Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB1618 Economic Management Capacity Building Project.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB1618 Economic Management Capacity Building Project Region AFRICA Sector General finance sector (85%); General public administration sector (15%) Project ID P Borrower(s) Government of Ghana Implementing Agency Ministry of Finance and Economic Planning, Ministry of Public Sector Reform Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 22, 2005 Date of Appraisal July 18, 2005 Authorization Date of Board Approval November 15, Country and Sector Background Since embarking on economic reforms in the mid-1980s, Ghana has made considerable progress in laying the foundations for sustainable growth and poverty reduction. This has resulted in sustained per capita output growth, averaging 1.6 percent per annum, and increased private sector activity and investment. Social indicators also improved over the period. In parallel with the economic reforms, the country completed the political transition, moving to a firmly democratic form of Government. In 2004 Ghana continued to enjoy robust growth and managed to avoid the weak macroeconomic management which has been traditionally associated with the electoral cycle. Finance Sector The Government of Ghana has shown strong commitment to financial sector development, in particular with the Cabinet approval in 2003 of the Financial Sector Strategic Plan (FINSSP) which aims at broadening and deepening the financial sector. In addition, the government has made substantial and tangible progress implementing various recommendations from the Financial Sector Assessment program (FSAP) in 2001 and the FSAP update in 2003 (including the enactment of core legislation). However various weaknesses remain, which include among others: inefficiencies of the state influenced financial institutions, lack of long-term capital and continued lack of a level playing field for providers of financial services. Improved governance in the financial markets remains an important focus for the continued reform agenda. The March 2005 Corporate Governance ROSC conducted by the World Bank noted that the Ghana capital markets call attention to the paramount need for improved enforcement, and stronger institutional capacity of most regulators and key administrative and judicial bodies. The legal and regulatory framework is less of a priority for reform in this respect. Through the implementation of the FINSSP the Government of Ghana intends to promote the evolution of a financial sector which is appropriate for the needs of a country moving towards 1

2 middle income status. The vision is one of a financial sector which is responsive to the needs of the 21 st century, particularly given the prospect of greater international and regional competition and opportunity for Ghanaian financial market participants. Consistent with the Government s vision, the project has an underlying theme of establishing an enabling environment supported by effective regulation, with an objective that all savers and investors will have the benefit of regulatory oversight. As a second generation financial sector reform program, it is accepted that the basic institutions required for an effective provision of financial services are largely in place, the objective is rather to allow them to operate more efficiently. Public Sector Reform The Government recognizes that its past efforts in Public Sector Reform have not had the desired impact. Among the main public sector issues are: (i) the current institutional setup in the public sector which is characterized by weak policy and implementation coordination among government ministries, subvented agencies and local governments; (ii) the challenges in Human Resources facing the public service (particularly with regards to training and compensation) which are seen to compromise both competence and professionalism, (iii) ineffective allocation of equipment and resources within Government, (iv) poor record keeping and use of Management Information Systems (MIS), (v) a perception that governance within the public service remains inadequate, (vi) a public service pension system Cap 30 which is modest in coverage but accounts for 1.3% of GDP in terms of its cost. To tackle these issues, the Government decided in 2003 to refocus its strategy for public sector reform. To consolidate public sector reform efforts, oversight of the reform agenda was transferred to the office of the Senior Minister in early In June 2004, the office of the Senior Minister formally issued a Public Sector Strategy document Towards a New Public Service for Ghana: a Working Document to improve effectiveness, efficiency and accountability of the public sector. In February 2005, the government appointed a new Minister of State for Public Sector Reform to spearhead the reform agenda. In May, a Ministry for Public Sector Reform (MOPSR) was created. The Minister of Public Sector Reform recently announced an implementation plan for selected agencies and presented the principal programs to Cabinet in August Cabinet approved the recommendations to restructure the management of Public Sector Reform Programs, in general, and to reform the Civil Service specifically, with particular focus on the appointment and remuneration of the Civil Service leadership; refocusing the mandate and structure of the Civil Service, improving operational procedures; Human Resource Management and compensation policies for all Civil Servants; enhancing Financial Management Systems; and better use of Information Technology. Cabinet decided that the progressive monetization of non cash benefits for Civil Service Leadership should be captured in the 2006 Budget. 2. Objectives The Ghana Poverty Reduction Strategy (GPRS) aims to create wealth by transforming the nature of the economy to achieve growth, accelerated poverty reduction and the protection of the vulnerable and the excluded within a decentralized, democratic government. The GPRS indicates that a crucial step to achieve this goal is to ensure sound economic management for accelerated growth. Financial sector development and public sector reforms are considered 2

3 fundamental components of sound economic management, key to continued macroeconomic stability and private sector-led economic growth. The Government has also noted that the ability of the financial sector to serve as an effective intermediary between savers and investors is seriously affected by issues such as a lack of competitiveness, and a low level of integrity. The project is intended to establish a better intermediation function within the financial system so that funds can flow to their most productive economic use thereby benefiting the entire economy in terms of more rational investment decisions, more sustained employment opportunities, increased production and exports and ultimately enhanced growth. Through facilitating renewed efforts in the field of Public Sector Reform, the project aims to assist in providing a platform for improving governance and reducing corruption in Ghana and therefore contributing to the GPRS objective of ensuring good governance through accountability and transparency. The project seeks to focus on the expansion of retail banking by removing policy and legal barriers to expansion of coverage. This is part of a complementary new focus on the expansion of retail banking and removing policy and legal barriers to that expansion. The banking and money transfer sector can use the data from the survey on access to financial services in developing its strategy and financial products to serve lower income and more rural clients. The central bank and government ministries can use the access to financial services data to improve its policies to reduce financial inclusion, and to adopt headline indicators and targets for access to financial services. Competitive grant funding for innovations in remittances and financial service delivery should provide a significant impetus for expansion in financial services provision in Ghana, and should help reduce poverty and stimulate economic activity. 3. Rationale for Bank Involvement The proposed project aims to support the Government of Ghana in strengthening specific aspects of economic management, namely financial sector development and public sector reform. The World Bank Country Assistance Strategy (CAS) has adopted a three pillar approach to support the GPRS: (i) sustainable growth and job creation, (ii) service provision for human development, (iii) governance and empowerment. To support this strategy, the CAS highlights the need for investment and technical assistance in financial sector development and public sector reform. The World Bank has been closely involved in financial sector reform in Ghana since the late 80s when the first Financial Structural Adjustment Credit (FINSAC) was launched. Following FINSAC I and II, further support was provided for reform under the Non-Bank Financial Institutions (NBFI) project which closed in 2002 and Economic Reform Support Operation (ERSO) I and II which closed respectively in 1998 and The Bank has continued to support the Government s poverty reduction agenda by being involved in the design of the FINSSP through analytical and advisory work (including the FSAP) in 2001 and the FSAP Update in 2003 and various recommendations made by the World Bank/IMF teams that participated in above work have been incorporated in the FINSSP. 3

4 The Government s Ghana Poverty Reduction Strategy (GPRS) has created the momentum for a significant group of donors to align their budgetary support under a common framework, the Multi-Donor Budgetary Support (MDBS), of which the PRSC is part. Through support to the implementation of FINSSP, the MDBS and the PRSC aim to diversify the financial sector and to improve access to financial services. The MDBS and the PRSC also intend to support the implementation of a refocused public sector reform. However, the MDBS and PRSC would support reforms at the policy level. There is therefore a need, as indicated in the CAS, for targeted capacity building operations to support government implementation of these reforms, with the understanding that the MDBS should be the appropriate mechanism for the support of recurrent costs. 4. Description Component One: Public Sector Reform The project will support the development of a framework for prioritization, consensus building and budgeting of public sector reform objectives. Once the framework for Public Sector Reform is established, the project will support the development of detailed action plans for individual operations within MDAs supported by rigorous monitoring and evaluation mechanisms. The project will support implementation, in collaboration with Development Partners, of reform initiatives of a scale which does not necessitate a separate operation. Component Two: Regulation and Supervision of Financial Markets The project will support strengthening of the Securities & Exchange Commission (SEC). The project will (i) provide SEC with technology upgrading; (ii) provide technical assistance and capacity building to enhance performance in the areas of supervision, surveillance and enforcement; (iii) support for the implementation of the amendments to the Long-Term Savings (LTS) Act, 2004; (iv) support the development, regulation and supervision of the LTS agency, and (v) provide support to SEC public education campaign. Component Three: Banking and NBFI (Non Bank Financial Institution) Regulation and Supervision The project will support strengthening of Bank of Ghana (BoG) through (i) technical assistance to review the structure of the Banking Supervision Department and the fit of various departments in the overall organizational structure of BoG; (ii) support to the enactment of several laws critical for implementation of reforms (e.g. Bills and Checks Bill, Credit Bureaus law); (iii) improvements to the technological base of BoG; (iv) provide support to clarify regulations and supervisions responsibilities between BoG and Credit Union Association (CUA), for credit unions and BoG and ARB Apex Bank for rural banks; (v) the project will strengthen supervisory and regulatory capacity of BoG, CUA and ARB Apex Bank. Component Four: Insurance Regulation and Supervision The project will support the National Insurance Commission (NIC) in (i) providing technical assistance for the design of curriculum and strategic plan to support training of insurance industry staff at, and operation of, the Insurance Industry Training Center; (ii) revising and instituting a modern legal and regulatory insurance framework, including development of 4

5 regulations ; (iii) capacity building to improve insurance supervision, and (iv) capacity building support to the research and actuarial units within NIC. Component Five: Strengthening of Capital Markets The project will (i) provide support to review Ghana Stock Exchange (GSE) rules and regulations; (ii) provide expertise to manage the business and regulatory risks of demutualization; (iii) support GSE automation and (iv) build GSE staff capacity and that of market operators. Component Six: Pension Sector Development This component aims to: (i) support the strengthening of legislation for the governance of the pensions sector, in particular in order to establish the framework to transfer the responsibility for SSNIT s (Social Security and National Insurance Trust) investment management to external, independent and regulated private investment fund managers; (ii) evaluate and design a process for such outsourcing of SSNIT s investment management functions; (iii) strengthen the capacity of SSNIT staff to undertake actuarial simulations of revenue and benefit flows according to different medium-term reform scenarios; and (iv) strengthen the timeliness and accuracy of individual data account records at SSNIT. Component Seven: Access to Finance and Financial Sector Governance The project will seek to establish a strengthened Banking and NBFI system that provides a wide range of competitive products through (i) providing technical assistance to develop a strategic vision and establish a governance framework for Ghana Commercial Bank, Agricultural Development Bank, National Investment Bank and State Insurance Corporation; (ii) applying the Finmark approach to better understand access to finance issues (with a focus on the demand side); (iii) facilitating the flow of remittances; (iv) establishing a sound basis for governance and regulation of the proposed Venture Capital Trust Fund. and (v) support the work program of the Presidential Commission on Pension Reform through technical studies of policy reform areas it is considering. In addition, the project will support the Aid and Debt Management Unit (ADMU) of MOFEP to (i) segregate MOFEP borrowing activity from BoG monetary policy to engender transparency and information flow through the establishment of a Domestic Debt Desk at ADMU and capacity building; (ii) restructure government borrowing patterns towards longer term maturities as well as long term debt market development and pricing. The project will also support research at Bank of Ghana to study cross-border capital flows, and (iii) support to the Financial Sector Division of MOFEP in the preparation and implementation of the Borrower s financial sector policies and oversight of relevant agencies. 5. Financing Source: ($m.) BORROWER/RECIPIENT 7.60 INTERNATIONAL DEVELOPMENT ASSOCIATION OTHER 5.20 Total

6 6. Implementation The project will be implemented through two parallel mechanisms, one for the Public Sector Reform component and another for the Finance Sector Reform component. Both components will make use of a Sector Wide Approach with basket funding arrangements for implementation and it is anticipated that additional Development Partners will contribute to each component. The Project takes the form of a Sector Wide Approach in that it is intended to form the basis of a country-led partnership among Development Partners and key stakeholders based on the accepted strategic frameworks developed through the FINSSP and the PSR Strategies. The project will undertake a common program and expenditure framework using basket funds, relying upon the Government s systems and procedures to the extent possible and under the direction of two Government nominated steering committees. In the initial stage it is envisaged that DFID will be the primary Development Partner for the both components; however, it is understood that additional partners will be joining the PSR component in the early stages and may also join the FSR component. Finance Sector Implementation The FSR component comprises six core themes to be coordinated through by six implementing agencies (MOFEP, SEC, GSE, NIC, SSNIT, and the Bank of Ghana). The Ministry of Finance and Economic Planning (MOFEP) will be responsible for overall coordination through the Financial Sector Division (FSD), the establishment of which is being supported through the project preparation. The FSD will serve as a link between the Development Partners and the implementing agencies. It will coordinate the preparation of work procurement plans by all implementing agencies and prepare composite work plans and progress reports. Each agency is to be responsible for implementation of its component of the project and will nominate a key technical level official to be liaison person for the project. A FSR Steering Committee (FSC) comprising the head of each implementing agency and chaired by the Minister of Finance and Economic Planning will be constituted to provide oversight and policy direction for the project. In addition a Joint Steering Committee comprising the FSC and the Development Partners will meet at least biannually to review and approve proposed activities and to review progress on implementation. Participation in the Financial Sector Basket Fund will be determined by a Memorandum of Understanding to be entered into between the Government and individual Development Partners, who may join at any time. DPs may enter into the MoU without contributing to the basket fund, but rather utilizing this process for the coordination of activities. Public Sector Implementation MOPSR will be responsible for overall coordination of implementation of the PSR component. The design of the implementation arrangements of this component will take the form of a basket fund to support Public Sector Reform which will broadly parallel those to be established by the Bank for the FSR component. DFID has signaled its intent to keep the PSR Basket Fund as simple as possible (consistent with clarity of operation, authority and accountability) and to draw on established experience. 6

7 Participation in the Public Sector Basket Fund will also be determined by a separate Memorandum of Understanding to be entered into between the Government and individual MDAs, who may join at any time. DPs may enter into the MoU without contributing to the basket fund, but rather utilizing this process for the coordination of activities. 7. Sustainability The project will make use of basket fund arrangements not only for the greater scope these provide for the harmonization of DP activities but also for their greater use of Government systems and processes and the contribution that this makes to a sustainable capacity for the development and implementation of policies and reform initiatives. This process will serve to reduce, but not eliminate, the use of consultants in the formulation and implementation of Government policy. To the greatest extent possible responsibility will be assigned to mainstream civil servants and extensive use will be made of governmental administrative support, human resource, operational and procurement processes and financial management resources. Financial sector component The Government and the various implementing agencies have demonstrated their commitment to the vision for the financial sector spelled out in FINSSP through the enactment of an extensive legislative agenda to facilitate reform. Important progress has already been made in the implementation in the four key areas defined in the strategy, namely strengthening of financial market structure, reform and review of legislative issues to improve the operating environment in the financial sector, strengthening of the supervisory and regulatory framework and capacity development to improve the outreach and depth of the financial sector. The Government has already made significant progress in reforming the financial sector legislative environment and a number of laws have been enacted or are in process of being enacted (such as the Long Term Savings Act, the Venture Capital Fund Act, the Securities Industry Amendment Act and the Insolvency Bill). The sustainability of the financial sector component is engrained in the strong and broad ownership of FINSSP in Ghana. Public sector component The objectives for PSR are less ambitious than those for FSR. Accordingly the time horizon for sustainability of this component is more immediate and will be achieved through the development and the implementation of a Public Sector Strategy which demonstrates strong ownership and effectively prioritizes allocation of resources to Public Sector Reform. The implementation of large-scale PSR initiatives goes beyond the scope of the EMCB project; however, it is a project objective that there should be a consensus that the reforms undertaken should be both important and realistic. 8. Lessons Learned from Past Operations in the Country/Sector Financial sector reform The complicated design of previous financial sector projects has been highlighted as a primary source of difficulty in implementation, limiting the capacity to provide depth in support to the 7

8 key components and institutions. Furthermore having a design with a number of small unrelated components led to difficulties in project coordination and monitoring. While it is inevitable that a holistic financial markets reform project will involve many counterparts, the number of implementing agencies has been limited to the extent possible. While the FSR component of the project is broad, this reflects an active distillation of the 119 items recommended for action in the FINSSP. The extensive number of components reflects the aspiration to attain a common standard for regulation and market efficiency. Moreover many reform initiatives are complementary (e.g. the reform of the GSE and the enhancement of the SEC both support the liberalisation of SSNIT investments and the implementation of the Long Term Savings Act). Previous financial sector projects intended to support the government divestiture from state banks. However both these projects failed to achieve this objective. EMCB will therefore rather seek to improve the management and the governance of the state influenced financial institutions through management or governance contracts in the first instance, within a strategy of transfer of ownership to the private sector. This approach is favoured by the government. Public sector reform It has been a concern in previous Public Sector reform initiatives that multiple initiatives by many Development Partners led to a fragmentation of the Public Service with Government effectively ceding direction of certain MDAs to donor bodies. The harmonization of Development Partner activities utilizing the basket fund approach under the guidance of government is intended to ensure that the PSR initiative is coordinated and that Government is the ultimate arbiter. The OED report An Independent Review of World Bank Support to Capacity Building in Africa: The Case of Ghana notes that 33% of Bank investment lending in Ghana has been for improvements in public sector capacity but that this has lacked a strategy and has not been integrated into sector programs. The EMCB proposes a broad approach to the field of Public Sector Reform, under centralized Ministerial direction as an integrated, strategically managed effort, rather than being sector-specific as in the past. It was a further finding of the OED report that lack of broad consultation in the Public Service was a likely contributor to the lack of success of the Bank s earlier PSR projects. Reflecting these concerns, a major aim of the EMCB PSR component is to build broad ownership of the reform process, following the FINSSP experience. Institutional issues have been carefully looked at during project preparation. In addition, the approach chosen for the PSR component (a multi donor PSR pooled fund) allows to be demand driven and to answer emerging reform opportunities. Cross-cutting issues Perhaps the most important lesson learnt in past reform initiatives has been the key role of Government and stakeholder ownership. The establishment of national ownership is the primary underpinning of the EMCB. This is reflected in both the project design and in the implementation arrangements. The FINSSP is built out of a long process of consultation of 8

9 market participants and users, supported by an ambitious legislative agenda, now largely completed. The financial sector component of the EMCB has grown out of the FINSSP process, itself engendered by the 2001 and 2003 FSAP reviews. The Government intends to consolidate its oversight of finance sector reform through a new Finance Sector Division at the MOFEP to coincide with the implementation of the FSR component. The PSR component comes after a long period of consultation and the development of the Government s public sector reform strategy, published in June 2004 and revised and resubmitted to Cabinet in August While this strategy did not itself prompt the same level of reform vigor as the FINSSP, the recent establishment of the Ministry of Public Sector Reform has increased the focus on this sector, both from those already engaged and from new entrants. The implementation of this strategy is equally intended to generate a strong sense of national ownership with the operation of a basket fund under the guidance of a Government steering committee. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [ ] [X] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP/GP 7.60) * [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [ ] [X] 10. List of Factual Technical Documents 1. Rural Financial Services Project (RFSP), Project Appraisal Document 2. Non Bank Financial Institutions (NBFI) Project, Implementation Completion Report 3. Public Financial Management Technical Assistance Project, Implementation Completion Report 4. Public Sector Management Reform Project, Implementation Completion Report 5. An Independent Review of World Bank Support to Capacity Building in Africa: The Case of Ghana, Operation Evaluation Department 6. World Bank Country Assistance Strategy for Ghana 7. DFID Ghana Country Assistance Plan 8. USAID/Ghana Country Strategic Plan ( ) 9. Ghana Poverty Reduction Strategy * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas 9

10 10. Annual Report, Bank of Ghana, Annual Report, Ghana Securities and Exchange Commission (SEC), Annual Report, State Insurance Corporation (SIC), Annual Report Credit Unions Association, Annual Report ARB Apex Bank, Ghana Financial Sector Strategic Plan (FINSSP) 16. Ghana Development Communication Enhancement Program, Towards a New Public Service for Ghana: a Working Document 18. Work Programme , Ministry of Public Sector Reform 19. Public Sector Reform, Civil Service Reform and Management of Public Sector Reform Programs, Ministerial Retreat, August Report of the Presidential Commission on Pension Reform, The Macro-economic Impact of Remittances in Ghana, Dr. Addison, September 2004, Bank of Ghana 22. UK-Ghana, Remittance Country Partnership, Ghana Scoping Mission Document, May Rural and Microfinance Regulation in Ghana, Implication for Development and Performance of the Industry, June 2003, World Bank Africa Region Working Paper Series (#49) 24. Financial Sector Assessment Programme (FSAP), Financial Sector Assessment Programme (FSAP) Update, Report on the Observance of Standards and Codes (ROSC), Corporate governance country assessment, Ghana, March Banking Law, Financial Institutions (Non-Banking) Law, Non-Bank Financial Institutions Business Rules, SEC, Takeovers and mergers regulations, SEC, Compliance manual for dealers, investment advisers and representatives, SEC Regulations, Securities Industry (Amendment) Act, Securities Industry Law, Unit Trust and Mutual Funds Regulations, Long Term Savings Act, Venture Capital Trust Fund Act, Companies Code, Ghana Administrative Barriers to Investment Update FIAS Contact point Thomas Muller Juan Costain Andrea Vasquez-Sanchez Financial Economist Lead Financial Sector Specialist Senior Programme Assistant Tel: (202) (202) (202) Fax: (202) (202) (202) tmuller@worldbank.org jcostain@worldbank.org avasquezsanchez@worldbank.org 12. For more information contact: 10

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