Document of The World Bank PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR XX MILLION (US$ XX MILLION EQUIVALENT) TO THE

Transcription

1 Document of The World Bank Report No: XXXX-ML PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR XX MILLION (US$ XX MILLION EQUIVALENT) TO THE REPUBLIC OF MALAWI FOR FINANCIAL MANAGEMENT, TRANSPARENCY, AND ACCOUNTABILITY PROJECT (FIMTAP) DATE AFTPR Public Sector Reform and Capacity Building Country Department 2 Africa Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective date) Currency Unit = Malawi Kwacha MK 1 = US$ 1 = FISCAL YEAR - ABBREVIATIONS AND ACRONYMS AAP ACB AG AGD APAC APL APPAI BFC CAS CCA CCS CFAA CG CIDA CPPR CQ DCA DfID DHRMD DISTMS DLC DO DSPC DPP ESAF ECSAFA EU FMU FIMTAP FRDPIII FRDPIII TA GDLN GOM GPN GTZ GWAN HIPC HIPC Assessment and Action Plan Anti-Corruption Bureau Accountant General Accountant General s Department Association of Public Accounts Committees Adaptable Program Loan Budget and Finance Committee Country Assistance Strategy Credit Ceiling Authority Commitment Control System Country Financial Accountability Assessment Consultative Group Canadian International Development Agency Country Portfolio Performance Review Consultants Qualification Development Credit Agreement Department for International Development Department for Human Resources Management and Development Department of Information Support, Technology, and Management Systems Distance Learning Center Development Objective Deputy Secretary to the President and Cabinet Director of Public Prosecutions Economic and Structural Adjustment Facility Eastern, Central and Southern African Federation of Accountants European union Facilities Management Unit Financial Management, Transparency, and Accountability Project Fiscal Restructuring and Deregulation Program III Fiscal Restructuring and Deregulation Program III Technical Assistance Loan Global Distance Learning Network Government of Malawi General Procurement Notice Government Wide Area Network Heavily Indebted Poor Countries i

3 HIV/AIDS IA IDA IDP2 IEC IFMIS IMF IAPSO ICB ICT IFAC INTOSAI IP I-PRSP IT/IS JEG JICA LAC LANS LCS MAB MAP MASAF M&E MIM MOFEP MPRSP MTEF MTL NAO NCB NEC NDI NORAD NS NSO NFRA NGO OMB OPC PAC PAEC PER PIU PPIA PIP PMIPS PPPA PRSP PTF QCBS Internal Audit International Development Association Second Institutional Development Project Information, Education, and Communication Integrated Financial Management Information System International Monetary Fund International Competitive Bidding Information Communication Technology International Federation of Accountants International Organization of Supreme Institutions Implementation Progress Interim Poverty Reduction Strategy Paper Information Technology/Information Systems Job Evaluation and Grading Legislative Affairs Committee Least Cost Selection Malawi Accountancy Board Malawi Social Action Fund Malawi Institute of Management Ministry of Finance and Economic Planning Malawi Poverty Reduction Support Paper Medium-Term Expenditure Framework Malawi Communication limited National Audit Office National Competitive Bidding National Economic Council National Democratic Institute National Shopping National Food Reserve Agency Non-Governmental Organization Office of the Ombudsman Office of the President and Cabinet Public Accounts Committee Public Accounts Examination Council Public Expenditure Review Project Implementation Plan Performance Management in the Public Service Payroll, Personnel, Pensions, and Advances Poverty Reduction Strategy Paper Performance Tracking Facility Quality and Cost Based Selection ii

4 RFP ROSC SA SADC SBD SIDA SOE ST SOCAM TAL TOR UNDP UPS USAID VSAT WAN WBI Requests for Proposal Special Account Southern African Development Community Standard Bidding Document Statement of Expenditures Secretary to the Treasury Society of Accountants in Malawi Technical Assistance Loan Terms of Reference United Nations Development Programme Uninterruptible Power Supply Very Small Aperture Terminal Wide Area Network World Bank Institute Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader/Task Manager: Callisto Madavo Darius Mans Brian Levy Rob Floyd iii

5 MALAWI FINANCIAL MANAGEMENT, TRANSPARENCY, AND ACCOUNTABILITY PROJECT (FIMTAP) CONTENTS Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: Procurement and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement of Loans and Credits Annex 10: Country at a Glance MAP(S) iv

6 MALAWI FINANCIAL MANAGEMENT, TRANSPARENCY, AND ACCOUNTABILITY PROJECT (FIMTAP) Draft Project Appraisal Document Africa Regional Office AFTI2 Date: Country Manager/Director: Darius Mans Project ID: P Lending Instrument: Technical Assistance Loan (TAL) Team Leader: Rob Floyd Sector Manager/Director: Brian David Levy Sector(s): BF - Public Financial Management Theme(s): Public Sector Poverty Targeted Intervention: N Program Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank Financing (US$m): Proposed Terms (IDA): Standard Credit Financing Plan (US$m): Source Local Foreign Total BORROWER IDA Total: Borrower: GOVERNMENT OF MALAWI Responsible agency: FIMTAP Secretariat, OFFICE OF PRESIDENT AND CABINET Estimated disbursements ( Bank FY02-07/US$21-4m): FY FY02 FY03 FY04 FY05 FY06 FY07 Annual Cumulative Disbursement Profile Project implementation period: Expected effectiveness date: Expected closing date: v

7 A. Project Development Objective 1. Project development objective: The objective of the project is to improve the effective and accountable use of public expenditures through capacity building and institutional strengthening for budget implementation and oversight and increased transparency of government institutions. Improved human and institutional capacity for expenditure accountability will strengthen frontline service delivery performance, and thereby contribute to poverty reduction. The project seeks to strengthen expenditure accountability by focusing on three primary components: Strengthening Accountability Institutions Improving Financial Management Systems Enhancing Human Capital Development 2. Key performance indicators: While specific performance indicators are provided in the logical framework, by the end of the project, it will be possible to characterize the public service as follows. Transparent in budget formulation, budget execution and budget reporting. Professional and timely external and internal audits, ensuring effective utilization of resources. Engaged and skilled Public Accounts Committee with the capacity to undertake its statutory responsibilities. Active community-level provision of feedback to decision makers on utilization of resources at the sub-national level. Networked IFMIS that provides timely and quality data, with internal controls increasing transparency and resource impact. In the areas of expenditure management, a skilled public service cadre of accountants, auditors, financial managers, IT professionals, and managers. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: Document number: IDA/R Date of CAS discussion: September, 2002 (ongoing) The World Bank and Government have recently launched new CAS discussions. The project is consistent with the Bank Group Country Assistance Strategy and the Malawi Poverty Reduction Strategy Paper (MPRSP). The project has been designed to support two of the MPRSP pillars: the human capital development (MPRSP pillar 2) and promoting good governance (MPRSP pillar 4). By strengthening human and institutional capacity in the public service, frontline service delivery will improve, thereby indirectly addressing the other pillars of the MPRSP. 6

8 The 1998 CAS articulated four areas of focus, of which two areas are directly related to this project: fostering human development; and improving public sector management and capacity. 2. Main sector issues and Government strategy: The key sector issues focus on expenditure management and accountability, particularly budget discip line, and a paucity of financial management capacity in the public service. From 1998 Malawi made progress in improving macroeconomic performance, implementing structural reforms, and development of democratic institutions. However, growth has been moderate (3% to 4% per annum) and annual inflation remains high, in part because of slippages in fiscal and monetary policies. In general terms, budgetary resources are spread thinly, with continuing pressure to over -spend, while there continues to be large variations between planned and actual expenditures, excessive virement, and non-compliance with financial rules and regulations. In addition, poor incentives and inadequate capacity in the public sector continues to hamper the Government s ability to effectively and efficiently carry out critical functions. These issues have been highlighted in the Malawi Public Expenditure Review (PER), HIPC Tracking Assessment (AAP) and the draft Country Financial Accountability Assessment (CFAA). Malawi remains very poor, with difficult development challenges exacerbated by a high incidence of HIV/AIDS, severe drought and food shortages, heavy reliance on a few commodities, and a low skills base. Likewise, there is increasing pressure to improve economic governance, particularly given the need to account for HIPC resources, articulation of poverty reducing programs in the MPRSP, and the Millennium Development Goals. The project will support the Government's efforts to deepen public expenditure management reforms, improve governance by building Malawi's capability to carry out budget implementation, enhance the transparency of public institutions, and build capacity for more effective service delivery. 2.1 Malawi's public sector reform agenda: Since its transition to multi-party democracy in the mid-1990s, Malawi has undertaken a broad range of public sector reform initiatives covering public expenditure management, administrative and civil service reform, capacity building, anti-corruption, and decentralization. Government has gradually instituted a Medium -Term Expenditure Framework (MTEF) which seeks to develop a strategic approach to budgeting and planning. Government has purchased and is implementing an Integrated Financial Management Information System (IFMIS) that will significantly improve overall quality and timeliness of the Government s fiscal and financial data by facilitating transaction reporting and accounting; automating processes such as cash management, commitment control, receipting and payments; and gradually introducing accrual accounting. Government has also reviewed aspects of its civil service system in order to strengthen the incentive and institutional framework with pay and grading reforms and functional reviews of line agency roles and structures. While Government has not embarked on large scale administrative reform, it has begun hiring accounting professionals on contract, as well as outsourcing other activities, a new housing allowance scheme has been introduced, and a performance contracting scheme is being implemented. Over the medium-term, Malawi's administrative reform agenda will include a thorough revision of job classes, grading, and salary structures in combination with systematic role restructuring of central line agencies in anticipation of the decentralization of service delivery responsibilities. 7

9 Improving public sector governance has also been a priority for the Government. The Anti- Corruption Bureau (ACB) was established under the Corrupt Practices Act. Since its establishment, the ACB has proven to be an increasingly credible mechanism for raising public awareness about the costs of corruption, and more important, investigating suspected corrupt practices by high officials. Likewise, the role of the Ombudsman has been prominent, with more than 5000 cases submitted annually and significant declines in maladministration reported in some agencies. Government has made progress in consulting civil society and steps are underway to institutionalize regular monitoring of budget and program implementation by local communities, NGOs, and other civil society groups. Significant progress has been made in ensuring a greater share of donor financing is being recorded in the development budget, introducing program classification in the budget and encouraging line ministries to comply with the requirements of the cash budget system. But despite these successes, Malawi has made only modest progress in achieving fiscal discipline, and allocative and operational efficiency in the public service. A range of structural or institutional deficiencies and poor capacity continue to weaken virtually all stages of the budget cycle. Formal rules and procedures governing budget formulation and appropriation, execution, and reporting are not adequately enforced. Also, extra-budgetary requests, intended as emergency measures, have become a standard practice. Moreover, the poor quality and lack of timely access to fiscal and macroeconomic data continues to be a serious constraint on budget monitoring, as does weak internal and external audit functions. Insufficient attention has been given to the monitoring of frontline performance, and improving the key public management requirements for effective program implementation. Cabinet has approved a paper on Public Sector Reform. Likewise, Government prepared its own Concept Paper for FIMTAP and Performance Management in the Public Service (PMIPS). Government aims, first, to focus on enhancing expenditure accountability through improved budget implementation. Subsequently, efforts to introduce performance management systematically across the public sector will link wage policy reforms to the role restructuring of line agencies in the context of decentralization. This sequencing reflects the GOM s recognition of the difficulties associated with implementing multiple reforms simultaneously with limited capacity. The approach also reflects the emerging view that a strong fiscal track-record in terms of aggregate discipline and strategic priorit ization will provide a robust foundation for longer term administrative reforms. 3. Sector issues to be addressed by the project and strategic choices: The project focuses on sector issues raised in the PRSP, primarily human capital development (MPRSP pillar 2) and promoting good governance (MPRSP pillar 4). Likewise, the project supports a sequenced approach to strengthening the public sector and improving expenditure management. The primary components are: Strengthening Accountability Institutions Improving Financial Management Systems Enhancing Human Capital Development Generally, Government suffers from weak accountability associated with poor compliance with formal budget rules, insufficient quality control, and limited external oversight arrangem ents. But Malawi has evolved a number of vibrant accountability institutions that play an increasingly important role in oversight and advising Government. Some, such as the Public Accounts Committee in Parliament have institutionalized their mandate, and while they continue to suffer from a lack of skills and resources, are contributing to increased accountability and transparency in Malawi. Other institutions need to be significantly strengthened. The Office of the Auditor General and the internal audit function have not 8

10 received adequate technical, professional, or financial support to effectively conduct analysis or carry out investigative functions. Likewise, other important accountability activities such as performance and expenditure monitoring (particularly by civil society) and adequate implementation of civil service performance contracts are only now being fully addressed by Government. The 2001 Public Expenditure Review (PER) and the draft CFAA notes that a viable MTEF begins with improved bu dget implementation through inter alia improving compliance with budget execution procedures, enhancing the timeliness and accuracy of reporting arrangements, and strengthening ex post accountability. To this end, an integrated financial management information system has been designed and adapted to the Malawian context. Pilots at five sites in three Ministries were carried out, implementation in other ministries is near readiness and capacity building is ongoing. In parallel with IFMIS implementation, key budget reforms are underway to improve the efficiency, quality, and realism of budget preparation, execution and reporting. To support these activities, significant resources are earmarked for the physical electronic infrastructure (Wide Area Network). Addressing the sector issues described above and improving economic governance and accountability will require a volume and quality of skills not currently available in Malawi. While limited numbers of civil servants are trained each year, Government suffers from brain drain, poor skills-needs mix, a very limited supply of critical skills, and limited capacity of training institutions. Within the context of a sequenced approach to public sector improvement, Government will implement a strategic capacity building program initially focused on financial management and accountability related skills. An additional considerable strain on the Malawi Public Service is HIV/AIDS. While a MAP programme is being developed for Malawi, the FIMTAP project endeavors to addresses the effects of HIV/AIDS on the Public Service through a very intensive training program, which will train substantially larger numbers than would be implied simply by a straightforward projection of skill requirements. In addition, the project builds into the organization of work the presumption of a very high attrition rate of staff based on comparable experiences, the assumption used in building the training program is that only one of every five people trained will remain in their job after five years. Finally, in critical skills areas, the project training plans assumes that the principal job-holder is shadowed by back-up specialists who are trained to take over as and when needed. This level of skills development will be particularly important for IFMIS, external and internal audit, and maintenance of the GWAN. 3.1 Strategic choices The most important strategic choice made jointly by Government and the World Bank was to focus on a narrow expenditure accountability project as the precursor to broader administrative and civil service reforms in the future. While Government continues to address an array of public service issues, primary focus within the context of World Bank support is on expenditure management, which will, in turn, provide a solid basis for further reforms. C. Project Description Summary 1. Project components: The project will support three components and the FIMTAP Secretariat as outlined below 9

11 Component Sector Indicative Costs (US$M) % of Total Bankfinancing (US$M) % of Bankfinancing 1. Strengthening Accountability Institutions % % 2. Improved Financial Management % % 3. Human Development % % FIMTAP Secretariat 2.3 8% 1.7 6% Total Project Cost % % Component 1: Strengthening Accountability Institutions The objective of Component 1 is to strengthen a number of important institutions (Public Accounts Committee, National Audit Office, Internal Audit Unit) that will, in tandem, usher in an era of im proved economic governance, reduced corruption, and improved allocation and utilization of resources. Most of these institutions are directly linked, such as internal audit, external audit, and the Public Accounts Committee, each of which depends on the other to fully exercise its mandate. While these institutions provide oversight, other institutions will provide inputs to decision makers on how well resources are being used. The performance contracting scheme will allow senior officials to benchmark management impact, and to take actions needed to improve performance. Likewise, the community level expenditure and performance tracking exercises will provide unique, grassroots data to decision makers on budget implementation. Component 2: Improving Financial Management The objective of Component 2 is to electronically link Government with an integrated financial management system that provides timely and quality data, while also providing enhanced internal controls to improve expenditure management. The Government Wide Area Network (GWAN) will eventually span the country and provide a backbone infrastructure for IFMIS as well as the personnel and payroll system, the Government intranet, and . The IFMIS will allow all financial management functions to be carried out electronically, greatly improving the availability of data and reducing the opportunities for virement, corruption, and mal-administration. Component 3: Human Development The objective of Component 3 is to support creation of critic al skills needed in areas of financial management, auditing, accounting, management, and information technology in order to maintain the improvements and reforms discussed above. The Capacity Building Fund will focus on critical skills in a demand-driven environment and will supplement the national training strategy. FIMTAP Secretariat The objective of the Secretariat is to serve as the primary implementing agency for FIMTAP, responsible for all aspects of project implementation including procurement, disbursement, project financial management, as well as monitoring and evaluation. 2. Key policy and institutional reforms supported by the project: The key policy and institutional reforms are related to improved financial management. These include implementation of financial management regulations, the strengthening of 10

12 internal audit, automation of the Government s budgeting and accounting system, and implementation of the contracting scheme for top cadres. Indirectly linked to these policy actions are passage of new Finance and Audit Acts which will provide the legal framework for improving the Internal Audit function and strengthening the National Audit Office. Institutional reforms and/or strengthening are also critical for overall economic governance and accountability. These will include a more robust role for external audit and the Public Accounts Committee, and expanded monitoring of expenditures and service delivery, and budget execution tracking. 3. Benefits and target population: The benefits of the project will be increased resource predictability in the public sector, greater availability of quality fiscal and financial data, enhanced transparency of government functions, and more developed human resources in the public service. These benefits will support frontline service delivery performance, and thereby contribute to poverty reduction over the medium term. The project largely targets the following: Core economic management agencies and ministries. Independent and Government accountability institutions. Civil society. Public sector agencies and their employees who will benefit from capacity building. 4. Institutional and implementation arrangements: 4.1 Institutional arrangements: The institutional arrangements provide for effective implementation of the project with the highest level of fiduciary oversight. Design of the institutional arrangements benefit from IDP2 and the ongoing Country Project Portfolio Review (CPPR) in Malawi. Deputy Secretary to the President and Cabinet (DSPC): The DSPC, as GOM Task Manager for FIMTAP will maintain overall responsibility within Government for the project and coordination of components. The DSPC is the accounting officer for the project. Sub-Component Managers/Technical Committee: Each sub-component will have a GOM manager who is responsible for implementation of the sub-component and who will liaison with the FIMTAP Secretariat regarding procurement, financial management, etc. The Sub- Component Managers will collectively make up the FIMTAP Technical Committee and will be responsible for managing resources to produce the outputs required for the project to meet its objectives. Sub-Component Managers will have primary responsibility for undertaking regular monitoring and evaluation through timely submission of quarterly and annual progress reports and work plans. Sub-Component Managers are technical specialists in their respective fields. FIMTAP Secretariat : General management and administration of project activities will be the responsibility of the FIMTAP Secretariat in the Office of the President and Cabinet. The Secretariat will be responsible for the following functions: (i) ensuring the timely and appropriate procurement of all technical assistance, equipment, training, and related services required for the successful execution of the proposed project; (ii) ensuring the timely identification and resolution of project execution issues and the optimal application of successful improvement measures; (iii) evaluating the overall performance of the proposed project, its individual components and project elements, providing regular reports on project issues and progress; (iv) keeping and maintaining project accounts; and (v) coordinating and preparing annual reports, audit reports and work plans. 11

13 The FIMTAP Secretariat will include a Project Manager, Financial Management Specialist (accountant), two Procurement Specialists, Monitoring/Evaluation Specialist, and required support staff. FIMTAP Steering Committee: A FIMTAP Steering Committee will be established prior to effectiveness. The Steering Committee will comprise members of Cabinet, Principal Secretaries, and representatives of civil society. The Steering Committee will provide oversight and will regularly review project progress. Likew ise, the Steering Committee will endeavor to ensure alignment between the FIMTAP and the PRSP. The Terms of Reference for the Steering Committee were agreed with the World Bank prior to negotiations. Accounting Officers (Principle Secretaries): The Principle Secretaries in each of the implementing agencies will be responsible for supporting the component coordinators and ensuring achieved results for their respective components pursuant to the logical framework. Financial Management Committee: A Financial Management Committee representing the Ministry of Finance, Office of the Accountant General, NAO and civil society will oversee financial management of the project. The committee will regularly review financial reports and will provide updates to the Steering Committee. The Terms of Reference for the Financial Management Committee were agreed with the World Bank prior to negotiations. CABINET DSPC Steering Committee Financial Management Committee FIMTAP SECRETARIAT Technical Committee Component Managers Component Managers Component Managers Principle Secretaries Principle Secretaries Principle Secretaries 4.2 Implementation Each component of the project will be implemented according to terms and conditions acceptable to the Bank. These terms and conditions will provide the basis for time-bound action plans, competitive bidding, and fiduciary oversight. The project plan of action, comprising component specific logical frameworks, the budget, the procurement plans and the project implementation plan, was agreed between Government and the Bank prior to negotiations. The plan of action will be regularly updated during project implementation. 4.3 Financial Management 12

14 The FIMTAP Secretariat will be responsible for maintaining accounting records for all project related expenditures for all components following generally accepted accounting practices. Given the responsibility of providing strong financial management to the project, additional capacity in accounting and financial management is being added to the Secretariat. The Secretariat will utilize a computerized financial reporting system and will employ a qualified financial manager. Oversight will be provided by the Financial Management Committee established to monitor and take action on risk areas in the administration of finance. The Financial Management Committee will be authorized to prescribe preventive measures to ensure that project implementation is effective and timely. Project records and accounts, including the Special Account and the Statement of Expenditures (SOEs) will be audited annually in accordance with appropriate auditing principles consistently applied by auditors acceptable to the Bank, and with terms of reference provided by the Bank. Audit reports will be submitted to the Bank no later than six months following the end of the fiscal year. 4.4 Procurement Procurement will be coordinated by the FIMTAP Secretariat. Each Component Coordinator will be responsible for: Preparing annual work plans and procurement plans Developing terms of reference (TORs), short lists, and requests for proposals (RFPs) for consulting assignments, and the preparation of bidding documents, including technical specifications, for goods contracts. Establishing a proc urement filing system and maintaining procurement documentation The Component Coordinators will clear their plans and procurement documentation with the FIMTAP Secretariat, which will play a central role in: Consolidating the annual plans of all components Vetting procurement documents and providing technical advice to procurement staff of agencies and departments Advertising contracts when appropriate Participating in the evaluation of bids and proposals Preparing no objection letters for onward transmittal to the World Bank Advising Component Coordinators and Principle Secretaries on matters pertaining to implementation of the project. 4.5 Flow of Funds Ensuring a consistent and transparent flow of funds is critical to project success. The principles for flow of funds arrangement for FIMTAP are based on simplicity and accountability. Due to these principles, the flow of funds arrangements are largely centralized. There will be one Special Account held by the FIMTAP Secretariat. All payments on contracts will be made by the FIMTAP Secretariat for all components, with the appropriate debits being made to the Ministerial accounts through IFMIS. Hence, at the end of each procurement or delivery of goods or services, the Sub-Component Manager will request payment be made on a specific contract. For recurrent costs within Sub-Components, the Sub-Component manager will, on a quarterly basis, submit Statements of Expense (SOE) to the FIMTAP Secretariat for recurrent expenses made directly related to the proje ct. Upon verification by the FIMTAP Secretariat, a transfer 13

15 will be made from the Special Account to the Sub-Component account within the budget, hence repaying the Sub-Component for project recurrent costs. Each Sub-Component manager will be responsible for maintaining the sub-component budget, but this will be maintained in coordination with the project accountant, who will maintain the master budget. 4.6 Monitoring and Evaluation The complex nature of expenditure accountability and institutional reform require particularly strong monitoring and evaluation. An external evaluation and review will be carried out midway through the project. However, this review will not substitute for sound project management practices, which require constant monitoring and regular evaluation. The FIMTAP Secretariat will include a Monitoring and Evaluation Specialist who will monitor expected outputs and outcomes, report to the Project Manager and GOM Task Manager on progress and challenges and will regularly assess the efficacy of project management systems, particularly regarding the collection of data, compilation of analysis and the development of conclusions and recommendations to inform future project action. Likewise, the Monitoring and Evaluation Specialist will assist Component Coordinators in establishing reporting schedules, identifying existing data sets, refining performance indicators, and drawing conclusions from studies and analysis. The program design also recognizes that monitoring and evaluation is a critical and ongoing function of Central Government. Ministries must be able to track key trends regarding economic growth, expenditure management, poverty, and social indices. As outlined in the project description, three activities support the cross-governmental monitoring and evaluation function, namely institutional support to the National Economic Council, performance monitoring at the local level, and monitoring/evaluation capacity building in line/sector ministries. D. Project Rationale 1. Project alternatives considered and reasons for rejection: It was agreed during project preparation that broad support for both aspects of the Government s public sector agenda namely, administrative and budgetary reforms might be overly complex if designed within a single operation. Moreover, commitment to the public financial management agenda and capacity building is demonstrable and Government indicated its preference that the Bank take the lead role in these areas. Some administrative reforms will continue with support from other donors and with Government own resources. Upon successful completion of key expenditure accountability reforms under this credit, alternative types of projects, such as an Adaptable Program Loan (APL), may be applicable for future projects. 2. Major related projects financed by the Bank and/or other development agencies There are strong linkages between the project and a number of other donor supported activities. The major related projects supported by the Bank and other development partners are listed below. 14

16 Sector Issue Project Latest Supervision (PSR) Ratings (Bank -financed projects only) Implementation Progress (IP) Development Objective (DO) Bank-financed Anti-corruption, public sector IDF Grant for Governance governance Survey underway NA NA Second Institutional Civil service reform Development Project (IDP2); NA NA recently closed Community-based capacity building MASAF S S Public sector capacity building Capacity Assessments underway NA NA HIV/AIDS HIV/AIDS MAP under preparation NA NA Financial Management FRDP III TA S U Component Donor Involvement UNDP Parliamentary Training Programme, ongoing 1.1 Public Accounts Committee CIDA Participatory Democracy Programme, preparation NDI Ad Hoc/issue specific (DfID provides resources) 1.2 External Audit ADB Governance Project, closes 2004 SIDA NOA working on proposal for TA support 1.3 Internal Audit DfID funded original study 1.4 Performance Contracts None 1.5 Expenditure Tracking 2.1 IFMIS DfID possibly TA support 2.2 GWAN UNDP TA support 3.1 Training Fund All donors provide some training IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in proposed project design: The following lessons from the public sector reform experience in developed and developing countries have been identified and incorporated in project design, as well as the recent Implementation Completion Report (ICR) for the IDP2 project: Sequencing of institutional reforms improves credibility of the budget process. Experience across African countries suggests that service delivery fails when budget implementation, expenditure management and accountability is poor. Increasingly, reforming governments are focusing on building the credibility of the annual budget process by focusing on downstream processes such as execution, monitoring, and accountability. FIMTAP supports this strategic shift towards building systems and strengthening institutions that improve budget implementation, before investing more heavily in elaborated medium-term planning exercises. Implementation targets should be realistic. Overly complex design and ambit ious implementation targets are unrealistic for low capacity beneficiary agencies. This leads to low disbursements during the early stages of project implementation as well as delays in resolving procurement-related issues. During preparation the number of components in the FIMTAP Project was significantly reduced to address complexity concerns. Likewise, it was agreed with Government prior to negotiations to centralize procurement within the project and to expand the number of procurement staff in the Secretariat. 15

17 Government ownership and commitment is key to institutional reform. Complex public sector and institutional reforms place a premium on ownership and commitment at the highest levels. Key components of FIMTAP such as IFMIS and capacity building have received significant high level support and commitment to objectives is perceived to be very high. The inclusion of key policy-based conditions for negotiation, such as Cabinet approval of the Finance and Audit bills also served as an indicator of Government commitment. Public sector training can be provided efficiently when conducted in an agency-wide, demand-driven environment. Historically, entrepreneurial individuals in the public sector have been able to seek out training opportunities. The binding capacity constraint on frontline performance, however, is providing training that is in line with institutional demands or agency-wide objectives. The capacity building window in the project provide a sustainable, structured framework for train ing. 4. Indications of borrower commitment and ownership: Government initiated the project by preparing a Concept Paper which is aligned with the PRSP. Borrower commitment has been very high at the level of the President, the head of the Public Servic e, the Minister of Finance, and other high ranking technocrats. The overall strategic thrust of program (expenditure accountability and capacity building) has been championed by the Minister of Finance, while the project directly responds to two pillars of the MPRSP of which the President has been a significant supporter. Component ownership is relatively strong based on the component manager approach and ensuring that Principal Secretaries are the accountable officers for each component. Likewise, components situated outside central Government (Parliament, External Audit) have strong commitment, as these agencies see their role as unique and their inclusion in the project as fortuitous. 5. Value added of Bank support in this project: The Bank has been providing support to the Malawi public sector reform agenda since the early 1990s. In addition to supporting aspects of civil service reform and public sector capacity building under IDP2, IDA financed diagnostic work underpinning the GOM s framework for financial management reforms. Revision of financial regulations were financed under FRDP III. Policy dialogue on budgetary reforms have been ongoing as well. The Bank s contribution to the formulation and design of FIMTAP draws on lessons from its past involvement with institutional reforms in Malawi, international experience on budgetary reforms (including IFMIS implementation), as well as more recent thinking on strategic sequencing of MTEFs (see 2001 PER) in the context of improved expenditure management. The donor community has increasingly expressed concerns about the governance of public resource management in Malawi in recent years. Such concerns reflect in part the international community's interest in effectively tracking poverty-related spending of HIPC resources. They are also indicative of the need, on the part of donors, to ensure the fiduciary safeguards that will enable more systematic use of budget support as a modality for providing donor assistance. Against this backdrop, FIMTAP will strengthen the "nuts and bolts" of the public sector financial management system, including mechanisms for expenditure monitoring and accountability. E. Summary Project Analysis 1. Economic: 16

18 A number of economic benefits will be accrued through the project, which will lead to improved front line service delivery and reduced resource leakages. Internal and external audit will be strengthened, leading to more effective control over the variability of expenses due to improper or inappropriate purchases, allowances, and loss. An integrated financial management system will provide for linkages between the planned budget and actual cash budget demands, thereby allowing managers to better schedule expenditures to minimize cash flow problems and improve service delivery. Increased accountability for managers and more transparency across Government will improve efficiency, reduce corruption and provide for a more conducive Public Service. Enhanced capacity will provide the Public Service will skills to carry out critical tasks and better manage implementation of core service delivery functions. 2. Financial: The financial implications of the project are related to improved efficiency in the budgeting process, reduced leakages due to increased transparency, and effectiveness of public servants. Overall, improved financial management will ensure better value for money, although direct financial benefits may not be realized in the short term. 3. Technical: The project will utilize lessons learned in other reform programs, while regional experience will be critical in implementation of the IFMIS and other complex sub-components. The strategy of focusing on expenditure accountability and capacity building before launching a broad administrative reform agenda will be reviewed on a regular basis to account for needed administrative changes and to ensure linkages between expenditure management changes and potential restructuring, decentralization or right-sizing of the public service. 4. Institutional: The institutional arrangements for managing the project and for ensuring sustainable results build upon experiences in earlier stages of the reform program. The FIMTAP Secretariat will include technical support personnel for Finance, Procurement and Monitoring and Evaluation. The Secretariat is housed in the Office of the President and Cabinet, thereby providing a natural linkage to the head of the civil service (Secretary to the President and Cabinet) and to public service reform issues. 5. Environmental: Not applicable. 6. Social: By involving communities and parliamentary institutions in budget monitoring, the project will promote demand-side pressures on Government and public officials at the national and local levels. The empowerment of communitie s to hold government accountable will help forge the accountability relationships necessary to deepen democratic decentralization and good economic governance in Malawi. In addition theproject endeavors to addresses the effects of HIV/AIDS on the Public Service through a very intensive training program, which will train substantially larger numbers than would be implied simply by a straightforward projection of skill requirements 17

19 7. Safeguard Policies: Policy Environmental Assessment (O P 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Applicability No No No No No No No No No No F. Sustainability and Risks 1. Sustainability: The sustainability of reforms under the project depends on Government maintaining its strategic focus on improving expenditure accountability through strengthening budget management and capacity building. Specifically, maintaining strategic focus implies that: (i) the objectives and instruments of reform are widely disseminated; (ii) senior staff are held accountable to the project s objectives; (iii) the recruitment and retention of staff in critical areas is given top priority; (iv) the fiscal implications of reform will be budgeted and costed on an annual basis; and (v) the impact of the project is monitored rigorously to encourage learning-by-doing. Real-time monitoring of the impact of new operating systems such as IFMIS or accountability mechanisms such as community-based monitoring on budget implementation is essential. In addition to assessing the effectiveness of various types of capacity building, rigorous monitoring and evaluation provides the basis for continual adjustments in design and learning-by-doing. Finally, sustainability will depend on the continued commitment of the political and technocratic leadership and the cascading support to middle management and throughout the entire public service. Sustainability over the longer term will be predicated on ownerships of reforms and building adequate capacities for improved service delivery. 2. Critical Risks Implementation of the project poses various technical, managerial, and coordination-related challenges for the Government. In addition, significant change management issues are likely to emerge as new operating systems, institutional reforms, and significant investments in upgrading capacity are introduced into a weak public sector environment. A variety of risk mitigation measures have been taken to ensure that investments in Malawi s capacity to manage its public resources accountably and transparently are sustainable. Risk Rating Risk Mitigation Measure Future Government s or senior civil servants will not Component managers responsible for the project are be as committed to improving expenditure S technical-level civil servants, whereby a two-level accountability commitment to the project is designed to maintain some progress regardless of political change. Accountability institutions expose corruption or M It is important for these institutions to become embedded 18

20 inefficiencies and their influence or impact is curtailed. The project will be difficult to manage. The complexity of IFMIS will overwhelm the implementing agencies and slow other expenditure management reforms Over time, interest will be lost in key components of the project, such as IFMIS, the training fund, or internal audit, due to perceptions of poor implementation. Political leaders will have weak incentives to improve accountability and transparency. While training programs are ambitious, training capacity is weak Overall Risk Rating M S S S M S in the culture of civil society in Malawi, whereby their oversight responsibilities are demand-driven and their support is broadened beyond Government and donors Project design has focused on streamlining subcomponents into three cohesive components. Each sub-component is designed to limit complexities and the number of transactions required to reach the expected output. Government and the Bank have focused on realistic phasing of implementation and ensuring adequate project management within the implementing agencies. An aggressive monitoring and evaluation system will serve as an early warning system to both implementation challenges, and changes in perception within the civil service regarding reforms underway. The project is being linked closely to both the HIPC initiative and the PRSP, which ensure senior political commitment and ensure the reforms envisioned remain at the forefront of the political and development debate. Support will be provided to also strengthen indigenous training institutions by ensuring quality and expanding the skills base within a broad range of training institutions. Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: There are no controversial aspects, other than those outlined as risks above. G. Main Loan Conditions 19

21 1. Effectiveness Conditions: Implementation Actions (i) FIMTAP Secretariat in place, to include project manager, financial management specialist, procurement specialist and monitoring/evaluation specialist. (ii) Financial management system satisfactory to IDA, to include the Financial Management Committee (iii) Procurement management system satisfactory to IDA (iv) Project Implementation Plan (PIP) satisfactory to IDA Technical Actions (i) IFMIS Action Plan is satisfactory to IDA (ii) Sr. Internal Audit Advisor has been hired Policy Actions (i) Finance Act is submitted to Parliament (ii) Audit Act is submitted to Parliament 2. Other None H. Readiness for Implementation [ ] 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] 1. b) Not applicable. [X] 2. [X] 3. The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] 4. The following items are lacking and are discussed under loan conditions (Section G): I. Compliance with Bank Policies [X] 1. This project complies with all applicable Bank policies. [ ] 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. 20

22 [signature] Team Leader: Rob Floyd [signature] Sector Manager/Director: Brian David Levy [signature] Country Manager/Director: Darius Mans 21

23 Narrative Summary Annex 1: Project Design Summary MALAWI: FINANCIAL MANAGEMENT, TRANSPARENCY, AND ACCOUNTABILITY PROJECT (FIMTAP) Key Performance Indicators Monitoring and Evaluation (Means of Verification) Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: From Goal to Bank Mission Improving public sector capacity and economic governance 1. Enhanced credibility and reliability of the budget system to execute on 1.1 Public expenditure reviews 1.2 Mid-term Government 1. Public expenditure management remains a focus of Government Project Development Objective: Improve the effective and accountable use of public expenditures through capacity building and institutional strengthening for budget implementation and oversight, and increased transparency of government institutions planned expenditures 2. Adequate capacity built to maintain expenditure management reforms and improvements Key Performance Indicators 1. Accountability institutions expand role and prominence 2. Financial data quality and timeliness improved, and internal controls strengthened budget execution reports 2.1 Skills assessments 2.2. Timeliness and quality of budget execution reports and audits Means of Verification 1.1 Public Accounts Committees reports 1.2 Country Financial Accountability Assessment 1.3 Audit or General's Report 2.1 Public Expenditure Review 2.2 Auditor General s Report 2. Local institutional capacity to implement training programs Critical Assumptions GOM pursues sequencing strategy for public sector reform, firstly focusing on expenditure management without introducing major new initiatives that will tax already limited capacity 3. Capacity built sufficiently to maintain expenditure management improvements 3.1 Skills assessments 3.2 Performance contract feedback Component Summary Key Performance Indicators (time, number, statistic) Monitoring and Evaluation Critical Assumptions 22