FINANCIAL MANAGEMENT OPERATIONS: ANNUAL REPORT FOR FY06

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FINANCIAL MANAGEMENT OPERATIONS: ANNUAL REPORT FOR FY06 OPERATIONS POLICY AND COUNTRY SERVICES FEBRUARY 9,2007 IN WORLD BANK 38671

2 ABBREVIATIONS AND ACRONYMS AFR CAS CFAA CSR DGF DPL EAP ECA ESW FM FMS GDLN FSAP HR IAD IASB IDF IFAC-IPSASB INT INTOSAI IPSAS ISR JV PFM K&L LCR LOA MDB MDB-FMWG MNA OECD-DAC PEFA PEFA-PMF PFM PREM PREM-PSG QAG QEA QSA REPARIS ROSC-A&A SA1 SAR SWAP UN Africa Region Country Assistance Strategy Country Financial Accountability Assessment Controller s Development Grant Facility Development policy lending East Asia and the Pacific Region Europe and Central Asia Region Economic and sector work Financial management Financial management specialist Global Distance Learning Network Financial Sector Assessment Program Human Resources Internal Audit Department International Accounting Standards Board Institutional Development Fund International Federation of Accountants-International Public Sector Accounting Standards Board Department of Institutional Integrity International Organization of Supreme Audit Institutions International Public Sector Accounting Standard Implementation Status and Results Report Joint Venture on Public Financial Management Knowledge and Learning Latin America and Caribbean Region Loan Department Multilateral development bank MDB Financial Management Working Group Middle East and North Africa Region Development Assistance Committee, Organization for Economic Co-operation and Development Public Expenditure and Financial Accountability program PEFA Performance Measurement Framework Public financial management Poverty Reduction and Economic Management Network PREM Public Sector and Governance Quality Assurance Group Quality-at-Entry Assessment Quality of Supervision Assessment Road to Europe Program of Accounting Reform and Institutional Strengthening Report on the Observance of Standards and Codes - Accounting and Auditing Supreme audit institution South Asia Region Sectonvide approach United Nations

3 FINANCIAL MANAGEMENT ANNUAL REPORT FOR FY06 IN WORLD BANK OPERATIONS: CONTENTS Page I. INTRODUCTION... 1 I1. FY06 ACHIEVEMENTS... 1 A. Country-Level Work... 2 B. Institution-Level Work Policies and Procedures Quality Human Resources and Knowledge and Learning... 9 C. Global Partnerships International Financial Institutions Institutions and Standard-Setting Bodies NETWORK ACHIEVEMENTS IN Fy Iv. LOOKING FORWARD: PRIORITIES AND CHALLENGES ANNEXES A. FY06 FM ESWI AAA B. FM CAPACITY BUILDING GRANTS AND LOANS... 21

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5 FINANCIAL MANAGEMENT ANNUAL REPORT FOR FY06 IN WORLD BANK OPERATIONS: I. INTRODUCTION 1. Over the last few years the Bank s financial management (FM) sector has been engaged in a range of efforts to ensure the quality and coverage of its services. For example, it has increased the coverage of analytic work, mounted an intensive effort to rationalize policies and improve compliance with them, and conducted purposeful recruitment efforts to increase the number of trained FM staff in the Bank. In FY06 most of these efforts came to maturity: for example, most active borrowers are covered with up-to-date analytic work, the major policy changes have been introduced, and staff numbers have reached appropriate levels. Thus FY06 could be considered a year of transition-a year in which the sector continued its steady state activities in all these areas, but also began to turn its attention to additional areas of concentration. This report summarizes the FM sector s activities during FY06 and describes the new focus areas. 2. Overview offy06 Report. Sector activities in FY06 were designed to (a) support client capacity development through analytic work, lending and grants; (b) provide quality fiduciary oversight through guidance to staff, quality reviews and monitoring, and training and learning events; (c) enhance global partnerships to meet harmonization commitments and support global standards. Following this introduction, Sections I1 hghlights achievements at the country, institutional and global levels. Section I11 illustrates Network operational highlights; and Section IV sets out the priorities going forward. 11. FY06 ACHIEVEMENTS 3. The work of the FM sector is integral to nearly all areas of the Bank s work. At the project level, in particular, FM staff must ensure that borrowers have, and maintain, appropriate arrangements to ensure that the Bank s funds are used for their intended purposes. In addition, they help the borrowing country improve its public financial management (PFM) system, thus extending development impact beyond the Bank-funded project to all of the borrower s development work. Within the Bank itself, the sector works to ensure that the institution appropriately enables and supports goodquality FM work. Beyond the institution, the FM sector works in a range of international partnerships to improve international standards for its work and harmonize approaches with other institutions. This section looks at each of these areas in turn, briefly describing the FY06 achievements in each one.

6 2 A. Country-Level Work 4. During FY06, the FM sector continued its important contribution to helping partner countries improve their PFM systems and corporate financial reporting standards and practices. 5. Strengthened Approach to PFM. Over the last year, the Bank has focused on carrying out its international commitments in the FM area by strengthening its in-country approach to PFM work. This approach is based on integration and alignment: (a) using the internationally agreed Public Expenditure and Financial Accountability (PEFA) program indicators for an integrated and harmonized approach to measuring and monitoring performance and progress; (b) strengthening integration at the country level by bringing together in a single team the three Bank sectors-fm, Poverty Reduction and Economic Management (PREM), and Procurement; and (c) aligning the Bank s PFM work with country needs and circumstances and emphasizing country ownership of PFM reforms, appropriate prioritization and sequencing of reforms within a multiyear framework, and close coordination among development partners in supporting PFM reforms. The Bank is increasingly taking this approach in country PFM work and reflecting it in work programs and Country Assistance Strategies (CASs). Afghanistan is a case in point (see Box 1). See Strengthening the Bank s Public Financial Management Work, July 25,2005, Joint Memorandum of the Vice Presidents of the OPCS and PREM networks.

7 3 Box 1. Afghanistan: A strengthened approach to PFM The Afghanistan PFM review was undertaken at the Ministry of Finance s request to develop a multiyear expenditure framework and design a strategy to strengthen the Ministry s core functions, to support the annual budget process, and to consolidate and deepen knowledge in public finance. The team included PREM, Procurement, and FM staff and made use of the PEFA indicators, which allowed for the establishment of a baseline against which future progress in performance improvement of the PFM system can be monitored. The findings fed into Bank-financed assistance, both in terms of supporting PFM reforms and agreeing appropriate fiduciary arrangements. The government and Bank management praised the team on the technical quality of the report and its impact. The final report Afghanistan: Managing Public Finances for Development (Report No AF) was translated into Dari, made available on the website of the Ministry of Finance, and discussed at a roundtable event at Kabul University in June 2006 attended by over 150 participants. The report made recommendations for both the government and donors with the aim of deepening aid effectiveness in Afghanistan. The government was urged to improve the quality of budget preparation and execution, including strengthening fiduciary standards. Donors were encouraged to channel more resources through the Government s budget as 75 percent of spending currently occurs outside Government channels and oversight. The report s findings also fed into the update of the Interim Strategy Note (IDA/R ) and the London conference that brought government and donors together in support of the Interim Afghanistan National Development Strategy (IANDS). Efforts to improve public finance in Afghanistan have been supported by a series of Bank-financed operations, led by a Senior Financial Management Specialist (FMS) based in Kabul. From the Bank s first operation in Afghanistan - the Emergency Public Administration Project (EPAP) and continuing through its follow-on projects (EPAP I1 and Public Administration Capacity Building I), building a transparent, well-functioning public administration has been the objective. As an emergency measure, an external advisor and agents were contracted to perform key fiduciary functions while in parallel financing the implementation of a centralized computerized system, the Afghanistan Financial Management Information System (AFMIS), was established to improve the central bank and establish a Treasury Single Account. The arrangements put in place provide adequate confidence in the fiduciary controls for the use of public funds though the reliance on external capacity will need to be addressed going forward. 6. Economic and Sector Work (ESW). In FY06, the FM sector used a broad range of tools and products to update country PFM knowledge-from national and subnational public sector reviews to sector-specific diagnostics and special topic policy notes. The sector undertook 10 formal PFM ESW products, 12 Accounting and Auditing Reports on the Observance of Standards and Codes (ROSC-A&As), and 10 policy notes; worked on other PFM analytic work in collaboration with PREM and procurement sector staff; and carried out sector PFM analytic work in such countries as Egypt, Jordan, and Kyrgyz Republic (see Annex A).2 In the spirit of the Paris Declaration on Aid Effectiveness3, the Bank routinely carries out ESW jointly with other development partners: in the Latin America and Caribbean Region (LCR), always with the Inter- American Development Bank (IADB), and often in collaboration with other partners (the U.K. s Department for International Development (DFID), Canadian International Development Agency (CIDA), German Technical Cooperation, Denmark, European Union (EU), and the Netherlands); and in the Africa Region (AFR), with the African Development Bank (AfDB), the European Commission (EC), and several bilateral agen~ies.~ Box 2 illustrates the changing approach to analytic work in LCR Region. Details on completed diagnostic work can be found on the Ftl website See ww. aidharmonization. org. 4 Information on completed and planned assessments is being made available on the PEFA website at

8 4 Box 2. Latin America: Responding to client demand and to the shift toward sub-national level Honduras: Public Financial Management Performance Review The Honduras PFM Performance Report, requested by the outgoing government as an updated analytic report for the new government, served two purposes: it measured improvements in the performance o f the country s PFM systems, and it established a platform for dialogue with the new government for advancing the PFM/governance agenda into different areas of the public sector. Mexico State-Level Technical Assistance to Establish Performance Indicators for Procurement, Public Expenditure, and Financial Management. All states are rated by at least two credit rating agencies, and the regular provision of well-prepared performance information could facilitate the rating process while also potentially improving the rating received. The study concluded that PFM at the state level is relatively strong when compared to states or countries o f similar levels of economic development, and good incentives exist to improve performance further. However there are also major challenges such as the lack of harmonization of accounting and budget classifications across states and across Mexico s three levels o f government and the relatively less efficient performance of the procurement processes in the states that participated in this exercise as compared to the federal government. Mexico Policy Note on Improving Fiscal Transparency and Administrative Performance at the State Level: Policy Options and Recommendations. This report is intended to bring into the policy dialogue with the Government of Mexico (GOM) the issue of better performance and accountability in public financial management at the subnational level in Mexico. It is also designed to elucidate upon a multidisciplinary technical assistance exercise that the Bank has been carrying out since September A revised form of this report is expected to be included in a broad series o f Policy Notes that the Bank intends to share with the Government and the appointed transition authorities o f the federal government elected in July PFM in Financing Instruments. The FM sector, in collaboration with PREM and the procurement sectors, uses the full range of the Bank s financing instruments to help build country PFM capacity (see Annex B). Investment projects. Stand-alone projects or project components often focus on PFM (see Box 3 on Cambodia). Box 3. Cambodia: PFM Reforms The Public Financial Management and Accountability Project (IDA H2410) aims to strengthen public financial management by improving the mobilization and management of public resources, the management of human resources, and external audit. The project has six components: 1) Revenue Management will help modernize the Tax Department by strengthening core tax administration functions and improving accountability arrangements, non-tax revenue policy and admmistration, and oil revenue management, as a means of developing policy and strengthening institutional arrangements for transparent oil and gas revenue management; 2) Budget Formulation will strengthen capacity to formulate and integrate the budget; 3) Budget Execution will help establish a Financial Management Information System and also strengthen procurement as well as Treasury systems and procedures; 4) Capacity Development will support the internal audit function, the organizational management of the Ministry of Economy and Finance (MEF), and training; 5) Merit-Based Pay Initiative will institutionalize an accelerated pay enhancement program in the MEF; and 6) Building the Oversight Capacity of Cambodia s National Audit Authority (NAA) will enable the NAA to conduct effective audits and to deliver relevant and timely audit reports that are published and made available to the public. This PFM reform program was developed in close coordination with the government and has received support from 10 other donors: the Asian Development Bank (AsDB), Australia, EC, France, Germany, IMF, Japan, Sweden, UK, and United Nations DeveloDment Programme (UNDP).

9 ~ Public 5 Sectorwide approaches (SWAps). SWAps are increasingly used to help develop country PFM capacity; some 16 SWAps involving one or more donors were reported to be under preparation or implementation in FY06. Grants and trust funds. In FY06, 14 Institutional Development Fund (IDF) grants (22% of the total) were approved to support PFM activities in the FM sector. Development policy operations (DPOs). An FY06 retrospective review of experience with the Bank s policy on development policy lending between September 2004 and March 2006 found that 72 percent of DPOs approved included PFM as part of the program ~ontent,~ covering such areas as budget formulation, medium-term expenditure frameworks, accounting, controls, procurement, and external audits (see Box 4 on Ghana). Box 4. Ghana Third Poverty Reduction Strategy Credit : Donors uniting in support of PFM Improvement financial management reform has been a focus area of the Ghana Poverty Reduction Strategy which the Bank has been supporting with a series of Poverty Reduction Strategy Credits since FY03. In FY06, PRSC3 (IDA GH) and PRSC4 (IDA GH), two credits of $125 million each, were approved. In preparing the operations, PFM analybcs were updated through an External Review of Public Financial Management (ERPFM). The ERPFM reviewed the 2004 budget execution and the 2005 budget design and took stock of progress in PFM reform implementation, and found that the modernization of budget, accounting and payroll management systems was proceeding as scheduled. Ghana showed satisfactory progress in completing prior actions under the Ghana Poverty Reduction Strategy, which included implementation of a Short-Term Action Plan for public financial management. The PFM reform achievements of 2003 and 2004 included passage of the Financial Administration Regulations (FAR) and Financial Administration Acts (FAA) providing an updated legal framework for financial management and procurement. The challenge in 2005 was implementation of the legislation, including leadership appointments, staff recruitment, training and support. Additional agreed actions included expanding the comprehensiveness of public accounts, with better accounting of the Consolidated Funds, including donor-funded activities, and assisting the Public Accounts Committee of Parliament to fulfill its functions and to ensure recommendations are implemented. Progress was satisfactory. Achievements included development of guidelines and procedures for the collation of annual public accounts, deepening of the alignment of the national functional budget with Government Financial Statistics (GFS) (with GFS-consistent reports now issued monthly), establishment of the Internal Audit Agency Secretariat and internal audit units in several operating departments, and expansion of the government s computerized financial and accounting information system, and submission to Parliament of the 2003 audited accounts for the Consolidated Fund. A multi-donor budgetary support framework memorandum between the Government of Ghana, seven bilateral partners (Canada, Denmark, France, Germany, the Netherlands, Switzerland, and the UK) and the EC sets out the common arrangements accepted by all financiers in the areas of performance assessment, funds commitment and disbursement processing, and coordinated dialogue and reporting, all linked to the Ghanaian budgetary and policy cycle. 8. Corporate Financial Reporting Standards and Practices. FY06 saw increased use of Bank-financed operations, technical assistance, and learning events to support the implementation of the A&A ROSC recommendations and capacity building. Some examples: See Development Policy Lending Retrospective, SecM , July 13,2006

10 6 0 BangZadesh: the Financial Reporting Act was drafted and the Financial Reporting Council designed in line with international good practice under the Economic Management Technical Assistance Project. 0 Nigeria: a corporate financial reporting component under the Nigeria Economic Reform and Governance Program is supporting implementation of the Nigeria A&A ROSC recommendations. 0 ECA Region: the Road to Europe: Program of Accounting Reform and Institutional Strengthening (REPARIS) continued to grow in FY06, with more than 10 countries participating. REPARIS activities include strategic input on drafting and phasing-in of legal and regulatory instruments to comply with the EU standards, institutional design and operating procedures, and design of education and training programs, as well as twinning arrangements with leading foreign institutions, and start-up support for a network of regulators, standard-setters, and officials from participating countries. 0 LCR Region: the Region piloted a dialogue series on corporate accounting and auditing using the Global Development Learning Network (GDLN), and began preparation for a 10-session series with the objective of facilitating policy dialogue within LCR countries covered by the ROSC-A&A. Inclusion of the ROSC-A&A in newly issued CASs (in Argentina, Dominican Republic and Honduras) is further evidence of progress in the mainstreaming of the FM work on corporate financial reporting. Similarly, close cooperation with the Financial Sector Assessment Program (FSAP) in Guatemala and Uruguay indicated further integration with the Bank s work and is expected to provide an avenue for implementing the ROCS-A&A s recommendations in FY07. Finally, the FM team in LCR was able to mobilize resources from country departments and trust funds to support follow-up activities relating to the Dominican Republic ROSC, including a dissemination seminar attended by 200 persons including representatives of six other LCR countries. B. Institution-Level Work 9. During FY06 the FM sector remained active within the Bank both to ensure that the conditions are in place for the institution to appropriately enable and support the country-level work of FM staff, and to oversee compliance with FM policies. 1. Policies and Procedures 10. Management worked to update the policy and procedures statements relating to FM and disbursement (Operational Policy/Bank Procedure or OP/BP 10.02, Financial Management, and OPBP 12.00, Disbursements) to reflect investment lending policy changes already approved by the Board and to rationalize policy and procedural requirements to distinguish between binding and nonbinding content.

11 7 11. Financial Management Practices Manual. As the investment lending framework was updated over recent years, the FM Network issued a number of guidelines to provide implementation support to staff. In FY06, the sector rationalized and consolidated this previously issued stand-alone guidance into the Financial Management Practices Manual for staff. The manual provides implementing guidance for implementing the provisions of OP/BP Financial Management, and sets out the Bankwide FM risk model and FM Network quality assurance arrangements. After the manual was issued in November 2005, the FM sector organized dissemination and rollout activities during and after the Fiduciary Forum. 2. Quality 12. The sector monitors two indicators of FM performance: the ratings of the quality of FM as measured by the Quality Assurance Group (QAG), and the FM ratings on active operations reported in the Implementation Status and Results (ISR) report. In FY06, the seventh Quality at Entry Assessment (QEA7) was completed, and the seventh Quality of Supervision Assessment (QSA) began (with FM results finalized in December 2006). Of the projects reviewed, 99 percent were rated satisfactory or better for FM aspects at entry, and 94 percent satisfactory or better for quality of supervision (see,table 1). In the ISR, the proportion of operations with FM ratings moderately satisfactory or higher was nearly 96 percent, almost unchanged from FY05 (95%). QEA4 QEA 7 (1100- QEA5 QEA6 (FY04 Unit 6/01) (FY02) (FY03) and05) AFR QSA6 QSA7 QSA4 QSAS (FY03 (FY05 (FYOO) (FYOl) and04) and06) ". n.a. ^ 86.." FM Performance in DPOs. In the context of the overall review of implementation experience with the Bank's development policy lending policy (OP 8.60), FM undertook an in-depth review of the implementation of the PFM and fiduciary requirements, and found the performance to be highly satisfactory.6 Specifically, the Bank generally builds on the rich analytic underpinnings on PFM systems; and PFM reform plays an important role in the content and design of many DPOs. This good performance can be attributed to the much wider availability of country PFM diagnostics and better integration of FM staff into Bank operational teams. In addition, FM staff 6 See 2006 Review of Development Policy Lending: Review of PFM Issues and Fiduciary Arrangements, FM Sector Board, June 2 1,2006.

12 8 have gained more experience with these kind of operations, and the new OP 8.60 policy and accompanying guidelines provide a useful degree of clarity. 14. Reviews of High-Risk Operations. In light of the increased institutional focus on governance and anticorruption, and the need to strengthen management oversight of multidimensional project risks, in FY06 the Office of the Managing Director introduced an OPCS review of high-risk projects performed at a very advanced stage of the project preparation process (either before Board review or before project negotiations). The FM component of this review was aimed at identifying shortcomings or omissions in FM due diligence, and it sought to ensure that assigned FM risk ratings were consistent with the macroeconomic and country context, and that FM arrangements and proposed risk mitigation measures were consistent with the assigned risk. The reviews performed between March and June FY06 indicated that the majority of the selected projects had adequately assessed project risks and had proposed sufficient FM arrangements and risk mitigating measures to manage them.* 15. Audit Compliance. The FM sector oversees the receipt of the audit reports that borrowers are required to submit. As Table 2 shows, the proportion of loan and credit audits received on time fell slightly from FY05, and audit compliance for recipientexecuted trust funds was at about the same rate as last year. In both areas there were wide Regional differences. Overall, audit receipt rates for loans and credits (audits received during the fiscal year including after the due date) declined very slightly from FY05, but the overall receipt rate for trust funds improved from FY05. With regard to audit findings, the proportion of audits received with clean opinions has shown little change in recent years (81% for FY06, 77% for FY05, 80% for FY04). Of the audits with qualifications, the highest proportion are exceptions (1 8% for FY06, 22% for FY05, 18% for FY04), and less than 2 percent are adverse or disclaimer opinions. Around 36 percent of reports were provided by supreme audit institutions (SAIs), 63 percent by private sector auditors, and 1 percent by private auditors on behalf of SAIs. Table 2. Timeliness of Audit Reports Due in FY06 (percentage) Received on time Received during FY FY06 FY05 FYO6 FY05 IBRD/ Trust IBRD/ Trust IBRD/ Trust IBRD/ Trust Regions IDA funds IDA funds IDA funds IDA funds AFR EM ECA LCR MNA SAR Bankwide Source: Business Warehouse-ARCS. 7 8 Because of high systemic corruption (as identified by CPIA or WBI) or as designated by the Regions. Of the 50 reviews conducted, less than 5 were referred to the Regions for further work and or stopped.

13 9 16. Audit Exemptions. No audit exemptions were approved by the Financial Management Operations Review Committee for FY06. Regions reported six audit exemptions for operations under $500,000, most of which were IDF grants. 3. Human Resources and Knowledge and Learning 17. Human resource management and knowledge and learning (K&L) strategy are critical to ensure that sector staff and skills can effectively respond to the Bank s evolving business needs and that the highly decentralized work force of the sector i s well managed, promoting staff skills and career development. 18. Staffillg. At the FM Sector Board level, the chair was filled with the appointment of the Chief Financial Management Officer and Head of the Financial Management Sector Board in February 2006, and a new Regional Financial Management Manager for Africa was appointed in May At the sector level, staff levels increased slightly from 137 at end-fyos to 141 at end-fy06 (see Table 4). During FY06, 10 FMSs were recruited, all in country offices, and there were 10 departures. In addition, there were four managed reassignments and five changes of duty station. Table 3. Sector Staffing as of June 30,2006 AFR EAP ECA LCR MNA SAR OPCFM LOA Sectorwide AS of HQ Asof6/30106-CO Total-asof6/30/ Knowledge and Learning Activities. FY06 was a rich year, with K&L activities delivered through a variety of modes-formal courses, brown bag lunches, workshops, roundtables and seminars, and e-learnir~g.~ The year also saw a major increase in outreach to partner countries, which achieved an unprecedented level of participation thanks to innovative delivery mechanisms such as the GDLN. Participants in learning activities increased also, more than doubling the level of participation of the previous year. Major highlights: 0 The Fiduciary Forum and Learning Week, which brought together all fiduciary staff for two weeks around subjects related to their work, career development, and the Bank s good governance and anticomption agenda (see Box 5). 0 Innovative use of GDLN to deliver K&L programs, particularly by ECA and LCR for ROSC-A&A follow-up activities. 0 Important high-level events, including a two-day public sector audit seminar using GDLN facilities to connect speakers from SAIs worldwide to debate the For hrther information, see Financial Management: FY06 Knowledge and Learning Annual Report, December 7,2006.

14 10 opportunities and challenges of public sector audit capacity development, and a public sector internal audit seminar organized in collaboration with IAD and the Institute of Internal Auditors to discuss internal audit capacity issues in partner countries. 0 On the basis of staff interests, the introduction of new topics to the course curriculum, such as FM risk assessment and management and anticorruption. Box 5. Fiduciary Forum and Learning Week 2005 Since FY02, the Financial Management and Procurement sectors have come together every other year to sponsor an integrated sectonvide Fiduciary Forum and an associated Learning Week. The FY06 Forum, organized around the theme of Working Together: Better Public Financial Management for Greater Development Effectiveness, brought together speakers from partner countries, development partners, and the Bank to discuss the centrality of financial management and procurement to development effectiveness. During the first day, a number of distinguished speakers at the ministerial level shared their experience and perspectives on the importance of PFM to achieving development results and curbing corruption. Participants spent the second day discussing a case study centered on the topics of PFM reforms, support and use of country systems and institutions, and developing partner country capacity. On the final day of the Forum, Senior Management and fiduciary staff discussed the issues of better PFM, use of partner countries systems, and how the Bank can contribute to the fight against corruption and strengthen development effectiveness. The main objective of Learning Week was to provide staff with the latest information on FM and Procurement work, particularly with regard to recent policy changes and to the skills needed to adapt to the evolving role of fiduciary staff, which increasingly emphasizes country-level work and capacity development. Thrty-two financial management and procurement courses were presented, through 66 learning sessions, most delivered jointly with Procurement, PREM, INT, and other units within the Bank. Of these courses, 10 were joint FWR learning events addressing cross-cutting issues and integration. Five courses were required for FM staff (Public Financial Management; What s New in Bank Operations; Policies, and Procedures; Disbursement Modernization; FM Risk Assessment; and Financial Management Approach to the Use of Country Systems). C. Global Partnerships 20. The FM sector is engaged in global partnerships of two kinds. Through partnerships with other international financial institutions, it aims to ensure that policy and operational issues affecting financial management work in client countries are approached in a coordinated way, and to move forward on agreements related to financial management under the global harmonization initiative. Through partnerships with global accounting and auditing institutions and relevant standard-setting bodies, it seeks to contribute to improved financial accountability globally, ensure that development issues are addressed in the activities of the organizations concerned, and develop standards, codes and practices that can be used in donor-financed operations and by client countries. 1. International Fin an cia1 Institutions 21. Joint Venture on PFM. In support of the work of OECD-DAC, the Bank continued to co-chair (with the European Commission), the Joint Venture on Public Financial Management (JV PFM). The group s FY06 work included

15 11 publishing a second volume in the DAC Guidelines and Reference Series, focusing on issues of budget support, SWAps, and capacity development;" 0 agreeing on targets and indicators to monitor progress on the two Paris Declaration indicators on PFM: (a) the number of country PFM systems that are assessed as being adequate, and (b) the extent to which donors use such systems; and 0 providing feedback to the International Federation of Accountants- International Public Sector Accounting Standards Board (IFAC-IPSASB) on its draft accounting standard dealing with development assistance. 22. Public Expenditure and Financial Accountability (PEFA) program. The Bank continued to participate actively in the PEFA initiative, a partnership of multilateral and bilateral development agencies that is working to harmonize donors' PFM approaches. Since the issuance of the PFM Performance Measurement Framework (PMF)" in June 2005, the Bank has been working with PEFA partners and the PEFA secretariat to operationalize the use of the framework, often in the context of analytic work. At the end of FY06, assessments using the framework were completed in 26 countries covering all six Regions, with almost one-third in Ahca. PEFA's review of early experience with the implementation of the framework'* found that adoption of the framework is progressing well, with extensive donor participation and indications that the framework has facilitated donor harmonization and collaboration around PFM analytic work. The review recommended that partners focus on enhancing quality, including through staff development and support; that the benefits of the strengthened approach be more systematically communicated to partners; and that PEFA develop a dissemination and training strategy and issue clarifications and supplemental guidance where needed. 23. Multilateral Development Bank Financial Management Working Group (MDB-FMWG). In December 2005, the World Bank hosted a meeting of the MDB Group that focused on monitoring progress, identifying challenges to deepening harmonization, and discussing and proposing appropriate institutional responses. All the MDBs reported progress in updating their policies and procedures, although they acknowledged that the World Bank leads in this area. The Working Group agreed to pursue supporting improvement of supreme audit institutions, harmonizing approaches to carrying out ROSC assessments, sharing information on good practice applications of the PEFA-PMF, developing joint country FM strategies, and preparing a good practice note on SWAps. 24. United Nations (UN) Family. In March 2006 the Bank and the UN signed an important framework agreement setting out the FM arrangements that apply to UN 10 See Harrnonizr'n~ Oonor. J +(mc(~,~ for Kffectiw Aid Dclrvcrjr, t'c)liiinc 3, I?iitlpet Siq~port, Srctot' Wide,4ppronches And (izyat'itj: Dewloptncnt iri Eiiuznt id tlniiuaeineiit 11 For further information on the PFM Performance Measurement Framework, see the PEFA website at fa.org. l2 PFM Performance Measurement Framework - Final Report on Early Experience from Application of the Framework, November 3,2006.

16 12 agencies executing Bank-financed projects: the UN s own FM regulations and rules now apply to any Bank or Bank-administered funds passed on to the agreement s ~ignatories. ~ With this framework in place, the Bank is now able to respond much more quickly to the international community s requests for it to work closely with UN organizations, especially in responding to emergency situations such as the Sudan Multidonor Trust Fund and the Bank s Global Program for Avian Influenza. 2. Institutions and Standard-Setting Bodies 25. The FM sector continued its strategic focus on partnerships with the key international accounting and auditing organizations, in both the public and private sectors, with the core objective of building client country FM systems to support development effectiveness. 26. Standards. The Bank continued to provide finding from the Development Grant Facility (DGF) to PAC-IPSASB for work on international public sector accounting standards (IPSAS),I4 and to a working group of the INTOSAI for work on developing public sector auditing standards that are harmonized, as far as possible, with the private sector. DGF funding was also provided to the International Accounting and Auditing Standards Board (IAASB) and to the Public Interest Oversight Board of IFAC. 27. ZFAC Developing Nations Committee. As a member of IFAC s Developing Nations Committee, the FM sector contributed to the development of a Guidance Note entitled Establishing and Developing a Professional Accountancy Body. Released in December 2005, it provides guidance on establishing a professional body, the roles and responsibilities of a professional accountancy body, education and examination, and capacity development. The guide also includes practical implementation guidance, case studies and examples developed with the input of people who are actively involved in the profession and who have themselves faced similar development challenges NETWORK ACHIEVEMENTS IN FY The Regions reported improvements in fiduciary compliance and innovative approaches to Bank-supported operations. Selected achievements are presented here. 29. Africa. The Region continued its improvement in fiduciary compliance for the fifth consecutive year, and the Ahca FM team was widely recognized, through the Africa Regional Awards for Excellence award, reflective of the improvement in the quality of FM in the Region. Other regional highlights include (a) approval of seven new IDF proposals (see Annex A), bringing the total funds under management to US$ 6.1 million, supporting country-level efforts to build institutional financial management See Finuncial li/lunog.enrtwt Frnmclivork Apr.rwnc- nf Nervi w n the JVix.lti Bonk And 7 hc United lvaficms. One of the standards under preparation was the draft standard on Financial Reporting on External Assistance (ED32) referred to in para. 21; the Bank is one of the co-sponsors. Further information available on IFAC s website at

17 13 capacity; (b) development of Regional FM service standards; and (c) pioneering work on internal audit capacity strengthening in Kenya. 30. East Asia and Pacific. There was continued dialogue and action to implement the recommendations from the Fiduciary Review in Cambodia and to work with the Government and project management to implement action plans to lift the suspension of three active projects that had been suspended as a result of the findings and outcomes of the Department of Institutional Integrity (INT) investigations following on from the fiduciary review. A fiduciary review has been initiated in the Lao PDR to assist in strengthening fiduciary compliance. Other regional highlights included: (a) country portfolio reviews conducted jointly with the other donors in several countries (Cambodia, Lao PDR); (b) project supervision conducted jointly with procurement colleagues; and (c) development of PFM indicators for local government (see Box 6). An important boost to staff professional development efforts was provided by the Regional Roundtable which gave an opportunity for all FM staff in the Region to attend a pilot course on anticomption, sessions on the core FM activities of assessment and supervision as well as capacity building. Box 6. Indonesia: Local Government Financial Management - A Measurement Framework Over the past few years, Indonesia has witnessed transitions in a number of arenas simultaneously, including political, economic, and fiscal. Of all these activities, the ongoing decentralization has been particularly challenging. The absence of systematic qualitative and quantitative information on how this fiscal decentralization is actually being managed in over 400 districts raises some very basic questions with regard to what this change might mean for the design and implementation of development activities, the integrity of decentralized government processes involved, and the impact these might have on the daily lives of Indonesians. These issues have become important for the central government as well as donors, given weak capacities of many of the district governments to manage large amounts of public resources efficiently and effectively. To address these issues, the FM team in Indonesia has developed and tested, in collaboration with PREM, a measurement framework for assessing the integrity of PFM processes at the sub-national level. Ths framework includes the full range of building blocks that traditionally apply to government financial management, such as planning, budgeting and external oversight. It adapted and expanded on nationallevel indictors that are available, for instance the PEFA PFM PMF. A diagnostic tool with drill-down capability was also developed, covering the full PFM cycle and adapted to prevailing local conditions. 31. Europe and Central Asia. On the fiduciary compliance side, the Region s FM information system-risk and Portfolio Management System (RAPMAN)-was expanded to include a corruption risk module to assist staff in the identification and monitoring of high-risk projects. Together with the Loan Department, financial management and disbursement training was organized in Almaty, Istanbul, and Zagreb, and was attended by nearly 400 client staff from 23 countries in ECA as well as participants from Afghanistan and Mongolia. To support the expansion of SWAps, the ECA FM team undertook Institutional Fiduciary Assessments in Kyrgyz (see Box 7) and Albania, the latter jointly with procurement colleagues. The move to place greater reliance on country systems continued in Ukraine, Krygyz, Albania and Georgia. On the capacity building front, two major events were hosted by ECAFM, The Advanced Program in Accounting and Auditing Regulation, developed and delivered using GDLN technology, was designed as part of a broader effort to develop and promote private and financial sector development. A Road to Europe: Program of Accounting Reform and

18 14 Institutional Strengthening (REPARIS) Workshop was also held in March 2006 in collaboration with the EC and with support from the Austrian Development Cooperation, with representatives from nine countries in southeastern Europe. The workshop was part of the initiative to work with countries to create a transparent policy environment and effective institutional fi-amework for corporate reporting. Box 7. Kyrgyz Republic Health and Social Protection Project: SWAP arrangements follow sector fiduciary assessment The Krygyz Health and Social Protection SWAP (IDA H1970-KG), a $15 million grant, will support implementation of the Manas Taalimi Health Reform Program through a sectonvide approach. The project aims to improve the health status in the country by improving access, financial protection, efficiency, equity, and fiduciary performance in the Kyrgyz health sector; ensuring sufficient and reliable financing; and strengthening the targeting of social benefits by developing effective administration and information management systems. There are two project components: Component 1, Support for the Manas Taalimi Health Reform Program and its associated Program of Work; and Component 2, strengthening the administrative system of the Ministry of Labor and Social Protection, which helps implement policy reforms and strengthens administrative systems. DFID and KhW are also supporting the program. During preparation, a Health Sector Fiduciary Assessment was undertaken jointly by FM and Procurement. The objectives were to identify strengths and weaknesses of the FM and procurement arrangements in health sector institutions, to assess and mitigate risks associated with use of Bank funds, and to facilitate a common understanding by the government and the participating financiers of the fiduciary risks of the FM and procurement arrangements in the health sector so as to design and implement appropriate capacitybuilding activities. The overall conclusion found weak FM capacity across the health sector institutions, with high FM risk. A comprehensive risk mitigation framework was developed, with both immediate and longer-term measures to strengthen FM capacity. For example, an innovative approach to external audit was developed whereby the SA1 agreed to enter into twinning arrangement with a recognized SA1 in the Region, including a specific requirement for the twinning partner to assist in the audit of the health sector. This arrangement not only ensures provision of an audit assurance on the financial status of the health program but also facilitates the transfer of skills and capacity building in the Kyrgyz SAL Other planned support includes training of accounting staff in modem management accounting techmques, to address the need for producing information for management decisionmaking and control. 32. Latin America and the Caribbean. With fiduciary work continuing to be a high corporate priority, the efforts of the Financial Management (FM) team in Latin America and the Caribbean during FY06 resulted in improvement in fiduciary compliance in several countries (see Box 8 on Argentina), steady new analytic work and significant progress in the implementation of completed analytic work. There were also targeted policy notes focusing on efficiency and accountability and on expanding the use of country systems. Efforts also focused on adopting innovative approaches to projects, closer working relationships with task teams to overcome implementation difficulties in some of the most challenging countries/projects, contributing to the Regional anticorruption strategy, and progress with the harmonization agenda.

19 15 Box 8. Argentina: Country Assistance Strategy includes Fiduciary Action Plan In preparing the CAS for Argentina, a fiduciary assessment and action plan were prepared in order to address fiduciary issues related to Bank lending in Argentina. A comprehensive program to tighten fiduciary controls over the existing portfolio and new projects was requested by the Country Director. As a result, the FM team participated in the elaboration of the Fiduciary Action Plan, which includes four dimensions: (a) a risk-based approach to supervising the fiduciary aspects of projects, (b) a recommendation on upgrading the government s own accountability units, especially the Auditor General s Office, (c) the sharing of information about procurement and financial management in relation to Bankfinanced projects on the Bank s website and (d) training civil society units on how to monitor public information and act when the information conveys negative messages. The CAS was approved by the Board in June. In the Chairman s Concluding Remarks, it was recorded that With respect to strengthening fiduciary management, Directors welcomed the Argentina Fiduciary Action Plan as an innovative approach. The team is now committed to making this program successful. Ths is a clear example of shared leadership between the Country Department and the fiduciary team, who worked together to build a broad appreciation for the fiduciary dimension of the Bank s work. Within the framework of the action plan, a dialogue developed between the Bank, the Ministry of Economy and the SA1 which led to strong buy-in to improve audit compliance, close follow-up by Bank teams with project counterparts and the SA1 on on-site audit issues, and increased technical cooperation between Bank fiduciary teams and SA1 staff. Although it is only one case, the record performance includes the first LCR case in which an SA1 has delegated audit work to private audit f m s to complement its limited staff resources. As a result of these efforts, significant improvement was reached in FY06 on timely submission of audit reports for the Argentina portfolio. As of June 30, 2006 the Bank received 76% o f the total audit reports required, exceeding the FY06 CAS target of 66% of timely audit compliance established as part of the Fiduciary Action Plan, and the target that had been set for FY Middle East and North Africa. The FM team embarked on a number of initiatives to strengthen fiduciary compliance, including issuance of a monthly Financial Management Portfolio Monitoring package as a tool to communicate to Regional Management and project teams the portfolio status in terms of compliance and risks by sector and country, and supervision of the implementation of an integrated accounting and reporting software for all projects in Iran. In support of enhanced corporate financial reporting, ROSC dissemination workshops were held in Jordan and an implementation action plan was agreed with the government of Egypt. Other activities to support PFM improvements included Institutional Financial Management Capacity Assessments for the Health and Transport Sectors in Egypt (See Box 9) and the Education and Social Sectors in Jordan, review of the Internal Audit Law and the reengineering process of the supreme audit institution (SAI) in Yemen, agreement on an Action Plan to enhance PFM in Egypt as part of a development policy operation in Egypt and a CFAA dissemination workshop and development of Country PFM Action Plan in Lebanon.

20 16 Box 9. Egypt: A consolidated institutional FM assessment for the Education, Health, Transport and Water Sectors The Institutional FM Capacity Assessment determined whether the Health, Education, Water and Transport Sectors in Egypt have acceptable financial management systems in place as part of the Egypt Public Expenditure Review. It placed special emphasis on the capacity of the sectors to undertake financial management tasks through their staff and information technology systems, to successfully deliver annual work programs and achieve the defined development outcomes. The study identified specific sector capacity gaps and recommended appropriate mitigating measures. Indirectly, the assessment reviewed the quality of current financial management systems at the governorate and district level, and evaluated ways to develop these systems to support the government s decentralization initiatives. The reports also outlined the risks associated with the identified gaps, including the risk of corruption and fraud. The assessment examined a number of components of the public financial management systems, including budget preparation and execution, accounting and financial reporting, internal controls, internal audit, and corruption risk. It examined the degree of coordination among the various entities and the accountable line ministers as well as the effectiveness o f ministry budget formulation and execution processes. The reports also used PEFA indicators to measure the degree of progress in the sectors selected. In addition, the reports identified potential government savings as a result of implementing its recommendations. A similar exercise was undertaken in two sectors in Jordan. 34. South Asia. SAR embarked upon a gap analysis study in seven of the Region s eight countries, to assess borrower s financial management systems and their adequacy to satisfy Bank requirements as well as their adherence to International Public Sector Accounting and Auditing standards. Action plans were prepared for each county and communicated to borrowers. The team continued to expand the use of country systems, putting them to use in SWAPS in Nepal and Bangladesh. The team also supported post-tsunami recovery in Sri Lanka and Maldives. 35. Loan Department. The Loan Department (LOA) issued several updated reference materials in FY06. To promote upstream consideration of disbursement arrangements and support the simplification of legal agreements, LOA issued Disbursement Guidelines for Projects in September 2005 The Guidelines were updated in May 2006 to reflect lessons learned.16 The Guidelines apply to projects negotiated under the new legal agreements (in the new legal agreements the Guidelines are referred to in the withdrawal of loan proceeds section as additional instructions ). The guidance ensures that disbursement arrangements are addressed prior to negotiations and also allows for modification of the disbursement arrangements without amendment to the legal agreement. In December 2005, LOA formally launched a guidance note on disbursement procedures for HIV/AIDS programs.i7 This guidance note responded to demand from project staff for clear and practical guidance on disbursement issues. At the 2006 Africa Region Consultation on Civil Society Response to HIV/AIDS in Nairobi, LOA staff introduced the guidance to representatives from 26 of the 29 Multi-Sector AIDS Program countries. Finally, a handbook for World Bank clients on Client Connections was also finalized; translations will be available online in early FY07. * 16 See World Bank Disbursement Guidelines for Projects, Loan Department, l7 See World Bank HIVIAIDS Program: A Guidance Note on Disbursement Procedures available on the Loan Department website. 18 See Handbook for World Bank Client Connections available on the Client Connection website.

21 ~ ~~ 17 LOA is also developing online and classroom leaming materials for Bank staff and clients to support the revised policy framework. The Client Connection website continues to experience steady growth, with increased use by Bank staff and clients to support dayto-day operations of both groups. The site is accessed by users in 150 countries from around 1,800 organizations: the countries most frequently accessing the site are Brazil, Nigeria, India, China, Vietnam, Argentina, Philippines, Indonesia, Pakistan, Cambodia, and Nicaragua, with the Africa Region having the highest number of registered users overall. Iv. LOOKING FORWARD: PRIORITIES AND CHALLENGES 36. As the previous section makes clear, the Bank's FM sector has reached a reasonably steady state in many of the areas that have been its focus for the last few years. While continuing to monitor these activities, and push for further improvements, the sector is also adopting new areas of emphasis for FY07 and beyond. They fall into four areas: implementation, governance and anticorruption, use of country systems, and capacity building. 37. Implementation. An important FY07 priority is supporting the implementation of the FM Manual, particularly on issues of fiduciary risk management and quality assurance arrangements. This work will be accompanied with enhanced information systems for work flows and portfolio performance monitoring. A second important implementation focus is progress with operationalizing PFM reforms as a follow-up to diagnostic work, and mainstreaming ROSC-A&A assessments into Bank operations. 38. Governance and Anticorruption. During FY06 the FM sector contributed, both at the Regional level and at the Anchor, to the Bank strategy to help member countries strengthen governance and to deepen the fight against corruption, including providing inputs to the paper on strengthening Bank Group work on governance and antic~rruption.'~ In support of this strategy, the FM Sector is setting out an approach to dealing with governance and anticorruption issues in operational work, building on the current FM operating model.*' The objective is to link FM sector work in providing fiduciary assurance on how Bank hnds are used with work on governance and anticorruption, particularly in three areas: (a) helping countries improve their PFM systems, a key element of the country's governance framework; (b) helping countries improve their corporate financial reporting standards and practices; and (c) strengthening fiduciary practices in Bank-financed projects. It emphasizes the importance of internal partnerships and the inter-relatedness of groupshectors in implementing the anticorruption agenda. 19 2o See Strengthening Bank Group Engagement on Governance and Anticorruption, DC , September 8, Also see Good Governance and Development: A Time for Action, Speech by Paul Wolfowitz, World Bank President, Jakarta, Indonesia, April 11, Further information on the FM operating model is available on the Jj:kl..?vygbsi~~..

22 Use of Country Systems. Using country PFM systems is the standard approach to financial management in Bank-supported operations: country systems are used if they are acceptable, taking into account any risk-mitigating or capacitystrengthening measures that may be needed. Noteworthy examples of progress in expanding the use of country systems in middle-income countries are in Mexico-the Decentralized Infrastructure project, a local currency SWAP that relies on the states auditing and accounting systems, building on the findings of the analytic work done at the state level; and the Innovation for Competitiveness Project, in which disbursement is based on a new expenditure report generated from the country s accounting system. In FY07, the sector will take stock of progress and challenges in expanding the use of country FM systems, including obtaining greater information on specific examples at the country and project level. These efforts will focus on deepening understanding of implementation issues, intensifying cross-regional learning, and responding to any emerging issues. 40. Capacity Building. Finally, the FM sector is intensifying its concern with building capacity, both in country PFM staff and in Bank staff. It will continue delivering learning opportunities tailored to borrowers needs. In addition, it will explore ways to provide more learning opportunities to Bank staff-particularly those who do not work in Washington. The FM Sector Board is developing a HR Strategy and short-term action plan to address staff skills-mix issues and staffing shortages at senior levels. The differing needs and views of country office and Washington-based staff, largely attributable to a disparity in skills mix, experience and focus will also be a priority areas. Finally, the sector plans to enhance communications, supported by appropriate technology, to ensure staff remain informed and have a channel through which they can communicate their achievements and challenges.