Document of. The World Bank PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD2470 PROJECT APPRAISAL DOCUMENT Public Disclosure Authorized Public Disclosure Authorized ON A PROPOSED GRANT IN THE AMOUNT OF US$3 MILLION FROM THE TRUST FUND FOR GAZA AND WEST BANK (TFGWB) WITH CO-FINANCING FROM THE PUBLIC FINANCIAL MANAGEMENT IMPROVEMENT PROJECT MULTI DONOR TRUST FUND (PFMIP MDTF) IN THE AMOUNT OF US$0.5 MILLION TO THE PALESTINE LIBERATION ORGANIZATION FOR THE BENEFIT OF THE PALESTINIAN AUTHORITY FOR A PUBLIC FINANCIAL MANAGEMENT IMPROVEMENT PROJECT May 10, 2018 Public Disclosure Authorized Governance Global Practice Middle East And North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective February 13, 2018) Currency Unit = Israeli New Sheqalim (ILS) US$1 = NIS 3.45 ILS 1 = US$ 0.29 FISCAL YEAR January 1 - December 31 Regional Vice President: Hafez Ghanem Country Director: Marina Wes Senior Global Practice Director: Deborah L. Wetzel Practice Manager: Renaud Seligmann Task Team Leader(s): Mark Ahern

3 AFD AS ASA CCS DA DGIRP DPs DPG DRU EU FC FM FS GA GAD GDP GFS GPC G&S HCPPP HR IFMIS IFR IMF IPF IPSAS MDTF MoFP MFD MoFP-GSD MoH MoLG MoPWH-CTD SMEs MTFF NPA OBL PA PDO PEFA PFM PMU PPFI PPL PRDP-TF ABBREVIATIONS AND ACRONYMS Agence Française de Développement Assistance Strategy Advisory Services and Analytics Commitment Control System Designated Accounts Directorate General of International Relations and Projects Development Partners Development Policy Grant Dispute Review Unit European Union Financial Controller Financial Management Financial Statements Grant Agreement General Accounting Directorate Gross Domestic Product Government Financial Statistics General Personnel Council Goods and Services High Council for Public Procurement Policies Human Resources Integrated Financial Management Information System Interim Financial Report International Monetary Fund Investment Project Financing International Public Sector Accounting Standards Multi Donor Trust Fund Ministry of Finance and Planning Maximizing Financing for Development Ministry of Finance and Planning- General Supplies Department Ministry of Health Ministry of Local Governments Ministry of Public Works and Housing- Central Tendering Department Small and Medium Sized Enterprises Multi-Year Framework National Policy Agenda Organic Budget Law Palestinian Authority Project Development Objectives Public Expenditures and Financial Accountability Public Financial Management Project Management Unit Palestine Public Finance Institute Public Procurement Law Palestinian Recovery and Development Program Trust Fund

4 SAACB SBD SPP TSA UK- DFID WAs WB&G ZBA State Audit and Administrative Control Bureau Standard Bidding Document Single Procurement Portal Treasury Single Account Department for International Development (UK) Withdrawal Applications West Bank and Gaza Zero Balance Account

5 BASIC INFORMATION BASIC_INFO_TABLE Country(ies) West Bank and Gaza Project Name Public Financial Management Improvement Project Project ID Financing Instrument Environmental Assessment Category P Investment Project Financing C - Not Required Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date 01-Jun-2018 Expected Closing Date 30-Jun-2022 Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective (PDO) is to enhance the expenditure controls, financial accountability and procurement management of the Palestinian Authority. Components Component Name Cost (US$, millions) Component 1: Improving Budget Expenditure Management and Control 1.07 Page 1 of 55

6 SUMMARY-NewFin1 DETAILS-NewFinEnh1 The World Bank Component 2: Improving Financial Accountability of the PFM System 1.00 Component 3: Modernizing Public Procurement 0.80 Component 4: Project Implementation Support and Management Costs 0.63 Organizations Borrower: Implementing Agency: Ministry of Finance and Planning Ministry of Finance and Planning PROJECT FINANCING DATA (US$, Millions) Total Project Cost 3.50 Total Financing 3.50 of which IBRD/IDA 0.00 Financing Gap 0.00 Non-World Bank Group Financing Trust Funds 3.50 Special Financing 3.00 West Bank & Gaza - Non IBRD Funded 0.50 Expected Disbursements (in US$, Millions) WB Fiscal Year Annual Cumulative INSTITUTIONAL DATA Page 2 of 55

7 Practice Area (Lead) Governance Contributing Practice Areas Education, Health, Nutrition & Population, Social, Urban, Rural and Resilience Global Practice Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment No No c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance High 2. Macroeconomic High 3. Sector Strategies and Policies Substantial 4. Technical Design of Project or Program Moderate 5. Institutional Capacity for Implementation and Sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Low 8. Stakeholders Moderate 9. Other 10. Overall Substantial Page 3 of 55

8 COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [ ] No Does the project require any waivers of Bank policies? [ ] Yes [ ] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 Performance Standards for Private Sector Activities OP/BP 4.03 Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Involuntary Resettlement OP/BP 4.12 Safety of Dams OP/BP 4.37 Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 Legal Covenants Conditions Page 4 of 55

9 TABLE OF CONTENTS I. STRATEGIC CONTEXT... 7 A. Country Context... 7 B. Sectoral and Institutional Context... 7 C. Higher Level Objectives to which the Project Contributes... 8 II. PROJECT DEVELOPMENT OBJECTIVES... 9 A. PDO... 9 B. Project Beneficiaries... 9 C. PDO-Level Results Indicators III. PROJECT DESCRIPTION A. Project Components B. Project Cost and Financing C. Lessons Learned and Reflected in the Project Design IV. IMPLEMENTATION A. Institutional and Implementation Arrangements B. Results Monitoring and Evaluation C. Sustainability D. Role of Partners V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks VI. APPRAISAL SUMMARY A. Economic Analysis B. Technical C. Financial Management D. Procurement E. Social (including Safeguards) F. Environment (including Safeguards) G. World Bank Grievance Redress VII. RESULTS FRAMEWORK AND MONITORING ANNEX 1: DETAILED PROJECT DESCRIPTION ANNEX 2: IMPLEMENTATION ARRANGEMENTS Page 5 of 55

10 ANNEX 3: IMPLEMENTATION SUPPORT PLAN Page 6 of 55

11 I. STRATEGIC CONTEXT A. Country Context 1. Economic growth is fragile percent in 2017, which is stagnant in per capita terms. Unemployment remains at 27 percent (18 percent in the West Bank and 44 percent in Gaza) and poverty in Gaza is very elevated. Lagging growth has resulted in fiscal difficulties. While the Palestinian overall fiscal deficit is down from 24.6 percent of the Gross Domestic Product (GDP) in 2008 to 7.7 percent in 2017, with the financing of the deficit largely dependent on declining budget support (from 32 percent of GDP in 2008 to 4.7 percent in 2017), a large and persistent financing gap continues to prevail. This has largely been covered through arrears to the private sector as well as the public pension fund. B. Sectoral and Institutional Context 2. Current Public Financial Management (PFM) and procurement practices are a barrier to growth. Addressing the PFM constraints has the potential to enhance private sector investment and job creation by making business with the PA more open and, over time, supporting fiscal stability by making payments more certain. It can also improve service delivery to the public, and by strengthening accountability, restore the trust of citizens and development partners whose contributions are critical to the PA s budget. While the PA has undertaken efforts to improve PFM since 2007, the outcomes have been uneven, as highlighted by the 2013 Public Expenditure and Financial Accountability (PEFA) assessment. Improvements were most significant in external scrutiny and audit while in other areas progress was more limited. Constraints at the level of the Ministry of Finance and Planning (MoFP) and line ministries have hampered the implementation of new procedures in the expenditure execution area. The limitations in expenditure control have led to the accumulation of arrears and adversely affected performance in key sectors such as health (payment arrears of some US$100 million in 2016), and municipalities (unpaid electricity and water obligations to Israeli suppliers have resulted in significant arrears). Moreover, government s oversight on the use of its resources is undermined by challenges with the accountability of the PFM system, with delays of five years in the audit of financial statements. Procurement reform is also delayed. While a new Public Procurement Law (PPL) and its implementing regulation were enacted in 2014 to regulate procurement at all levels of government, and a procurement policy and oversight body was established, several provisions of the law remain largely unimplemented. The role of civil society in monitoring the financial performance of the PA also remains weak, and there is no Legislative Council in operation to oversee and monitor budget and fiscal performance. 3. In coordination with the World Bank, the IMF (International Monetary Fund), UK Department for International Development (DFID) and the European Union (EU) support the PA s efforts in strengthening the Public Financial Management sector through Technical Assistance (TA). IMF TA has focused on establishing a macro-fiscal unit at the MoFP to help guide budget preparation within a multi-year framework (MTFF). However, this unit has struggled to build capacity and its role is not yet integrated into the budget preparation procedures. DFID TA has focused on Page 7 of 55

12 budget preparation and formulation including program budgeting, in addition to efforts to strengthen tax administration. A new project is being developed, which will commence in Its focus is broad, but the vision is to avoid overlap with the World Bank engagement on budget execution and reporting issues. EU TA has focused on external financial audit with the State Audit and Administrative Control Bureau (SAACB). This activity has been successful and led to an improved scrutiny of the financial statements of the PA, despite the long delays in the production of audited financial statements. Going forward, the EU intends to continue to promote twinning arrangements with audit institutions in member countries, while having its PFM engagement coordinated through a Multi-Donor Trust Fund (MDTF) managed by the World Bank. C. Higher Level Objectives to which the Project Contributes 4. The Project is aligned with the Palestinian National Policy Agenda (NPA) for and its PFM Strategy Paper. It supports the NPA s second pillar Government Reform with a National Priority of Effective Government and linked to a National Policy on Effective and Efficient PFM. It highlights the need for the PA to strengthen the quality of its public financial management and deliver services in the most cost-effective way. The Project further supports key areas of the PFM Strategy Paper, an annex to the NPA. 5. The Project is also consistent with the World Bank Assistance Strategy (AS) FY18-21 for West Bank and Gaza (WB&G) (Report no GZ) 1. It emphasizes the contribution of the private sector and civil society to development in WB&G. The AS aims at invigorating the private sector and creating an environment for dynamic and inclusive job creation. The Project will support its first Pillar Setting the conditions for increased private sector investments and job creation by facilitating a more inclusive approach towards the private sector in government purchasing through PFM reforms that reduce the incidence of payment arrears. Making the procurement process more open and fair are important components of this strategy, which aim at encouraging broader, and more active engagement in PA procurement. 6. The project is consistent with the World Bank Group s approach to Maximizing Financing for Development (MFD) 2. It is classified as an MFD-enabling project on the basis that enhancing private sector confidence in PA payment and procurement procedures is necessary to encourage greater private sector investment, especially in sectors where the PA remains a dominant purchaser such as energy generation. 7. The proposed Project further contributes to the implementation of the World Bank Group s Middle East and North Africa Regional Strategy, in particular its pillar on renewing the social 1 Discussed by the Board of Executive Directors on December 15, DEVELOPMENT COMMITTEE Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries elopment%20- %20Leveraging%20the%20Private%20Sector%20for%20Growth%20and%20Sustainable%20Development.pdf?source=http s://worldbankgroup.sharepoint.com/sites/mfd/ Page 8 of 55

13 contract. The proposed Project supports the strategy by: (i) strengthening accountability and citizens ability to hold the PA accountable through the Project s activities relating to financial accountability at both central and local levels; and (ii) improving sectoral institutions, for more accountability in social service delivery especially with respect to outside medical referrals in the health sector. 8. The Project also contributes to the World Bank Group s strategic goals of ending extreme poverty and boosting shared prosperity in a sustainable manner. It aims at promoting private sector investment and job creation by addressing PFM constraints, as well as improving service delivery to the public and restoring the confidence of the development partners who are critical to finance the budget. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 9. The Project Development Objective (PDO) is to enhance the expenditure controls, financial accountability and procurement management of the Palestinian Authority. B. Project Beneficiaries 10. The Project is designed to create a better environment for the private sector and citizens by strengthening service delivery to citizens, increasing oversight of PA financial management, and reducing risks of payment delays for private sector suppliers to the public sector. The main beneficiaries will be: i. The private sector: The supply of goods and services to the public sector by private sector firms is currently impeded by financial management practices, which can lead to significant payment delays, and by procurement procedures, which limit the opportunities for new and smaller firms to access government business. By strengthening internal PFM systems, the opportunities for firms to participate in the supply of goods and services to the PA will be expanded, and over time their risks will be reduced. ii. Citizens: Weaknesses in current financial management practices within the PA are contributing to both unnecessarily high costs for some inputs and unexpected delays in supply of essential commodities such as pharmaceuticals. By strengthening the PFM systems, the project aims to enhance both the quantity and quality of services to citizens. It will also improve the oversight of PA financial management and thus lead to greater trust of citizens in the PA. Page 9 of 55

14 iii. Government Institutions: The Project is designed to support selected ministries and institutions, including municipalities, by strengthening public financial management and capacity to deliver services. C. PDO-Level Results Indicators 11. The performance of the Project will be monitored through four key PDO level results indicators as follows: i. Budget Expenditure Management and Control: improved process for budget allotments established that increases predictability to line ministries based on cash forecasts; ii. Medical Referrals Expenditures Control at MoH: reduction in the gap between the budgeted and actual expenditure on referrals to less than 10 percent; iii. Financial Reporting and Auditing: public disclosure of audited financial statements takes place within two years of the end of the reporting period; iv. Public Procurement: public procuring entities disclose their procurement plans, procurement notices, and contract awards on the single procurement website. III. PROJECT DESCRIPTION 12. The Project s underlying rationale aims at addressing specific challenges in the downstream cycle of the PFM system that impede private sector involvement in the supply of goods and services to the PA. It also aims to increase citizen oversight of public financial management and accountability of the PA. The PA s PFM reform strategy covers a wider range of issues which are expected to be supported by other DPs (IMF and DFID in particular). 13. The Project builds on previous World Bank Technical Assistance (TA) activities with MoFP since 2014 while extending to and encompassing other important sectors (Education, Health and municipalities). The design of the Project responds to lessons learned from the previous interventions in two particular ways: a. Implementation and change management: The Project will establish a dedicated Project Management Unit (PMU) at the MoFP to support project implementation and to address any potential bottlenecks hindering progress or obstructing the Project s performance. Ensuring that the PMU has an effective coordination link with the Ministers office and the Senior Management team in MoFP will be critical; b. Synergy and complementarity: A Multi-Donor Trust Fund (financed by the EU and Denmark) was established, and will be used to co-finance the Project. 14. At a technical level, the Project will address three critical challenges: (i) poor expenditure management and control at central and municipal government levels that undermine service delivery to citizens and relations with the private sector; (ii) insufficient PFM accountability that Page 10 of 55

15 restricts citizen oversight over the PA finances and reduces DPs appetite for budget support; and (iii) the lack of sound procurement practices that limits actions against corruption and economic capture, discourages fair competition among contractors and leads to public services price inflation. A. Project Components 15. The Project will address a number of systemic PFM weaknesses. Some of these were identified in the 2013 PEFA and the PFM Strategy Paper ( ), or were identified by SAACB s audit reports of the 2010/2011/2012 financial statements. The Project consists of the following activities. Component 1 Improving Budget Expenditure Management and Control (US$1.07 million) 16. This component will address core weaknesses with the current expenditure management and control mechanisms through four subcomponents: a. Subcomponent 1.1 Improving Budget Expenditure Management, Financial Control and Cash Planning. This will be done by desigining, developing and implementing a proper Commitment Control System (CCS) to upgrade the existing pilot-based commitment recording system and operationalizing the annual cash planning held by the Accountant General at MoFP as well as modernizing the financial control, in line with the new CCS and international standards. While the elimination of expenditure arrears will require substantial expenditure and revenue reforms, the new procedures can help in the short term by reducing low priority expenditures, and over time will provide the MoFP with a tool to exert control in line with a more sustainable budget setting. b. Subcomponent 1.2 Establishing Medical E-Referrals System Linkages with Commitment Control System. To help the MoH and MoFP enhance the management of health referral expenditures, the Project will develop an exchange of data between the E-referrals system at the MoH and IFMIS at the MoFP. This will provide an MOH ad hoc Committee with better information to review the trends of the health referral expenditure against the budget on a quarterly basis to facilitate more active management of this activity. c. Subcomponent 1.3 Enhancing MoFP management of Intergovernmental Fiscal Transfers. The Project aims to build the capacity at the MoFP to take a more proactive role in managing intergovernmental transfers, especially where municipalities are facing financial stress. This will be done by (i) improving procedures related to transfers; (ii) establishing better forecasts; (iii) defining a calendar for transfers; and (iv) developing a methodology to introduce fiscal discipline in management of the fiscal transfers. d. Subcomponent 1.4 Enhancing the Wage Bill Establishment Control. The aim is to develop new tools and procedures to oversee the wage bill and monitor the budgetary impact of decisions on the wage bill (recruitment, promotions, salary adjustments, etc.). Page 11 of 55

16 A key requirement is to establish modalities to connect the human resources (HR) IT system at GPC and the Payroll system at MoFP. Component 2 Improving Financial Accountability of the PFM System (US$1.00 million) 17. This component will address the core weaknesses with the current financial accountability of the Palestinian system through four subcomponents: a. Subcomponent 2.1 Aligning Accounting/reporting with International Standards (GFS/ IPSAS). The Project will help the MoFP complete the alignment of the accounting and reporting on international Government Finance Statistics (GFS) and International Public Sector Accounting (IPSAS) standards. This will include issuing and implementing Accountant General s instructions in several areas including, among others, (i) mandatory cash IPSAS policies; (ii) preparation of financial statements (including at line ministries); and (iii) financial reporting in GFS-format. Trainings will be provided to staff involved with IFMIS-based transactions on the Accounting Handbook. b. Subcomponent 2.2 Improving the Bank Reconciliation Process. The aim is to help the MoFP implement an action plan prepared in March 2017 after a World Bank-financed review 3 of the bank reconciliation process between the accounting data in the IFMIS and the cash in the bank accounts. The activity will consist of improving current procedures and re-engineering some associated ICT support functionalities (software). c. Subcomponent 2.3 Reducing the Backlog of Financial Statements of the PA. The Project will help the MoFP and SAACB expedite the backlog of unissued financial statements (since 2013) to strengthen financial accountability. This will be supported by the improvement of accounting and reporting procedures but will also require the hiring of an additional temporary accounting (MoFP-GAD) and auditing (SAACB) task force to expedite the backlog. Moreover, audited financial statements will be publicly disseminated by the MoFP. Events will be held to encourage public scrutiny of the financial statements. CSOs, media, academia among others will be invited to attend. d. Subcomponent 2.4 Enhancing SAACB s capacity to audit Bank s Projects on a pilotbasis. The Project will support the audit of World Bank and other international public organizations projects by the SAACB, on a pilot basis. With some safeguards in place, the Project will engage with the SAACB in a capacity building and training program to select at least one new World Bank project to be audited by the institution. 3 Ernst and Young report WB&G Internal Control Assessment MoFP _ Bank Reconciliations Process March Page 12 of 55

17 Component 3 Modernizing Public Procurement (US$0.8 million) 18. Component 3 will support the implementation of key aspects of the 2014 Public Procurement Law (PPL) by the High Council of Public Procurement Policies (HCPPP), in coordination with the two central procuring entities; namely Ministry of Public Works and Housing Central Tendering Department (MoPWH-CTD) and Ministry of Finance and Planning -General Supplies Department (MoFP-GSD), and other procuring entities at the central and local levels. It will build on the TA activities provided by the World Bank in the past decade and will be focused on implementation. The envisaged improvements to the procurement system will contribute to strengthening the enabling environment for inclusive private sector development. This will be achieved through creating greater opportunities for private sector entities, particularly small and medium sized enterprises (SMEs), to access government procurement contracts on fair and transparent terms. This component has three subcomponents as follows: a. Subcomponent 3.1 Institutional Strengthening of HCPPP. This subcomponent will support the strengthening of HCPPP, through: (i) developing HCPPP internal systems and procedures and building capacity with its staff as a critical step to the effectiveness of the HCPPP in carrying out its regulatory and oversight functions defined by the law; (ii) establishing an independent Dispute Review Unit (DRU) in order to carry out administrative reviews of appeals from aggrieved bidders concerning alleged noncompliance by procuring entities in conducting procurement proceedings; and (iii) developing and implementing a performance monitoring framework for HCPPP to assess the functioning of the procurement system and needs for improvement in order to better inform national procurement policies. b. Subcomponent 3.2 Development of Modern Procurement Tools. This subcomponent will support the following activities: (i) implementing and further developing the Single Procurement Portal (SPP) which was established by HCPPP with the Bank s support to serve as a gateway to all information about the procurement system and proceedings (procurement plans, notices and award decisions, and other bidding procurement documentation); (ii) developing framework agreements (standard forms to solicit participation and place orders and related terms and conditions) for procurement of common-use goods and services aimed at efficiency and service-delivery benefits, and transaction-cost savings, while preserving competition and transparency; and (iii) issuing sector specific Standards Bidding Documents (SBDs) for pharmaceuticals and nonconsulting services to address the requirements of the procurement process in these sectors. c. Subcomponent 3.3 Capacity Building of the Procurement Workforce and Other Stakeholders. This subcomponent will support the implementation of a capacity building and awareness raising strategy for procurement officials both at the central and local levels, as well as other stakeholders from private sector/sme, civil society organizations and the general public. To implement the strategy, the Project will support HCPPP to: (i) develop a sustainable training program based on the outcomes of Page 13 of 55

18 the needs assessment; and (ii) deliver the training program to 300 procurement officials from procuring entities at the central and local levels. Component 4 Project Implementation Support and Management Costs (US $0.63 million) 19. This component finances costs related to project management and capacity building at the MoFP throughout the life of the Project. It will provide support for project implementation, coordination, monitoring and evalution, including fiduciary control, external audit and oversight, and prepation of Project reports. The Project Management Unit (PMU) will be located at the MoFP under the authority of the Director General of International Relations & Project (DGIRP). Training to both middle management and technical staff at MoFP will be provided on project activities and a particular focus will be on ensuring gender balance in all training opportunities. Currently only 27 percent of middle management positions are female and training opportunities are limited for female employees with only 8.6 percent of total middle managers trained in 2017 being female. B. Project Cost and Financing 20. The Project is an Investment Project Financing (IPF) and will be financed by a Special Financing Grant in the amount of US$3 million from the Trust Fund for Gaza and West Bank (TFGWB) 4. The Project is expected to be complemented by co-financing from the Multi-Donor Trust Fund (MDTF) in the amount of US$0.5 million. The MDTF was established with confirmed contributions from the EU and Denmark. Project Components Project cost Special Financing Grant (TFGWB) Trust Fund (MDTF) Counterpart Funding Component 1: Improving Budget Expenditure Management and Control Component 2: Improving Financial Accountability of the PFM System Component 3: Modernizing Public Procurement Component 4: Project Management Arrangement Total Project Costs Special financing. Page 14 of 55

19 C. Lessons Learned and Reflected in the Project Design 21. There is no previous experience implementing an IPF specifically in the PFM area in WB&G, however there have been numerous Advisory Services and Analytics (ASAs) and Non-Lending TA activities with the MoFP that highlight the importance of supporting the commitment of the authorities. Lessons learned point to some challenging issues that the Project may have to address, in particular: (i) potential delays in implementing regulations or alternative actions that required decisions at a high level (Minister of Finance, Cabinet); (ii) delays in managerial actions within MoFP senior management ; (iii) high turn-over especially among qualified staff that may affect the implementation of reforms; and (iv) a low general level of technical skills at middle management that needs to be upgraded. 22. The Project has been designed to address these challenges. The activities of the Project have been kept as simple as possible and aligned with previous TA activities. They will be implemented with the support of the PMU authorized with a leading role and directly affiliated to the DGIRP who will be the focal point for the Project and also for the PFM Strategy Paper implementation. These requirements include: (i) limiting at this stage the adoption of completely new procedures that would require new regulations; (ii) capitalizing on the TA activities carried out by the Bank since 2014, especially in expenditure management and accounting, as opposed to launching entirely new procedures that may disrupt the current ones; (iii) implementing the new procedures initially on a pilot basis; and (iv) building technical capacity and training in all units involved in the activities (especially at the General Accounting Directorate (GAD) which comprises many departments and units working separately). IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 23. The Project will be implemented and led by the MoFP, but will involve other ministries on specific components. These relate to the Ministries of Education and the General Personnel Council (wage bill), Health (medical referrals), and Local Government (intergovernmental fiscal transfers). In addition, two other implementing entities will manage and implement activities: the SAACB (audit), for subcomponents 3 and 4 of component 2 (audit) and the HCPPP (procurement), for component 3. Recognizing the interconnected nature of the reforms the different ministries will be invited to meetings to oversee their overall implementation. 24. The assignment of three different implementing agencies for the Project raises some risks but these are considered manageable. In particular, the implementation arrangements will follow the current well-functioning architecture of the flow of budget funds and payments for all World Bank projects in place in WB&G. The fund flow arrangements will include two designated accounts (DAs) for the implementing agencies; one managed by the PMU at MoFP and the other by HCPPP (SAACB will not need a DA). Page 15 of 55

20 25. The role of the PMU will be instrumental given its dual function of administering the Project and promoting the PFM change expected from the Project. It will be particularly responsible for: a. Ensuring the general administration and management of the Project in line with the World Bank fiduciary requirements, in particular: (i) contracting with seasoned experts to address challenging technical tasks (e.g. CCS, cash planning, Petroleum Authority accounting); (ii) liaising within the MoFP, and with other implementing entities and externally with the World Bank; (iii) ensuring the financial management and procurement arrangements for the activities; (iv) monitoring and evaluating the budget expenditure management according to the agreed results-framework; (v) ensuring quarterly interim unaudited financial reports and anannual audit of the project; and (vi) taking opportunities to disseminate its activities to the public and to development partners, in particular providing inputs for discussions involving the MDTF partners and with the PFM donors group. b. Promoting the change management approach expected from the Project within the MoFP and other implementing entities in line with the PFM Strategy Paper. This will be informed by the lessons learned from previous Bank TA activities since In particular, the PMU will seek to identify and resolve bottlenecks of the activities and facilitate coalition-building and streamlined decision-making mechanisms. In that regard, the role of the two residentadvisors (PFM and Procurement experts) placed directly in the two main implementing entities, the MoFP/GAD and the HCPPP will consist of three specific tasks: (i) supporting the two implementing entities (GAD and HCPPP) in managing the activities of the project, in particular by sequencing and selecting the recruitment of seasoned peripatetic experts when needed in order to drill down some issues requiring specific expertise (CCS, accounting, procurement, etc.); (ii) following up on the implementation of the activities by the three implementing entities in order to ensure compliance with the project and avoid bottlenecks or stalled activities; in particular, they will follow up on the training activities, workshops and learning exchanges related to the implementation of new procedures, and monitor and evaluate the results; and (iii) reporting to both the head of the implementing entity and the lead of the PMU in order for the latter to report back to the World Bank. 26. The location of the PMU in the Directorate General of International Relations & Projects (DGIRP) will support the implementation of the Project. The DGIRP is the best placed unit at the MoFP to: (i) coordinate, monitor and report in a neutral manner on the Project activities to the Bank, especially those implemented by GAD, the main MoFP implementer, and ensure their compliance with the objectives and expected results outlined in the Results- Framework of the project (see section VII); (ii) recruit seasoned peripatetic experts; (iii) ensure the conformity of the Project with the PFM Strategy Paper as its main author, implementer and coordinator; and (iv) coordinate with all other TA providers to ensure complementarity and prevent duplication. Page 16 of 55

21 B. Results Monitoring and Evaluation 27. The PMU will oversee monitoring and evaluation (M&E) of the Project. To lead this task, the PMU will: (i) coordinate the sequencing and implementation of the activities of the various implementers involved (MoFP, in coordination with line ministries for some activities, SAACB and HCPPP); and (ii) collect all data required to monitor the results indicators according to a Results-Framework defined in section VII and that will be disclosed in the reports of the PMU to the World Bank. The latter will also review and follow the achievements of the main results of the project as defined in the results-framework. A dedicated officer within the PMU will be in charge of this activity and will liaise in particular with the GAD and the other sectors and institutions. 28. The PMU will monitor the results of the Project and will provide insight to the MoFP Steering Committee established to follow-up on the PFM Strategy. This will ensure that the Steering Committee is kept informed about the Project s overall progress and implementation and as such will help in preventing and addressing issues that may arise and that may undermine the achievement of the agreed results and expected outcomes. C. Sustainability 29. The Palestinian Authority is committed to improve the PFM system in line with the objectives of the PFM Strategy Paper The Strategy Paper highlights the need to enhance budget expenditure management and control, financial accountability, and procurement for better public resource allocation and public service delivery. The activities of the Project over the four-year period aims to achieve sustainable results and outcomes to prevent the risk of a reform halt and to keep bearing fruits within the five-year period of the Strategy Paper through institutional and capacity building, as well as training of PFM staff. 30. By improving the downstream cycle of PFM, which is a crucial component of the whole Palestinian PFM system, the Project will also pave the ground for comprehensive PFM reform through a revised Organic Budget law. In particular, the PA intends to achieve during the fiveyear period of its PFM Strategy Paper the issuance of a renovated Organic Budget Law that would take over the outdated Basic Financial Law (1995) although the precise timing is not yet decided. While the reform is supported by the IMF, the World Bank would closely coordinate with it to ensure well-informed and timely decisions related to the downstream PFM cycle stemming from the project s implementation. 31. The sustainability of the Project s activities will also be achieved through capacity building and hands-on training activities for MoFP staff (and those of other ministries and institutions). The experts placed under the main implementing institutions and peripatetic experts will lead toward this capacity building objective. Their role is not to substitute regular staff but to guide them with new procedures and ensure the necessary transfer of knowledge. This is clear from the deliverables expected from the PMU and experts, in particular the delivery of manuals, instructions, and methodological notes with relevant training (see annex 1). The Palestinian Page 17 of 55

22 Public Finance Institute (PFI), as a MoFP Directorate, would also contribute to the sustainability of the Project given its successful on-going experience with capacity building. D. Role of Partners 32. Coordination of PFM activities between development partners (DPs) is well established in WB&G. A working group chaired by the IMF and World Bank and comprising the EU and UK DFID discusses PFM issues on a quarterly basis in order to coordinate programs, projects and TA activities. Through this framework, the Project has been closely coordinated with the activities of other DPs-TA providers, especially through a coordinated review of the PFM Strategy Paper of the PA mentioned above. Specific attention has been paid to ensure that the activities of DPs do not duplicate or overlap, and are consistent with the various components of this Strategy of which some directly link with the project (accounting, procurement, etc.). 33. The partnership between the World Bank and other DPs (EU & Denmark) around the creation of a Multi-Donor Trust Fund (MDTF) is increasing the role and engagement of DPs in the project. By contributing to the Project, the MDTF will lead to greater harmonization and alignment of partner support. Other TA providers, mostly IMF and DFID, who are not part of the MDTF are also interested in the successful implementation of the project because of its leveraging impact on their own program. a. IMF: will be mostly involved in the upstream cycle of PFM (Budget planning, Macrofiscal forecasting, and tax administration) during the period of the Project. It is also keen to be able to rely on an improved expenditure management and financial accountability framework; the latter being a core element of the quality of the macro-fiscal forecasting. b. DFID: is a significant TA provider and is currently defining its TA program for the next few years ( ). The scope of activities has initially been broadly framed but it is expected to be refined during an inception phase to ensure complementarity with the World Bank Project. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks Risk Category Rating 1. Political and Governance High 2. Macroeconomic High 3. Sector Strategies and Policies Substantial Page 18 of 55

23 4. Technical Design of Project or Program Moderate 5. Institutional Capacity for Implementation and Sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Low 8. Stakeholders Moderate OVERALL Substantial 34. The overall governance context in WB&G is challenging and the PA has struggled to effect substantive reforms. This is due to various factors including capacity constraints at the MoFP. Consequently, the overall risk rating for the Project is assessed as substantial. The major risks (high and substantial) and their mitigation measures are outlined below: a. The high risk inherent to the political and governance situation stems from a highly volatile and very specific political context of WB&G (in particular, the disruption in security conditions due to the lack of a peace agreement, three wars in Gaza since 2008, and the separation between Gaza and the West Bank). It is expected that the PFM reforms supported by the Project will positively impact the governance situation through service delivery and transparency improvements. The World Bank will closely monitor the political situation to assess any impact on implementation. One additional specific factor of risk bears on procurement reform and will require immediate attention if political commitment is not existent. Although the recently announced reconciliation between the WB&G is a positive sign, the risk linked to the Gaza situation remains high and largely unpredictable. To mitigate the risk, political and security developments are monitored regularly to allow readjustments to the World Bank operations if the need arises. b. The high risk related to macroeconomic conditions reflects the particular context in WB&G where the fiscal position is extremely vulnerable. Because the budget is formulated with an unfinanced fiscal gap, there is considerable strain on budget expenditure management as planned expenditures cannot be paid. The resultant payment arrears are extremely damaging for the private sector, creating high liquidity costs, and disadvantaging those companies not able to manage this difficult situation. Even beyond the planned financing gap, the unpredictable nature of the flow of revenues collected on behalf of the PA by the Israeli authorities, and the decline of donor aid particularly from the GCC countries create additional constraints. The Project includes activities aimed at mitigating the substantial risk by: (i) developing a cash plan/commitment control system (CCS) that would help MoFP to better manage liquidity shortages/fluctuations during budget execution, and (ii) improving the accountability of the PFM system to restore some confidence with partners defining their aid policy. Beyond these measures, the World Bank will continue to closely assess the macroeconomic situation and its impact on project implementation. c. The substantial risk related to the sector strategies and policies and the institutional capacity are closely linked and reflect the uneven record in policy reform in the PFM area. The risks are mitigated as follows: Page 19 of 55

24 (i) Scope of the project: As already mentioned, the aim of the project is not a comprehensive PFM reform, but a reform focused only on the downstream cycle; its three main components follow up on areas where Bank TA activities have been provided since 2014 as part of the 2013 PEFA action plan and for which the challenge is now to focus on effective implementation. The first three components of the Project will rely heavily on expertise through consultant services. The Project activities will mostly consist of: (i) hiring local or international experts to provide support and ensure compliance with international practices and standards; (ii) supporting software development as needed in relation with the CCS, Referrals, SPP and establishment control reforms; and (iii) training and capacity building under its various and complementary aspects. A specific challenge is the procurement component that will be very closely monitored since the implementation relies on a new institution (the HCPPP) that has not been very active so far due to understaffing and budget constraints. Recent developments have been more positive, with supportive staff appointments in MoFP- GSD, allocation of staff to HCPPP, and the inclusion of procurement in the PFM Strategy Paper prepared by the MoFP as a core component of its engagement toward better transparency, efficiency and prosperity. (ii) Monitoring of the Project: A time-bound governance and accountability framework focusing on achievable PDO-Level result indicators (outputs and outcomes) is included in the Project (see section VII) and will be closely monitored by the Project team. The PMU team will monitor the main risks at implementation stage, in particular those stemming from activities that will require new rules and instructions/regulations (e.g. CCS) and that may be hampered by delays and bottlenecks. (iii) Bank-led TA activities alongside the Project: The separate ASA activities which are expected to be funded by the MDTF will be critical to monitoring the implementation of the Project and contributing through complementary activities. More specifically, ASAs could (i) bring in experts to facilitate tasks that complement those supported by the PMU (e.g. for CCS) and (ii) support more direct coordination with other development partners in order to leverage some strategic activities. (iv) Focus on Change Management: A number of the reforms being promoted by the project will disrupt existing financial management processes. In implementing the reforms particular attention will be given to the change management challenge. This will place emphasis on ensuring effective communication with staff on the rationale for the change, and training on the new processes to build broad support for the new procedure. d. There is room for substantial improvement with regard to the financial management capacity of the PA, hence resulting in a substantial fiduciary risk. This risk is mitigated through the fiduciary arrangements around project implementation (budgeting, flow of funds, accounting and reporting, internal controls, audit, and procurement) that are described below in sections VI C and D. Page 20 of 55

25 VI. APPRAISAL SUMMARY A. Economic Analysis 35. By improving the PA public accountability and strengthening expenditure management and control of public services in some crucial sectors, the project will contribute to Palestinian economic development. Uncertainty surrounding the PA s overall fiscal management, especially the timing of the payment of expenditures, is a constraint on economic performance. The Project aims to provide (i) the private sector with improved conditions of economic equity and prosperity linked with both the modernization of public procurement and the rationalization of the payment process,and an expected decrease of payment arrears; (ii) development partners with better visibility for their support to the PA budget, which has significant impact on the development of the Palestinian economy; and (iii) civil society with more transparency and efficiency in public service delivery, in particular in the sensitive sectors of Education, Health and the local government (municipalities). These are challenges that the PA is facing in the wake of its economic development in addition to the longstanding problems resulting from the restrictions to economic activity (physical and fiscal restrictions to the activity and revenues) and the fragile and conflict-affected environment. The Project will contribute to having a positive impact on conditions and prerequisites for sounder economic development. 36. The Project is also expected to encourage improved financial reporting by the private sector. Poor PA performance in the Palestinian financial environment in recent years has not encouraged good financial governance in the private sector. By focusing on strengthening the financial accountability in the public sector, the Project is expected to also send a strong message to the private sector to improve corporate financial reporting and subsequently to contribute to a better business environment. The activities of the Project specifically dedicated to this area in component 2 will be complemented by separate Bank led ASAs funded by the MDTF for larger dissemination of these good practices in the private sector. 37. By strengthening oversight of budget expenditure in some sectors (education, health and fiscal relations with local government), the Project will contribute to their sounder development. The impact of streamlining medical referrals, beyond its expected result with the decrease of arrears for the PA budget, will be to foster a sounder balance between often high cost external supply of medical care, and creating additional capacity in the Palestinian medical infrastructure for better basic service delivery to the population, in particular the more vulnerable. Similarly, reducing opacity in the fiscal relations between the central government and municipalities will create an enabling environment for stronger development of municipal activities and economic development at that level. 38. The World Bank s involvement in the design and implementation of the proposed PFM Project will maximize the development impact of the Project. By setting the ground for the revamping of essential public financial systems, along with the World Bank s extensive involvement in the preparation of relevant technical reports, often based on international experience, Development Partners will be encouraged to contribute to the much-needed PFM Page 21 of 55