Annex. Sector Policy Support Programme: - Project mode (centralised management). DAC-code Sector Public Finance Management

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1 Annex 1. IDENTIFICATION Title/Number Public Finance Management (PFM) Reform Support Programme for Tajikistan DCI-ASIE/2011/ Total cost EU contribution: EUR Aid method / Method of implementation Sector Policy Support Programme: - Project mode (centralised management). DAC-code Sector Public Finance Management 2. RATIONALE AND COUNTRY CONTEXT 2.1. Country context and rationale for SPSP Economic and social situation and poverty analysis Over the period Tajikistan s real GDP per capita averaged year-on-year growth of 6.1% (IMF World Economic Database, 2011). The IMF s annual progress report on PRSP implementation for 2010 found that reductions in poverty and extreme poverty over this period were linked to economic growth supported by macroeconomic, social and political stability. Tajikistan continues to face a number of serious socio-economic challenges requiring sustained growth and poverty reduction efforts. Although the economy has been recovering well from the adverse impact of the global financial crisis, Tajikistan remains the poorest CIS country, and clearly lags behind comparator countries over a range of key indicators, including GDP per capita, social expenditures per capita and poverty rates. According to the latest Living Standards Survey of 2009 the poverty rate was reduced from 72.4% in 2003 to 46.7% in 2009 (Tajikistan Living Standard Survey, 2009, WB & State Committee of Statistics' estimates). IMF forecasts the rate to decline to 41.5% in The poverty rate is lower, however, when using the internationally-comparative USD 2.15 per day threshold, valued at purchasing power parity per day: this rate fell from 63.5% in 2003 to 39.6% in Even more pronounced was the fall of the extreme poverty rate during this period from 41.5% in 2003 to 13.8% in The PRSP includes as key elements, improvements in public sector administrative and PFM reform (including budget policy and medium-term expenditure framework (MTEF), tax policy and administration, internal and external audit, public debt management, public procurement) and adoption of these measures would support forecasts of annual GDP per-capita growth of above 5% National development policy (i). Tajikistan s development strategy is articulated in two inter-connected documents, namely: (1) The National Development Strategy (NDS), which covers the period and provides long-range strategic outlook; and (2) a series of three-year 1

2 period Poverty Reduction Strategies (PRS) covering the intervening periods that provide internally consistent action plans for the efficient implementation of the NDS. (ii). The co-existence of a long-term NDS with medium-term PRS with a clear focus on poverty reduction provide a useful framework for the design and implementation of consistent socio-economic policies. The challenge is to integrate a Medium-Term Budget Framework (which, in Tajikistan, is in the process of being developed), the Public Investment Programme, the foreign aid programmes of donor organizations, the annual statement of policy priorities and the annual budget and annual action plans of line Ministries. This is acknowledged in the NDS and the latest PRS for as a key area for further work. A new three year PRS ( ) is currently planned to be worked out by the Ministry of Economy, Development and Trade (MOEDT). (iii). The establishment of the National Development Council under the President of Tajikistan in December 2007, and the requirement to include in the annual reports of line ministries, agencies and local authorities the actions for implementing PRS priorities have raised the importance of the NDS and PRS documents. Under this overall development strategy, many sectoral sub-strategies were designed, including the ten year PFM reform strategy Most sub-strategies were complemented in recent years by medium-term action plans such as that for PFM. The Government demonstrates most clearly its reform ownership by implementing these action plans of sectoral sub-strategies and regularly updating them. A key issue hereby is completion of the establishment of units within Ministries and government agencies for strengthening the analysis, monitoring and evaluation of both reforms and strategic documents Sector context: policies and challenges (1) PFM sector features, sector policy and link with PRS The PFM sector is comprehensively described in the presidentially approved 10 year Public Finance Management Strategy of the Republic of Tajikistan for (approved March 20, 2009 # 639). The strategy sets out a multi-annual and overarching agenda and framework for PFM reform, which is explicitly linked to the NDS, Public Administration Reform Strategy (PARS) for the period until 2015 and drawing on the PRS Papers for , updated to cover the period up to A high level PFM Council chaired by the Minister of Finance and comprising other ministers and key stakeholders was established in 2009 to supervise the implementation of the PFM strategy by Decree of the President (#542 of September 16, 2008). The Strategy sets out a clear approach for the country s PFM system to achieve consistency with internationally accepted principles until 2018, i.e. (a) aggregate fiscal discipline (to maintain sustainable government finance); (b) allocating efficiency (resources are more effectively allocated over the relevant policy priorities); and (c) operational efficiency (quality public services are delivered at lower costs). The Strategy also includes sequencing activities, identification of priorities, assignment of responsibilities and coordination with State and NSAs. Commitment and ownership by the Government to PFM is demonstrated by progress in key areas of reform (described in subsequent sections) and decisions of the high level PFM Council meeting on 26 August 2011, which approved an updated 3-year PFM reform action plan ( ) and three sectoral sub-strategies regarding treasury and accounting reform ( ), tax administration reform ( ), and training management of the MoF ( ). 2

3 (2) Sector budget and its financial perspectives A key component of Tajikistan s PFM reform strategy is the achievement by 2018 of a full MTEF. It is planned that national strategies will be translated into sector strategies with clearly defined and costed objectives reflected in multi-annual budget estimates, and supported by medium-term sector expenditure plans. This will encompass appropriate monitoring frameworks, developing a clear fiscal strategy and resource availability, establishment of reliable aggregate and sector ceilings, and line ministries presenting budgets in which all programmes are costed on an output basis. Assistance in institutionalizing and funding the operationalization of the Government of Tajikistan's ( PFM reform strategy over the short to medium term has been through a Public Financial Management Modernization Project (PFMMP over the period ) jointly funded by the, European Union, the Department for International Development, Government of the United Kingdom, the Government of Japan, and the Swiss Government Cooperation Office, and which is well coordinated with the other interventions by International Financial Institutions and donors. EU support to MTEF development has been the main EU PFM contribution over several years. This support focused so far on several selected pilot ministries in addition to the MoF, i.e. Ministry of Labour and Social Protection, MoLSP), Ministry of Health (MoH) and Ministry of Education (MoE). The process should be rolled out to eventually all ministries and sub-national government levels and should be contributing to the improvement of several crucial PEFA indicators related to budget planning, execution, transparency, and comprehensiveness. With EU Technical Assistance all required MTEF guidelines and instructions were worked out and a new public finance law became effective in June 2011 that incorporates MTEF. In 2011 the Government of Tajikistan started to apply the revisited approach to MTEF with one year budget and MTEF cycles merged into one process. This change allowed to introduce additional phase in the beginning of budget process development of baseline budget, and gave more time for strategic thinking on allocation of resources and formulation of programmes. Three social sectors ministries MoH, MoLSP and MoE were supported in this process by external consultants and made first, although not perfect, attempts to implement all the budget preparation guidelines. Progress was made by MoF in formulating in the beginning of 2012 an official and improved budget calendar for 2012, which integrated the MTEF/budget process and proper instructions to line ministries. An open issue is, however, integration of the main institutions determining the investment budget, above all the presidential administration since a functioning MTEF means that Government investment is fully integrated in the budget process. (3) Coordination process with the beneficiary country and other donors From February 2011 a process of dialogue, consultation and coordination meetings was initiated with key beneficiaries, individual donors, the Development Coordination Council (DCC), and other stakeholders, including the MoEDT, the contractors and staff carrying out EU supported interventions, the PFMMP, the IMF, World Bank, SCO, DFID, UNDP, USAID, GIZ and ADB. In April 2011, a donor coordination meeting was initiated to present the EU's current PFM reform support and to coordinate the future PFM reform support programme. Discussions continued with the Government, bilaterally with donors, and within the working group "Governance" of the DCC, to optimize the EU contribution. In the beginning of 2012 the consistency of the proposed programme was fine-tuned considering the views of beneficiaries, 3

4 stakeholders and other donors to maximize complementarities of efforts. Feedback received from the Government, donors, IFIs and EU projects confirmed the thrust and intent of the objectives and activities of the proposed programme, and its importance for successful implementation of Tajikistan s PFM Reform Strategy. (4) Assessment of institutional capacity The adoption of the Tajikistan PFM strategy and subordinate action plans have been preceded and informed by series of reviews of the PFM system by IFIs (2006 and later) and PEFA assessments (2007). These assessments identified a number of weaknesses of the institutional capacity of the PFM sector that work to undermine the latter's efficiency. These include, inter alia: an unreliable fiscal framework for budget planning; insufficient linkages between the budget and policies, limited role of line ministries in sectoral policy formulation; weak payroll control and audit, and absence of budget execution reports' audit; and weaknesses in financial reporting and accounting. Additional institutional weaknesses, identified by EU experts, projects and other donors are: lack of willingness by ministers to give clear instructions that follow newly adopted laws and regulations; lack of middle management to organize scarce human resources to implement changes; lack of appropriate skills, knowledge and experience of MoF officers to oversee and implement the MTEF and of motivation of internal audit unit staff to undertake audits according to own adopted guidelines; weak capacity within and no clear mandate for MoF regarding development and formulation for revenue and tax policy; staff structures impeding efficient budget coordination; fragmentation in the process of preparing macroeconomic projections; no capacity in MOF to meet emergent needs for high quality economic studies/analyses on important and urgent policy issues; no effective system of advanced training and re-training of public officials or students in Public Finance; no structure, technical capability or plan to address the issue of development of an appropriate fiscal equalization system; an unclear relationship between the government and State Owned Enterprises (SOEs); Tajikistan is yet to complete, but is making progress in implementing a Treasury Single Account (TSA); implementation of accounting and reporting standards consistent with international practice and standards; development of External Audit; weakness in communicating the budget to Parliament and the public, and in implementation of an integrated government wide Financial Management Information System (FMIS). A review of the fulfilment of EU s budget support conditionality found in fall 2011 regarding PFM reforms, that there is: i) a need for increased ownership at Government level; ii) limited leadership that the Ministry of Finance can provide as champion of reform its powers may be limited; and iii) need for increased capacity, given human resource constrains and the complexity of the sector. However, there is also substantial PFM reform success achieved in 2011 and there are positive signs of reform ownership in the beginning of 2012, described in section 7 below. Hence, the Government s strong support at highest level for the PFM reform strategy, combined with IFI and donor support, represents an opportunity for Tajikistan to further advance its PFM system to achieve more transparent, accountable, predictable and efficient use of public resources. There is also strong receptiveness to change in the policy dialogue at political and technical level. 4

5 (5) Overall framework for performance monitoring The Government of Tajikistan articulated a formal progress monitoring plan against Action Plans with a three year horizon, which are annually updated and approved by the PFM Council. The Action Plans are the basis for monitoring progress of the strategy under supervision of the PFM Council. The Government of Tajikistan formally nominated the PEFA methodology as measurable indicators for monitoring, fully supported by donors. Specifically, the baseline is given by the PEFA indicator scores of the first assessment in 2007 and the Strategy sets target scores to be achieved by The PFM Strategy distinguished 7 priority areas that were sequenced over that period. Each activity in the PFM Strategy contributes directly to a PEFA indicator if not several. Currently (spring 2012) a follow-up PEFA assessment is being performed and the proposed Programme includes provision for organisation, in consultation with other donors, of a PEFA assessment in late 2015 to coincide with assessment of measurable indicators at the end of the project. Since there are areas in PFM which are not or only loosely covered by the PEFA methodology (such as the quality of the MTEF process and the quality of the revenue and tax system), the proposed PFM Program includes specific objective and measurable indicators to address and monitor planned Programme purposes and results, thus complementing the PEFA monitoring framework (Annex 1, Log Frame). (6) Macroeconomic framework The IMF concluded in January 2012 the fifth program review, giving a positive macroeconomic picture and outlook. Real GDP grew by about 7.4 % in 2011, supported by growth in trade and services, fuelled by rising remittances, and growth in the agricultural and construction sectors. The inflation rate decelerated from 15 % in May 2011 to 9.3 % at the end of 2011 and further in The overall fiscal balance including the large Public Investment Programme (PIP) is estimated at -3.1% of GDP in 2011, slightly improving compared to Total public and publicly-guaranteed debt as a share of GDP in 2011 declined slightly to 33.3%. Given faster growth of the import value than that of exports, the trade deficit is growing and financed only through rising receipts of remittances because of a dearth of capital inflows. Gross reserves expressed in months of imports of goods and services increased slightly to 1.6 at the end of FDI inflows increased to the still very low level of about USD 30 million in 2011, but are expected to further grow. Given an extremely low export diversification (with only 2 dominating export goods, cotton and aluminum) and high dependence on remittances, the economy remains vulnerable to shocks. Major policy challenges to maintain macro-stability include keeping the fiscal deficit and growth of base money moderate, and to strengthen oversight and banking supervision to curb directed lending in the banking sector, especially to agriculture, so as to improve trust in the banking system and promote domestic savings in banks. (7) Public Financial Management System: its quality and improvements The quality of the PFM system in Tajikistan is characterised by a number of capacity, motivational and technical constraints that hamper its effectiveness. Establishment of a well founded and transparent, accountable public resource management system, based on international best practices for budget preparation, monitoring and execution, would allow Tajikistan to better direct and prioritize the allocation of resources to programs that are most important to economic and social development. The constraints and the overall PFM environment are summarised in Section 2.4 above. 5

6 Through the combined efforts of the Government of Tajikistan working in cooperation with donors and IFIs within the framework of the PFM Reform Strategy, substantive advances have been made in the areas of budget policies and procedures aimed at more efficient organization, control an utilization of public funds, specifically in: developing and implementing internal audit (IA) related legislation with EU support; enhanced comprehensiveness and focus of the budget; better tracking of expenditures through classification improvements; development of a Single Treasury Account; loans and grants are now included in the budget process; the domestic part of the PIP as well as the counterpart funding from the external PIP have been integrated into the budget; and budget execution reports are prepared quarterly. Progress is now being made on reform areas that had been delayed for several years, such as cash management and commitment control in the Treasury, a functioning PFM reform steering secretariat, internal audit units in many ministries and regional administrations have been set up; effective improvements in the Treasury IT software; the administrative budget classification is in place for the Republican budget; progress has been made in budget classification, macro-economic forecasting through establishment of a joint Government forecasting group comprising the MoEDT, MoF, National Bank of Tajikistan (NBT), and Statistical Agency (SA), valuation of fiscal risks arising from large state-owned enterprises (SOEs); and after several years the EU MTEF project assisted the adoption of a new Public Finance Law (which incorporates MTEF) and dissemination of modern budgeting procedures, including budget execution and biannual budget memoranda that explain intended policies to the public. Other ongoing or planned reform efforts in PFM include developing a treasury bill securities market and improving public debt management capacity; modernizing tax administration; making the recently adopted external audit institution operational (by 2012); introducing international accounting standards for SOEs; developing economic and strategic policy setting roles; effective implementation of internal audit; reforming the public procurement system; and the Government pledged reform to the Tax Code by second half of Eligibility for budget support A well defined sector policy is in place. The sector policy is comprehensively described in the presidentially approved Public Finance Management Strategy of the Republic of Tajikistan for Confirmation that the macroeconomic stability eligibility criterion is met (for detailed assessment, see section 2.2) The macroeconomic stability criterion is being met. Per-capita output continues to grow significantly, inflation has moderated and the fiscal accounts over-performed relative to expectations in The Tajik authorities have tightened fiscal and monetary policies to ensure fiscal and debt sustainability and, to this end, plan to tighten further monetary conditions and target additional reductions in the budget deficit in the medium term. The fifth review of the IMF programme was recently approved by the IMF board, albeit with agreed waivers in a number of areas (i.e. net international reserves, and wage and pension arrears). The PFM eligibility criterion is being met (for detailed assessment see section 2.2). A credible and relevant programme to improve PFM is in place and substantive and ongoing progress is being made in cooperation with the Tajik authorities with support from the EU, other donors and IFIs. In this regard it is important to note that tying reform efforts to Budget Support is a very effective aid modality, and will provide incentives for ongoing budget reform as well implementing the products of TA envisaged under this Programme. 6

7 2.4. Lessons learnt The most significant specific lessons learned in respect of PFM reform in Tajikistan are those derived from areas of assistance where the EU has been investing in technical assistance for a number of years, such as medium term expenditure framework (MTEF), macroeconomic forecasting, and public financial internal control (PIFC). Notwithstanding high quality assistance, donor agreement and support, stated government commitment, and the availability of legal frameworks, guidelines, and relevant models, the practical application of often excellent technical assistance has been slow. This is confirmed by the recent review of the EU s Support to the Social Safety Nets Human Development (September-November 2011). For example, despite the adoption of a new Public Finance Law, introduction of modern budgeting procedures was stymied during 2011 by MoF until January Furthermore, well founded macro-economic models developed under the EU-funded technical assistance (TA) will require further TA to develop into fully operational and practically applied fiscal tools. This derives from a combination of capacity, availability of suitable, qualified and motivated officials, and an overall context of limited understanding of the uses of macro-economic and fiscal forecasting1. While recognizing that the PIFC system is at an early stage of development and good progress has been made in implementing Internal Audit (IA) related legislation, the quality of the internal audit units created under the EU-funded PIFC project are mainly inspections instead of auditing systemic issues according to the international standards. There is effectively no roll-out of the comprehensive manuals, guidance and other instructive material developed with EU supported technical interventions and auditors are not effective. Future assistance shall become effective and sustainable by focussing on modalities of delivery that result in practical skilling and application of technical assistance, such as on-site training, working with beneficiaries on emerging work issues, and considering what developmental/education rewards and incentives can be offered to motivate and engage key officials. The proposed Programme intends to strengthen in the delivery of technical assistance the elements of mentoring, training through the own civil servants that have acquired the technical knowledge, guidance and educational and development incentives. By making MoF and its officers accountable for delivery of supported elements of the PFM Reform Strategy, this will support improvements in the pace of reform. In discussions with key officials from MoF, this revitalised approach to TA was greeted very favourably, particularly the issue of developmental rewards and incentives to ignite the interest of officials in carrying out the PFM reform agenda. It was agreed that by making MoF and its officers accountable for delivery of supported elements of the PFM Reform Strategy, this will support the embedding of technical assistance. In particular, it is planned that by the end of the Programme, MoF and relevant officials will enforce timeframes and quality of agency submissions required by the Budget Circular and methodological guidelines, and provide relevant guidance and training to line agencies across Programme components. Through the proposed approach for the Technical Assistance (TA) component, more efficacy and ownership 1 However, the establishment through EU support of the above mentioned joint Government macro-forecasting working group provided proof that long-term capacity investment can eventually pay-off with good results (wellreasoned forecasts of major economic variables, government revenues etc., and qualitatively satisfactory presentations at a conference in February 2012) 7

8 of the reform can be achieved by supporting MoFs leading role, whereby capacity building of line ministries and agencies is undertaken by MoF (following skills upgrading), and the emphasis is on rolling-out of valuable tools/models/manuals already produced through EU technical assistance Complementary actions EU funded projects: The EU contributes to institutionalise and operationalise the PFM reform strategy through the Public Financial Management Modernization Project (PFMMP) (EUR 1,85 million; 17/12/2009 4/06/2014). The project is managed by the World Bank and supported by the EU, the UK Department for International Development (DFID), the Government of Japan and with significant co-financing from the Government of Tajikistan. It focuses on enhancing the Ministry s capacities in more effective budget planning, budget execution, capacity building and introducing a Government Financial Management Information System (GFMIS). The project Strengthening Public Internal and Financial Control (EUR ; 8/12/2010 8/12/2013) supports establishment and strengthening of the internal control systems and professionalization of the internal audit function. Two additional PFM projects will be completed by end of 2012: the Support to the Public Administration Reform Strategy (EUR ; 20/12/ /12/2012) contributes to the public administration reform implemented by the Spell out properly, specifically the Department for Civil Service Affairs (DCSA) and the Institute for qualification of civil servants (IIQCS), to make the public service more effective, reliable, transparent, accountable, ethical and professional; and the Technical Assistance to the Ministry of Finance regarding the Sector Policy Support Programme (EUR ; 10/12/ /12/2012), which contributes to: (i) the improvement and monitoring of the quality of social protection and health services/benefits and (ii) effective implementation of the PFM Reform Action Plan Subsequent Sector Policy Support programmes would be supportive of the planned Programme to the extent that they include requirements reinforcing PFM reform objectives. Finally, the project Support to establishment of the Tajik Financial Academy (EUR 1 million, 15/12/ /12/2013) provides training of all Tajik public finance staff and it started in January Projects implemented by other donors: The introduction of International Public Sector Accounting Standards (IPSAS) is undertaken by the Swiss Government Cooperation Office (SCO), which established with the World Bank an additional side trust fund to the one of EU and DFID financing the PFMMP. ADB is providing TA for tax administration and social protection to ensure full implementation of proposed reforms. The US$ 45 million budget support program focuses on tax policy administration reforms, and the conditionality ties closely with the EU supported interventions in PFM and the social sectors. SCO completed a regional program in public debt management with MoF and NBT for the development of a securities market, specifically, issuing T-Bills, ain If needed SCO may provide further support for External Audit and the Supreme Audit Institution following adoption of the law on this external court of auditors. SCO 8

9 and DFID are financing a current PEFA assessment. DFID supports demand side of the PFM reform through the Governance Partnership Facility in Tajikistan (GFP). GPF is a multi-donor trust fund managed by the World Bank. The grant consists of four components which supports implementation of the WB s Governance and Anticorruption Strategy in Tajikistan. The project is aimed to enhance transparency and anti-corruption work in key sectors, including increasing Parliament s engagement in budget process, foster demand for good governance through CSOs and deepening the engagement in social sectors with key actors. USAID assists the process of de-monopolization and decentralization of housing and communal services. District level governments are supported in improving their service delivery capacity. In the long-term, the project promotes good, democratic governance through enabling national and local governments to respond to local constituents' demands and priorities through better citizens' participation. UNDP is preparing a Public Administration Reform work with selected partners Donor coordination The Government of Tajikistan has established a range of institutional arrangements to ensure the reform strategy is coordinated, managed and carried out. This includes: (i) the establishment of the PFM Council, chaired by the MoF and which supervises the implementation of the PFM strategy; (ii) the establishment of a PFM Secretariat, which supports the PFM Council in implementing this strategy; (iii) the development of formal action plans, designating responsible agencies and cooperating donors, and establishing a monitoring system based on the PEFA methodology and achievement of target scores from the baseline 2007 PEFA assessment. The Council should ensure timely implementation of the PFM strategy and action plan, and harmonize PFM reform with the ongoing sector reforms. Notwithstanding the instigation of the abovementioned coordination and monitoring arrangements, and in spite of noticeable improvements in donor coordination through the Development Coordination Council (DCC), interventions in the sector are still somewhat slow and the effectiveness of a clear national focal point for sector intervention (the PFM reform Secretariat), including its power and that of the MoF to implement reforms, is still developing. However, there exists a clearly articulated willingness of the Government to undertake sector leadership and lead donor coordination. Regarding the latter and given specific concerns about the progress in PFM reforms, the EU Delegation brought its concerns in July 2011 to the attention of the DCC working group (WG) on Governance that deals with public finance issues and comprises all relevant donors in the PFM area. The WG decided to revise its implementation plan, and that some issues in PFM reform progress may be addressed better through the DCC on behalf of all donors. Hence, in the PFM area, donor coordination has recently become stronger. Most importantly, donors are currently unanimous in their judgement of PFM reforms such that there has been recent considerable progress in some PFM areas, even if these are uneven. 9

10 3. DESCRIPTION 3.1. Objectives The overall objective of the Project is to contribute to poverty reduction, economic growth and good governance in Tajikistan. The specific objective of the Project is to ensure that the Ministry of Finance (MoF) of Tajikistan and the other relevant authorities achieve a more effective and efficient PFM system Expected results and main activities The following results are expected to be achieved and followed directly by specific activities. All five results are supported by cross-cutting activities relating to: (i) The provision of capacity building and technical assistance to MoF to monitor progress in implementation of the PFM conditions in the budget support programme and assist MoF in fulfilling these conditions; and (ii) The organisation in consultation with other donors of a PEFA assessment to coincide with the assessment of measurable indicators at end of project. I. Improved macroeconomic, fiscal and revenue/tax policy formulation and management, and enhanced capacity and flexibility to respond to changing economic circumstances, including economic shocks. The result will be achieved by: assisting MoF and other relevant agencies to analyze existing macroeconomic, revenue and fiscal models and tools used in Government of Tajikistan including the underlying assumptions, causal relationships and data and assessing their capacity to contribute to development of sound and verifiable projections of economic activity, revenue and expenditure; based on this analysis, work with MoF and other institutions to resolve data and model deficiencies, and develop either enhanced or new models; working with MoF to develop a Medium Term Fiscal Framework, which will permit the assessment of the realism of fiscal targets and their sustainability; providing on-the-job training and mentoring of local officials, ensure that relevant MoF officials understand and can effectively apply the macroeconomic, revenue and fiscal models; development of a cadre of officials trained in modern econometric, statistical, analytical, economic and revenue evaluation techniques to institutionalize improved capacity within the Ministry of Finance to undertake fiscal and economic analysis and policy formulation; developing capacity in MOF to meet emergent needs for high quality economic studies/analyses on important and urgent policy issues; organization of a study tour to a country/ies, which have a proven record of achievement in macro-forecasting and utilization of the macroeconomic framework for development of fiscal and budget planning; and examining and reviewing coordination mechanisms for development of the macro and fiscal framework and support their development with other agencies responsible for macroeconomic/fiscal projections to promote consensus and informed dialogue, and avoid fragmentation and inconsistency in macroeconomic framework development. II. A budget framework for Government of Tajikistan is developed and established across selected republican budget agencies, which is coherent with international best practice in respect of a Medium Term Expenditure Framework (MTEF). 10

11 The result will be achieved by: reviewing existing budget guidance, directions, methodologies and instructions for development of budget submissions that comply with MTEF, and work with MoF and target line agencies to ensure that these are coherent with international practice and modified for the Tajik context; providing a combination of mentoring, training, guidance and educational and development incentives, so that MoF budget officers are capable and motivated to undertake the training of target line ministries on how to respond to the budget instructions based on MTEF, and they enforce compliance with deadlines and quality of budget submissions; providing technical assistance to MoF and line agencies to effectively rollout the MTEF to selected republican budget agencies by the end of the project, including use, analysis and application of the enhanced budget information; supporting the MoF in establishing an electronic repository, desirably integrated with existing systems, that will allow the compilation, analysis, recording of production reports based on MTEF that are useful for decision making; organizing a study tours to European countries with a well developed budget system, to share experience and elaborate the benefits of an MTEF and other relevant budget reforms; assisting MoF to upgrade the presentation and timeliness of budget information to the Budget, Government of Tajikistan and Parliament such that MTEF information is produced in a timely way during the annual budget process and can be used by the Government to take decisions on strategic budgeting choices; and assisting the MoF in improving the quality and public availability of PFM and budget data; proposing to MoF strategies for other complementary budget reforms as sequencing and opportunities arise - this includes but is not restricted to Budget Preparation Systems, improvements in budget analysis, ensuring comprehensiveness of coverage of budget funds, treatment of quasi-fiscal funds and extra-budgetary funds, improved budget classification and management and integration of the capital budget. III. The MoF can undertake informed discussion and allocation of budget resources to sub-national levels of government based on an objective and transparent methodology, aligning financing with functional responsibilities. The result will be achieved by: undertaking, in consultation with MoF, a review of the functional responsibilities and requirements of local levels of government throughout Tajikistan and the existing mechanisms for funding; examining the revenue raising capabilities of sub-national levels of government throughout Tajikistan and capacities for own source revenue; based on the foregoing activities, and in consultation with MoF, relevant authorities and donors, develop a formula based model/s for allocation of budget resources to local governments; undertaking a study tour for relevant senior officials from MoF and other agencies, fiscal decentralization unit, and selected subnational government officials, to demonstrate the methods and results obtained from relevant fiscal decentralization models in other countries. IV. The Tajik Financial Institute (TFI) delivers sustainable training and education to students in public finance. The result will be achieved by: assisting the TFI in reviewing all operations, curricula and training modules to ensure: 1) it is delivering sustainable and accessible training and education to students in Public Finance; and 2) that it is making progress towards its qualifications being endorsed by an internationally recognized agency assuring quality standards in higher education; supporting the TFI and MoF in rectifying any shortfalls in operations, curricula or content of courses, which are not making progress towards European standards and/or which impact on achievement of the TFI s 11

12 objectives; and undertaking two study tours to linked/ or other educational institutes which can serve as models in contributing to achievement of TFI objectives. Supplies foreseen in the budget will be used for electronic hardware and software maintenance/installation, and books/improvement of the library. V. Operational Internal Audit (IA) regime expanded in Tajikistan, thereby reinforcing Internal Control (IC) The result will be achieved by: developing standard Terms of Reference for a Government Audit Committee; developing an Audit Committee Handbook; in the first 18 months of the project supporting the following 6 Ministries and agencies (including capacity building and study tour/s) to roll out and implement the manual - MoF, MoH, MoLSP and Pension Fund, MoE, and two additional agencies selected in consultation with MoF and Tajik authorities, e.g. Ministry of Agriculture, Ministry of Transport; in the subsequent 18 months of the project, supporting a further 6 Ministries/Agencies to be agreed with the Secretariat of the PFM Council to roll out and implement the manual (including capacity building and study tour/s); supporting the Accounting and Audit Methodology Department of the MoF in reviewing and updating their Internal Audit Manual to ensure (i) it fully complies with Internal Audit Standards (IAS) and International Internal Auditing best practices; and (ii) adopt a risk-based approach to audit; and supporting the creation of a Chapter of the International Institute of Internal Auditors in Tajikistan where auditors in Tajikistan can become members and pursue internationally recognised qualifications thereby raising the professional profile of auditors in Tajikistan Risks and assumptions Political and macroeconomic stability is a significant risk together with any worsening of the security situation in the country. It is expected that Tajikistan will face an ongoing threat of instability, as high levels of poverty and unemployment provide a source of popular grievance. Real GDP is forecast to expand by about 7% in 2012, however, as the industrial sector appears to be undergoing a slowdown, forecast growth may according to the IMF - slow to about 5% and remain at that level through Transparency International ranks Tajikistan as 152 from 182 in its 2011 Perceptions of Corruption Index. This and an increase of security events since September 2010 can undermine stability and security. A major assumption is that the Government of Tajikistan possesses the political will and commitment to ongoing PFM reform and development, as stated in its own policy and strategic documents. It is assumed that the Government of Tajikistan will continue to take the leadership in PFM reform implementation and coordination, continue to pursue the objectives set out in the Poverty Reduction Strategy and other sector-specific and national strategic papers (e.g., NSD), proceeds with the related process of reform and strengthening of the public administration, and enforce its own MTEF decrees, sectoral instructions, and regulations. This assumption can be mitigated by a tight project monitoring and evaluation system and by support for Government-led coordination mechanisms, such as the PFM Council and Secretariat. The proposed Programme also assumes that there is adequate inter-institutional and stakeholder support, and that the donor community through the Development Coordination Council carries out effective coordination on further development of sustainable public expenditure management reform. Experience with existing EU interventions has shown that inter-agency conflict, diverging priorities and poor 12

13 communication channels can impede effective programme implementation. The same issues apply for the donor community. At the donor level the risks can be mitigated by making the existing consultation and coordination mechanisms effective and productive, and ensuring the regularity and quality of the dialogue with the Government. Implementation of a sound communication strategy would be useful in this regard. Inter-agency divergence and conflict in the Government of Tajikistan on strategic PFM objectives can be addressed by the MoF exercising its leadership role in driving the PFM reform process, and resolving issues (e.g. access to statistics, information and officials) which may impede Programme implementation Stakeholders Stakeholders: The main stakeholders are the President's apparatus, MoF, the line Ministries and sub-national levels of government. The MoF is responsible for the implementation and coordination of the Government of Tajikistan PFM strategy and is also responsible in the domains of development and implementation of fiscal policy, including strategic planning, budget preparation and execution, internal audit, accounting and reporting. The other main ministries and agencies are the MoEDT, the MoLSP, the MoH, the MoE, the NBT and the SA. In addition the MoF interacts directly with a large number of Budget Organizations as well as with the 17 main subnational governments and their budgeting processes (3 oblasts, the city of Dushanbe and 13 cities and rayons of republican subordination). However, the role of line ministries in formulation of budgets for relevant sectors has been negligible with the exception of the three line ministries chosen to be pilot ministries in the MTEF process. Financial departments of line ministries primarily deal with the financing of the central apparatuses of ministries only. Indirect stakeholders include participants from selected academic and research institutions, think tanks, media and the Budget Committee of the Parliament. The project will aim at both a) increasing the awareness of the stakeholders of the elements of the Government's Poverty Reduction Strategy to promote gender equality and b) introduce a constant monitoring and evaluation of gender policy by the main stakeholders to be ensured by the implementing partner. Beneficiaries: Target groups include MoF officials, other relevant officials, line ministries and other budget agencies working in the PFM domain and students (who will attend the Tajik Financial Institute). These will directly cooperate with the programme and be the recipient of its planned technical assistance and capacity building activities. A number of budget-funded institutions will directly benefit from the programme as well through the upgrading of PFM skills of their staff, and through dealing with a more informed and skilled MoF. The final beneficiary will be the population of Tajikistan Crosscutting Issues Relevant cross cutting issues such as the environment as well as gender balance will be incorporated in the selection and qualification criteria. For each of these crosscutting issues indicators to be achieved will be defined and monitored throughout project lifetime. Special attention will be given to ensure that in developing training, educational and developmental programs, participation reflects gender equity. 13

14 4. IMPLEMENTATION ISSUES 4.1. Method of implementation Direct centralised management through the signature of a Financing Agreement with the Beneficiary Government. There will be three service contracts and one supply contract divided in lots. The first service contract covers results 1, 2, 3, and 4, since they all require high level expertise in public finance, macroeconomics, and some also in econometrics. The second one covers result five, because it requires business process and audit expertise. The third one covers result 0.2 (PEFA assessment). Since tying reform efforts to Budget Support is an effective aid modality, and will provide incentives for ongoing budget reform as well implementing the products of TA envisaged under this Programme, Budget Support conditionality is proposed to be included in the matrix of the foreseen Sector Policy Support Program Social protection. This procedure ensures to avoid fragmenting the EU Delegation's Budget Support to Tajikistan as this may loosen its leverage capacity and unnecessarily confuse governmental officials Procurement and grant award procedures All contracts implementing the action will be awarded and implemented in accordance with the procedures and standard documents laid down and published by the for the implementation of external operations, in force at the time of the launch of the procedure in question. Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by DCI Regulation (EC) N o 1905/2006 of 18 December 2006 (geographic programme). Further extensions of this participation to other natural or legal persons by the concerned authorising officer shall be subject to the conditions provided for in articles 31(7) and (8) DCI Budget and calendar EUR 8 million is foreseen for this PFM Reform Support Programme for Tajikistan, which is proposed to be implemented during a period of 3 years. The allocation of the budget is as follows: 14

15 Category Breakdown Government/ EU Contribution Other Donors' Total PA/CA (Euros) Contributions 1. Services European 1.1 Technical Assistance: A) Capacity building macro-economic forecasting & fiscal policy formulation, MTEF, Preconditions fiscal federalism, Tajik Financial Institute, (results 1-4) B) Public auditing PIFC (result 5) C) PEFA implementation (activity 0.2) European European 1.2 Monitoring and evaluation European 1.3 Audit and verification European 2. Supplies European 2.1. Provision of equipment for the Tajik Financial Institute European 3. Communication/Visibility European Total European The duration of the operational implementation phase is fixed at 72 months from the signature of the Financing Agreement. The duration of the closure phase is fixed at 24 months. The launch of the procurement procedures is estimated to the first semester of 2013 so that actual implementation could start at the end of Performance monitoring Regular monitoring will be a continuous process as part of the EU s responsibilities. As articulated by the Government of Tajikistan, reform progress will be monitored against the three year annually updated PFM Action Plan, as approved by the PFM Council to ensure fulfilment of the 10 year Government of Tajikistan PFM strategy until For the monitoring the Government of Tajikistan has formally nominated 15

16 the PEFA methodology, which is supported by donors and involves improving the PEFA indicators derived from the assessment of 2007 to achieve a target set of scores to be achieved in 2018, the end of the PFM strategy. Each activity in the PFM Strategy contributes directly to one or several PEFA indicators. Monitoring of achievement of quantitative targets will be conducted with the use of a renewed PEFA assessment. A current such assessment is will be finalized by fall 2012 and the next one is planned in the program for end However, given areas in PFM which are not or only loosely covered by the PEFA methodology (e.g. quality of the revenue and tax system), the proposed EU PFM support program includes a small component to work out a proposal how reasonably monitor progress in this area and thus to cover this gap in the PEFA framework. Moreover, the above mentioned EU budget support conditions, planned to be included in the foreseen Human Development Support Program, are an additional effective monitoring tool. External impact monitoring may also be carried out by independent consultants recruited directly by the in accordance with EU rules and procedures on specifically established ToRs Evaluation and audit External evaluations and audit will be carried out by independent consultants recruited directly by the through a Framework Contract in accordance with EU rules and procedures on specifically established ToRs. The Programme will be subject to an external evaluation by independent consultants towards the third year of implementation to assess progress and the validity of the approach and justify and design a follow-up if required Communication and visibility More than before the program puts emphasis on these activities. Hence, all of the program's objectives include workshops and round-tables to provide for better communication and visibility. The Delegation will develop a communication plan, including press relations and other awareness-raising programmes through a variety of media, including radio, which will aim at improving public understanding of PFM issues. Activities will include: (i) inviting the press to workshops/round-tables, seminars as appropriate, (ii) displaying the EU logo at all project workshops/roundtables/seminars, and its inclusion into signage and related visibility materials; (iii) the EU contribution will be highlighted in all documentary outputs, including press releases, progress reports, information brochures, posters, training materials and general and other publications and, most importantly, in the context of all events and public information campaigns. LIST OF ABBREVIATIONS ASFCCC ADB SB AIP BO CC CS CCIP Agency for State Financial Control and Combating Corruption Asian Development Bank (department of) State Budget Aggregate Indicative Planning Budget Organization Customs Agency under the Government of the Republic of Tajikistan Civil Service Centralized Capital Investment Programme 16