentives. There was reluctance on the part of, especially, the technically oriented ministries, e.g., Health, which had already embarked on their own rationalization projects before the implementation of CSRP, to abandon their pre-csr programmes in which they had invested heavily. Indeed, the process appears to have been started without proper planning, which may explain in part why reorganization of the ministries on the basis of which functions they would retain, and identifying those to be privatized and commercialized, came much later. Ministerial rationalization was linked to the assumption that the civil service was overstaffed and therefore, one of the targets of rationalization was retrenchment of staff. This was done, however, without considering the peculiarities of individual ministries, or establishing staffing norms. Furthermore, the rationalization of individual ministries was started before they had established their core functions. This explains in part some of the difficulties experienced with rationalization; the core functions of government should ideally have been identified first.

79 In 1999, Government, on the basis of eight newly defined core functions, reduced the number of ministries from 27 to 15. This reduction disrupted the rationalization process that had already begun in some ministries. During the merger of ministries, departments at different stages of rationalization found themselves in the same Ministry. The re-grouping made some ministries too amorphous to be effectively managed. Ideally, if the urgency of containing growth in the wage bill had not been so overwhelming, the reform sequence ought to have been: the identification of core functions of government, ministerial rationalization based upon functional analysis, determination of optimal staffing norms and numbers, and then well-administered, targeted retrenchment. Public procurement practices are essential to projects being executed on schedule. The execution of the Project was to be carried out through the Department of Personnel Management (DPM) in the Office of the President in collaboration with several other ministries and departments. The institutional arrangements for procurement were not set out in the Development Credit Agreement; initially they were centralized within DPM and later they were decentralized. In the absence of a formal structure agreed to by all participants at the beginning, neither approach worked very well. One could not possibly schedule project activities with any degree of reliability under such circumstances, and the management of procurement was responsible for several lengthy delays in project implementation. One should ensure then, when several Government ministries or departments are responsible for project implementation, that the institutional arrangements for the management of the project set out an effective structure and processes for the procurement function.

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81 MAP SECTION