AFRICAN DEVELOPMENT BANK GROUP

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1 AFRICAN DEVELOPMENT BANK GROUP PROJECT: INSTITUTIONAL SUPPORT TO PUBLIC FINANCE MANAGEMENT AND AID COORDINATION (PFAID) COUNTRY: REPUBLIC OF SOUTH SUDAN PROJECT APPRAISAL REPORT December 2012 Appraisal Team Head Unit: Mr. J. WAHOME, OIC, OSFU Regional Director: Mr. S. KONE, OIC, OREB Team Leader: Mr. J. WAHOME, OIC, OSFU OSFU UNIT

2 TABLE OF CONTENTS Acronyms and Abbreviations, Currency Equivalents, Fiscal Year, Weights and Measures, Client s Information, Project Summary, Results-based Logical Framework Project Timeframe I STRATEGIC THRUST AND RATIONALE 1.1 The proposed 1.2 Project linkages with country strategy and objectives 1.3 Project Linkages with Aid Strategy of South Sudan 1.4 Rationale for Bank s involvement 1.5 Institutional Arrangement and Donor Intervention in PFM II PROJECT DESCRIPTION 2.1 Project components 2.2 Technical solution retained and other alternatives explored 2.3 Project type 2.4 Project cost and financing arrangements 2.5 Project s target area and Beneficiaries 2.6 Participatory process for project identification, design and implementation 2.7 Bank Group experience and lessons reflected in project design 2.8 Key performance indicators III PROJECT FEASIBILITY 3.1 Economic and financial performance 3.2 Environmental and Social impacts IV IMPLEMENTATION 4.1 Implementation arrangements 4.2 Monitoring 4.3 Governance 4.4 Sustainability 4.5 Risk management 4.6 Knowledge building V LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal instrument 5.2 Conditions associated with Bank s intervention 5.3 Compliance with Bank Policies VI RECOMMENDATION Tables Table 2:1 Project components Table 2.2: Project Cost Estimates by Component Table 2.3: Sources of Financing Table 2.4: Project Cost by Category of Expenditure Table 2.5: Expenditure Schedule by major Table 2.6: Expenditure by years Table 4.1: Procurement arrangements Table 4.2: Project Implementation Schedule i-xi Annexes Annex 1: Map of South Sudan Annex 2: Comparative Socio Economic Indicators Annex 3: Donor Interventions Annex 4: Bank Support to Sudan and South Sudan

3 ACRONYMS AND ABREVIATIONS ACMU Aid Coordination and Management Unit, MoFEP ACCA Association of Chartered Certified Accountants ADB African Development Bank ADF African Development Fund ASYCUDA Automated System of Customs Data AUHIP African Union High Level Implementation Panel CBTF Capacity Building Trust Fund CPA Comprehensive Peace Agreement DFID/UK Department for Foreign and International Development (U.K.) DRC Democratic Republic of Congo EA Executing Agency FSF Fragile States Facility GoNU Government of National Unity GPN General Procurement Notice GRSS Government of the Republic of South Sudan ICBPRGGP Institutional Capacity Building for Poverty Reduction and Good Governance ICT Information and Communication Technology IMF International Monetary Fund ISP Institutional Support Project JDT Joint Donor Team MDTF Multi Donor Trust Fund MoHRD Ministry of Human Resource Development MoFEP Ministry of Finance and Economic Planning MTCDS Medium Term Capacity Development Strategy NCP National Congress Party NDP National Development Plan N-JAM National Joint Assessment Mission OAG Office of the Auditor General OSFU Fragile States Unit PC Project Coordinator PCR Project Completion Report PEFA Public Expenditure and Financial Accountability PFAID South Sudan: Institutional Support to Public Finance Management & Aid Coordination PFM Public Financial Management PIU Project Implementation Unit PSC Project Steering Committee SDR Special Drawing Rights SPLA Sudan people s Liberation Army SS South Sudan SSAS South Sudan Aid Strategy SSCCSE South Sudan Center for Census, Statistics and Evaluation SSDP South Sudan Development Plan UA Units of Account UNDP United Nations Development Program UNICEF United Nations International Children s Emergency Fund USAID United States Agency for International Development i

4 Currency Equivalents: As at December 2011 South Sudan Currency Unit: South Sudanese Pound 1 Unit of Account (UA) = 1 Special Drawing Rights (SDR) 1 Unit of Account (UA) = US Dollar 1 Unit of Account (UA) = Euro 1 Unit of Account (UA) = GBP 1 Unit of Account (UA) = South Sudan Pound (SSP) 1 South Sudan Pound (SDP) = 1 Sudan (Khartoum) Pound GOVERNMENT FINANCIAL YEAR July 1 June 30 Weights and Measures 1 metric tonne = 2204 Pounds (lbs) 1 Kilogramme (kg) = lbs 1 meter (m) = 3.28 feet (ft) 1 millimeter (mm) = inch ( ) 1 kilometer (km) = 0.62 mile 1 hectare (ha) = acres ii

5 Client s information BENEFICIARY: EXECUTING AGENCY: Republic of South Sudan Ministry of Finance and Economic Planning (MoFEP) Financing plan Source Amount (UA) Instrument ADF/FSF 4.80 million Grant Timeframe - Main Milestones (expected) Preparation July 2011 Appraisal July 2011 Project approval December 2012 Effectiveness January 2013 Mid-term Review December 2013 Last Disbursement December 2014 Project Completion and Audit February 2015 iii

6 Project Summary Paragraph Topics covered Program name: Institutional Support Project to Public Finance Management and Aid Coordination (PFAID). Geographic scope: Entire country Project Overview Expected Outputs: The project will contribute to: i) building state capacity and accountability in PFM at the Central Government (GRSS), the State Governments and Counties; and ii) improving aid coordination in support of the country s PFM systems. Consistent with the agreements reached with the GRSS, the operation will benefit the Office of the Auditor General (OAG) and the following Departments in the MoFEP: i) the Accountant General; ii) Internal Audit; iii) Customs and Excise; and iv) the Aid Coordination and Management Unit (ACMU). The selection of these institutions reflects the negotiations undertaken by Bank staff with the South Sudanese Authorities and priorities identified in the South Sudan Development Plan (SSDP), , the Medium Term Capacity Development Strategy (MTCDS) as well as the South Sudan Aid Strategy (SSAS). Implementation timeframe: January 2013-December 2014 Project cost: UA 4.80 million Project direct beneficiaries: The project will build institutional and human capacities in the OAG and selected Departments in the MoFEP, including the ACMU, the MoFEP. A direct outcome of a wellfunctioning PFM system is enhanced provision of essential public services for the entire population, including women and the vulnerable sections of the population. Needs Assessment Bank s Added Value Knowledge Management South Sudan (SS) gained independence on 09 July The new State has critical development challenges stemming from the bloody and prolonged civil conflict with the North that started in 1955, a year before Sudan s independence from Egypt and the United Kingdom in 1956 and ending in 2005 with the signing of the Comprehensive Peace Agreement (CPA) on 9 January 2005 between the Sudan People s Liberation Movement (SPLM) and the National Congress Party (NCP). With respect to the PFM capacity, all policies, systems, institutional arrangements and staffing need to be built almost from scratch. Capacity building in PFM is rendered even more difficult by lack of long term technical support to strengthen or build national institutions; lack of updated and disaggregated data to serve as a basis for government strategies; and policies; lack of skills training facilities; and weak strategic coordination between key national institutions. It is against this background that the Government of the Republic of South Sudan (GRSS) made a request to the African Development Bank to assist in building its capacity in PFM. The proposed PFAID is the first operation submitted for consideration by the Board of Directors to assist the independent state of South Sudan. The project will build and complement other Banksupported operations, such as the on-going Institutional Capacity Building for Poverty Reduction and Good Governance Project (ICBPRGGP) and the support to Juba University provided under the Governance Trust Fund. Further, the PFAID will complement the on-going capacity building support by development partners. The Bank s added value in supporting this project derives from a number of factors, including: (i) the lessons and experiences gained in preparing and implementing Institutional Support Projects (ISPs); and ii) the Bank s long-standing experience in strengthening PFM in various fragile and post-conflict countries in Africa. In addition, the Bank has gained considerable experience in supporting capacity development and rebuilding PFM systems in countries neighboring South Sudan, namely Kenya, Uganda, Tanzania and Rwanda. This experience is vital given that South Sudan will borrow heavily from the financial systems and programmes from neighboring countries. The project will contribute to knowledge building to support the recovery and development efforts in fragile and post-conflict countries, particularly with respect to the modalities of delivering institutional capacity development projects in support of PFM systems. The findings could also be useful to all fragile states in Africa, including Somalia, Central Africa Republic etc. The Bank will gather and disseminate the knowledge generated through monitoring and evaluation reports, mid-term reviews and Project Completion Reports. iv

7 IMPACT Results Based Logical Framework Country and Project Name: Republic of South Sudan- Institutional Support Project for Building Public Financial Management and Aid Coordination (PFAID). Purpose of the Project: To Support the recovery and development efforts of South Sudan Development Plan, RESULTS CHAIN Impact: Poverty in South Sudan is reduced and aid coordination strengthened Indicator (including CSI) -GDP annual growth rate (%) -Revenue/GDP ratio -Incidence of poverty PERFORMANCE INDICATORS Baseline -Estimated real GDP growth of 5.5% in Revenue reached 18.% of NGDP in % of the population below poverty line in 2010 Target -GDP growth rate >6.5% by Revenue/GDP ratio increase to 24% by December Population below poverty line decline from 50.6% in 2011 to 46% in 2014 MEANS OF VERIFICATION -Real GDP data from the South Sudan Center for Census, Statistics and Evaluation -Government publications in 2012/13/14 -World Bank and IMF Surveys in 2012/13/14 RISKS/MITIGATION MEASURES Risk # 1: Consolidating peace and security countrywide: Despite the remarkable progress being made to consolidate peace and security country-wide, possibility of resurgence in instability cannot be ruled out. Mitigation: Mitigated by concerted efforts by GRSS and international community, including the African Union High Level Panel, especially through the ongoing negotiations on the sharing of oil-revenues, citizenship and border security. v

8 OUTCOMES Results Based Logical Framework RESULTS CHAIN Outcome 1: Enhanced transparency and accountability in use of public finance management systems Indicator (including CSI) Aggregate revenue outturns compared to original approved budget (PI- 3) -Stock and monitoring of expenditure payment arrears (PI-4) PERFORMANCE INDICATORS Baseline Performance Indicator (PI) ratings as captured in 2010 Assessments of South Sudan s PFM (see accompanying Technical Annex of PFAID): PI-3 D (2010) PI-7 D+ (2010) Target PI-3 C (2014) PI-7-above C (2014) MEANS OF VERIFICATION -Bank assessment of PEFA -Publications by GRSS, including fiscal budget report -World Bank publications, including Integrated Fiduciary Assessments and IMF Reports RISKS/MITIGATION MEASURES Risk # 2: Weak procurement capacities. Weak procurement could delay implementation of operation. Mitigation: Mitigated by the coordinated provision of technical assistance, institutional capacity development assistance by various donors. Risk # 3: Corruption that could derail implementation of the operation or lead to shortfall in donor funding for PFM reforms. Mitigation: Government ownership and support for ongoing PFM reforms and the desire to create the enabling environment for economic growth and poverty reduction. Vigilance of the anti-corruption agency to investigate cases of corruption -Public access to key fiscal information (PI- 10) PI-10 D (2010) PI-10 above C (2014) Risk # 4 : The global economic slowdown reduces the country s economic growth and government revenues -Effectiveness in collection of tax revenues (PI-20) PI-15 D+ (2010 PI-10 above C(2014) Mitigation: A credible and transparent macroeconomic management system and improved policy environment should strengthen GRSS s ability to respond to external shocks vi

9 Results Based Logical Framework RESULTS CHAIN Indicator (including CSI) PERFORMANCE INDICATORS Baseline Target MEANS OF VERIFICATION RISKS/MITIGATION MEASURES Outcome 2: Improved aid coordination for support to PFM - Meetings of the GRSS Donor Forum after the implementation of the South Sudan Aid Coordination Mechanism, Roll out of the Aid Information Management system (AIMS). - Irregular meetings of the Sector Working Groups in At least four meetings of GRSS Donor Forum each years, starting Four (4) rounds of aid reporting published in accessible format. -Reports from donors and the MoFED, AfDB supervision reports, including quarterly and semi-annual reports of PFAID -Aid Reports published Risk # 5: Technical assistance does not deliver sustainable capacity improvement due to insufficient emphasis on skills transfer Mitigation: Terms of Reference for project advisor will contain specific requirements to transfer skills to local counterparts with measurable indicators of progress and success, which will be evaluated as part of project implementation progress. -% of staff in Aid Coordination and Management Unit (ACMU) with training in aid and debt management -0% -All five staff trained in aid and debt management and in the use of Aid management Information Systems (AIMS) -At least 96 manmonths of consultancy services provided -Fiscal budgetary system reports -Co-financed projects as a % the total aid-flow annually vii

10 Results Based Logical Framework RESULTS CHAIN Indicator (including CSI) PERFORMANCE INDICATORS Baseline Target MEANS OF VERIFICATION RISKS/MITIGATION MEASURES Outcome 3 Increased mobilization of tax-revenue by 2014 and reduction in the financing of the budget by oilrevenue -Government expenditures financed by non-oil revenue in Staff trained in PFM, Auditing, customs and excise, and specialized management. -Less than 10% of government total expenditure was financed by non-oil revenue in No staff has received any training on customs and excise operations and management -Increase financing of government expenditure by non-oil revenue to more than 20% by end At least 50% of the staff in Customs and Excise Department in 2012 receive training in customs and excise operations, and management, auditing and other PFM related training -At least five Senior Officers undertake secondment/high level training on customs management and administration in neighboring countries - Data generated from Automated System Customs data (ASYCUDA++) -Fiscal budget for 2012/13/14 - Reports by the IMF, the World Bank and the other donors -Bank s annual Country Policy and Institutional Assessments (CPIA) viii

11 RESULTS CHAIN Outcome 4 Indicator (including CSI) PERFORMANCE INDICATORS Baseline Results Based Logical Framework Target MEANS OF VERIFICATION RISKS/MITIGATION MEASURES Enhanced operational effectiveness and productivity of beneficiary institutions - Staff members trained in PFM, auditing, aid coordination and management, customs and excise, and in specialized management. --Annual audit reports; availability of reliable data and regular reports on aid by the aid coordination and management unit; improved revenue performance in customs department; efficient control systems in the Internal audit department. -At least 300 staff receives direct raining in core PFM systems and 40% of trainees are women. At least 300 staff trained in various aspects of Customs and Excise Department, use of ICT including Number, type and value of ICT provided each years -PEFA report for 2012/13/14 PFM progress reports in 2012/13/14 -Supervision mission reports and Mid-term Report of PFAID -Staff with professional training in accountancy in the MoFEP and OAG - Only 5 staff with training at the level of Association of Chartered Certified Accountant (ACCA) -20 more staff members trained to attain ACCA. - Annual Report of the OAG ix

12 KEY ACTIVITIES RESULTS CHAIN Indicator (including CSI) PERFORMANCE INDICATORS Baseline Results Based Logical Framework Target MEANS OF VERIFICATION RISKS/MITIGATION MEASURES Project management and procurement courses offered by the PCU -No qualified staff fully conversant with the Bank s project management and procurement procedures - At least two course each year on Bank s project implementation arrangement, including financial management and procurement -At least 4 senior staff trained on project implementation and management annually in the Bank Headquarters/Regional offices over 2013 and Reports from the MOFEP and other donors -Quarterly, supervision, midterm review Reports of PFAID -Annual Audit Reports of the PFAID ACTIVITIES of PFAID INPUTS 1. PFM training for the Office of the Auditor General and selected Departments in MoFEP ADF : UA4.80 Million Implementation support supervision mission 2. Provision of technical assistance to the Office of the Auditor General and the following Departments in the MoFEP: i) Internal Audit; iii) Aid Coordination and Management Union; iii) Debt Management Directorate and v) Customs and Excise Department. 3. Provision of office equipment, including computers, printers, photocopiers, scanners, local area networks etc x

13 Project Implementation Schedule Government of South Sudan: Institutional Support Project for Building Public Finance Management Systems and Improving Aid Coordination. Activities/Years Project Processing and Management Grant Approval Signing Protocol of Grant Agreement Project Effectiveness and Launching of Project Supervision and Monitoring Mid-term Review Project Completion Report Submission of Final Audit Report Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Action by Q1 AfDB AfDB & GRSS AfDB & GRSS AfDB AfDB &GRSS AfDB &GRSS AfDB/GRSS Component of Project: Building PFM systems A. Procurement and distribution of Goods * B. Commencement of training activities C. Recruitment and deployment of technical assistance d. Procurement and installation of local area networks GRSS GRSS GRSS AfDB & GRSS xi

14 REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED GRANT TO SOUTH SUDAN FOR INSTITUTIONAL SUPPORT TO PUBLIC FINANCE MANAGEMENT AND AID CO-ORDINATION (PFAID) Management submits the following Report and Recommendation on a proposed Grant for UA 4.80 million to the Republic of South Sudan from Pillar III of the Fragile States Facility (FSF) to finance the Institutional Support to Public Finance Management (PFM) and Aid Co-ordination (PFAID) STRATEGIC THRUST AND RATIONALE 1.1 The proposed PFAID is the first operation submitted for consideration by the Bank Group s Board of Directors for the new state of South Sudan. The PFAID is essential given that South Sudan s development efforts have been constrained by low administrative capacity in the face of high demands posed by fiscal and policy decentralization. The country has also been managing substantial inflows of oil revenues and donor resources using limited institutional and human capacity. As a consequence, spending patterns continue to be governed by cash availability, and reflect the institutions capacity for spending rather than their approved budget appropriations. South Sudan also faces lack of capacity for tax administration and services delivery at the central, state and local level which continues to be compounded by the huge influx of internally displaced people and refugees. The proposed PFAID draws from, and is aligned with the Government s core governance functions, the SSDP, , the Medium Term Capacity Development Strategy (MTCDS) and the South Sudan Aid Strategy (SSAS) and therefore commands priority in the GRSS s development priorities. 1.2 Project Linkages with Country Strategy and Objectives The proposed operation has strong linkages with the South Sudan Development Plan (SSDP), , which sets out a medium term agenda for reconstruction and development, under the broad theme of Realizing Freedom, Equality, Justice, Peace and Prosperity for All. The SSDP has four pillars that encapsulate the development objectives of South Sudan: i) economic development; ii) social and human development 3 ; iii) governance; and iv) conflict prevention and security. The PFAID operation will assist in the implementation of the economic development and governance pillars. The SSDP provides a framework for building the new nation of South Sudan, and to guide international partners in programming support to the country. The ten states of South Sudan will follow suit in developing their own state-level development plans in conformity with the overarching vision articulated in the SSDP, Finally, the plan is supposed to serve as an instrument for resource mobilization and policy dialogue Embedded in the SSDP is The Medium-Term Capacity Development Strategy (MTCDS) that provides a strategic framework for planning and organizing institutional and human capacity in support of the recovery and development priorities of South Sudan. The objective of the MTCDS is to ensure that the GRSS can effectively address critical institutional capacity needs required to implement the SSDP, , including building public administration and management 1 This appraisal report of the South Sudan PFAID is accompanied by detailed annexes that elaborate on various aspects of the project, including the South Sudan Development Agenda, the Medium Term Capacity Development Strategy, the 2011 Aid Strategy for the Republic of South Sudan, Assessment of the Challenges in Public Finance Management systems, and the Implementation Arrangements, Procurement and Financial Policies and Procedures that will apply in implementing the operation.. 2 See Directorate of Planning, Ministry of Finance and Economic Planning South Sudan Development Plan, Juba, Also see Annex 2 on South Sudan Comparative Social Indicators. 1

15 systems that facilitate the provision of public goods and services to the population under an accountable and transparent system of governance which is a priority in the MTCDS The proposed PFAID is also consistent with the economic governance pillars of the Bank s Medium Term Strategy, , and the ADF-12 operational priorities, Bank s Governance Strategic Action Plan 1, the Strategy for Enhanced Engagement in Fragile States 2, and most important, the Guidelines on Administration of the Technical Assistance and Capacity Building (TCB) Program of Pillar III Operations of the FSF 3, all of which underscore the important role that good financial and economic management play in supporting the recovery and development efforts of fragile states The PFAID will be implemented within the framework of the Cooperation Agreement 4 that was signed between the Bank and the GRSS in September The first South Sudan Interim CSP is under preparation. 1.3 Project Linkages with Aid Strategy of South Sudan The PFAID is closely aligned to the South Sudan Aid Strategy (SSAS) 5, whose central objective is the effective management and coordination of aid-inflows into the country within a Government-led framework. The Aid Coordination and Management Unit in the MoFEP are responsible for implementing the SSAS. The Government attaches high priority to implementation of the SSAS, given the current challenges in managing and coordinating development assistance. The SSAS was formulated utilizing the lessons and experiences learned in the course of implementing the 2006 Aid Strategy. Consistent with the 2005 Paris Declaration on Aid Effectiveness and the Accra Agenda for Action (AAA), the SSAS is guided by principles which include ensuring that the development assistance accruing to South Sudan is: i) Government owned and led; ii) aligned with Government s policies as set out in SSDP; iii) use Government systems, as much as possible including the existing institutions for public finance management (PFM); v) is coordinated and harmonized through sectoral mechanisms; v) managed for achieving results and vi) based on the principles of mutual accountability. 1.4 Rationale for Bank s Involvement The proposed PFAID will contribute to building capacity and accountability in PFM at the central government (GRSS), the State Governments and Counties. South Sudan is a fragile, post-conflict country that was engulfed in a bloody civil conflict with the North (Sudan (Khartoum)) for nearly 50 years with few breaks, starting in 1955, a year before independence from Egypt and the United Kingdom in 1956 and ending in 2005 with the signing of the Comprehensive Peace Agreement (CPA) on 9 January 2005 between the Sudan People s Liberation Movement (SPLM) and the National Congress Party (NCP). Since the signing of the CPA in 2005, the authorities in SS have set out to build the country almost from scratch by creating economic institutions and working towards establishing an environment conducive to growth and stability. 1 African Development Bank Governance Strategic Directions and Action Plan (GAP), ADF/BD/WP/2008/40 or ADB/BD/WP/2008/70 2 African Development Bank Strategy for Enhanced Engagement in Fragile States ADF/BD/WP/2008?10 or ADB/BD/WP/2008/37 3 African Development Bank The Fragile States Facility (FSF): Guidelines on Administration of the Technical Assistance and Capacity Building (TCB) Programs of Pillar III Operations ADF/BD/WP/2010/44 or ADB/BD/WP/2010/75 4 See African Development Fund Proposal for a Cooperative Agreement with the Republic of South Sudan Pending its Membership in the Bank Group July Government of the Republic of South Sudan (2011) Aid Strategy for the Government of South Sudan Ministry of Finance and Economic Planning (MoFEP), August,

16 1.4.2 Considerable progress has been made that culminated in the attainment of independence on 09 July As is the case with other fragile states in Africa, South Sudan faces formidable development challenges, including the lack of institutional and human capacity that severely constrains the implementation of its development agenda. Public administration at all levels lacks the basic human, financial and logistical means to deliver services. Infrastructure services are also nonexistent in many parts of South Sudan. Moreover, a majority of civil servants have not had any formal training for several years due to the prolonged civil conflict. Accordingly, the institutional and human capacity in South Sudan is characterized by low level of productivity and service delivery that has forced Non-Governmental Organizations, the United Nations Agencies, Funds and Programs, NGOs and religious organizations to step in with the objective of covering the gaps The weak human resources base, combined with lack of systems, absence of a robust legal framework, and weak institutions in South Sudan have proven to be the greatest challenge to the development of the PFM systems in the country 1. However, over the past three years there have been notable improvements including: i) in the budget formulation process; ii) the introduction of an integrated financial management system (IFMS) in the MoFEP; and iii) strengthening the support for procurement agents. More recently, a draft Public Finance Management and Accountability Bill was prepared by the Ministry of Legal Affairs and Constitutional Development, and submitted to Parliament for consideration. Despite these efforts, substantial challenges remain in developing functional PFM systems. The Minister of Finance and Economic Planning while presenting the budget for fiscal year 2010 confirmed the current challenges by noting that corruption can undermine the best budgets and that the greatest issues in South Sudan are irregular and over-priced procurements, selfawarded allowances, and ghost workers, which are clear pointers to the continuing weaknesses in the PFM system. The management and accountability of public sector resources therefore remains a central issue in South Sudan There is also a need to improve transparency and accountability of the financial resources that accrue to the ten (10) states of South Sudan. These resources could be significant, particularly for states that have oil revenues. States also have the power to legislate to raise revenue collection from the various sources and areas such as: i) State land and property tax and royalties; ii) User charges and fees for state services; iii) State licenses; iv) State personal income tax; v) Levies on tourism; iv) State enterprises and projects and national parks; vii) Stamp duties on State transactions, and viii) other taxes that do not encroach on South Sudan Government taxes. Extending the PFM support to the states and counties is therefore critical The project will also assist in improving aid management and coordination. The MoFEP does not have a well-functioning, staffed and equipped Aid Coordination and Management Unit (ACMU). To strengthen the capacity of the ACMU, a number of challenges need to be addressed including i) reviewing existing aid financing arrangements to ensure that there is appropriate alignment with the priorities set in the SSDP, ; ii) having donors provide estimates of their future aid commitments on a rolling three-year basis; iii) reduce current substantial fragmentation of aid programs along with increased emphasis on multi-year commitments to priority programs; and iv) in close collaboration with the donor community, strengthen arrangements for monitoring the status of on-going donor funded projects and programs and for evaluating their effectiveness. To address these, and other pressing concerns, the ACMU will need to implement a program of capacity building and technical support over the two-year period, Early action in strengthening the capacity of the ACMU is critical in order to position it to play an important role in the preparation of the next National Development Plan starting The PFAID will therefore provide technical assistance (TA) that will facilitate aid coordination principally through 1 See Government of the Republic of South Sudan Public Finance Management Assessment: Based on the Public Expenditure Financial Accountability Framework (PEFA) September

17 on-the-job training for the local counterparts and the transfer of skills with a view to improving aid management and coordination and producing timely, accurate and reliable data and reports on aid inflows and use. The TA will further assist in revitalizing the Donor Coordination Forum. The project will also offer overseas training opportunities in aid management as well as provide the relevant equipment and software The PFAID complements and adds value to Government and other development partners efforts to address the challenges faced by South Sudan. The rationale for the PFAID is three-fold: first the PFAID will assist in strengthening institutional capacity for managing the country s public finance systems and aid coordination. Severe organizational weaknesses in the country s PFM institutions and systems continue to seriously hamper the development and peace building efforts of South Sudan. Second, by building the capacity of the OAG and key Departments in the MoFEP, the project will help fight corruption and wasteful leakages of the scarce public sector resources. Third, the project will help consolidate gains in financial and economic governance reform supported under the Pillar III of the FSF and the ongoing ADF - financed Institutional Capacity Building for Poverty Reduction and Good Governance and the support to Juba University Overall therefore, the PFAID will contribute to strengthening fiduciary standards while ensuring that public resources are used for the intended purposes and reach the targeted beneficiaries. The PFAID will also contribute to moving the country closer to achieving compliance with international standards of financial management, including the use of internationally recognized accounting and auditing systems and reporting standards through application of modern ICT. 1.5 Institutional Arrangement and Donor Intervention in PFM A) Institutional Arrangement Ministry of Finance (MoFEP): This project focuses on two main areas of governance in the economy, namely: i) the public financial management system; and ii) aid coordination and management in South Sudan. Within the PFM system, the project will support the Office of the Auditor General (OAG) and four (4) functionally interlinked Departments in the MoFEP - Internal Audit; Accountant General; and Customs and Excise Departments. Under aid co-ordination, the PFAID will strengthen capacity of the Aid Coordination and Management Unit, in the MoFEP The MoFEP is headed by a Minister with two Deputy Ministers and two Under Secretaries and has seven (7) Directorates: i) Procurement; ii) Accounts; iii) Budget; iv) Internal Audit; v) Taxation; vi) Planning; and vii) Administration and Finance. Amongst other tasks, the MoFEP is responsible for i) formulating and administering the national budget; ii) mobilizing financial resources to finance government programmes; iii) collecting revenue due to government; iv) carrying out macroeconomic reviews and recommending policies that support macro-economic stability and promote economic growth and poverty reduction; and v) providing policy guidance to the Bank of South Sudan Internal Audit Department, the MoFEP: As is the case with other Departments in the MoFEP, there is a dearth of capacity in the Internal Audit Departments, which is characterized by inadequate staffing, lack of office equipment and infrastructure, absence of appropriate regulatory legal framework and inadequate logistics for field work (transport, computers etc.). To improve productive capacity, the departments need immediate support in the development of legislative instruments for internal audit, extensive training of existing staff and those coming from Sudan (Khartoum) and the provision of basic office equipment, including audit soft-wares, computers, printers, photocopiers and networks, and technical assistance and advisors. 4

18 1.5.4 Customs and Excise Department: USAID commissioned a study on the customs and Excise Department of South Sudan in The findings of the study are that the Department lacks a i) comprehensive GRSS border infrastructure/equipment; ii) clear mandate of customs role; iii) proper revenue collection and accountability; iv) clear exemptions procedures; and v) internal-control mechanisms, inadequate border enforcement and security measures and virtually no automation. The PFAID will address these constraints with the objective of increasing the non-oil tax revenue that accrues to GRSS. Accordingly, the project will provide office equipment, wireless internet networks and large-scale training in basic and advance Customs and Excise Administration, in addition to other office equipment including the installation and implementation of ASYCUDA++. The project will also make provisions for study tours to neighboring countries with the objective of learning about the management of their taxation policies and procedures Aid Coordination and Management Unit (ACMU): The ACMU is housed in the MOFEP. As at July 2011, the ACMU had a staff complement of six who were assisted by one technical adviser. More recently, a Debt Management Directorate (DMD) was added to the ACMU. Under the MOFEP, the DMD is entrusted with the responsibility of formulating, implementing and coordinating South Sudan s external assistance and to prepare and implement the overall debt strategy of the country. The DMD therefore constitutes an important element of public financial management systems in South Sudan and is expected to contribute significantly to investment planning and programming. Notwithstanding its important functions, the DMD has an urgent need for qualified personnel, especially debt management specialists and experts. Currently, the DMD is poorly staffed and lacks the operational tools, including debt management soft-wares to work effectively Office of the Auditor General (OAG): The OAG was created as an independent office through the Interim Constitution of South Sudan. Through this arrangement, an Audit Chamber was established in Prior to 2010, very few audit reports were prepared because of lack of manpower and the legal framework for auditing public sector entities. The mandate of the Auditor General as stipulated in the interim constitution relates to carrying out audit of public sector entities within statutory set deadlines, and assessing the efficiency and effectiveness of the central government, courts, local authorities, national assembly, statutory bodies/states corporations, commissions, and submit reports to the Parliament On account of the huge backlog of unaudited public accounts, the President of the Republic of South Sudan signed a provisional law in January 2011 that facilitated the appointment of an Auditor General and the preparation of an audit manual. Relevant professional staff were also recruited for the OAG. The results of this commendable initiative have been that the OAG was able to prepare and submit to Parliament the audit reports for 2005 and The audit reports for 2007, 2008, 2009 and 2010 were finalized and presented to Parliament. Presently, as the audit chambers does not have the requisite capacity to carry out systems auditing, specialized audits and evaluations, it does only financial auditing. Other challenges faced by the Office include poor skills of staff, inadequate funds and absence of time saving ICT. The proposed project will, therefore, provide consultants to assist in finalizing audits, train inspectors and audit managers and audit public sector institutions. It will also provide training in procurement and forensic audit. B) Donor Coordination Evidence in the field tends to suggest that coordination among donors along the lines envisioned in the Paris Declaration is less than satisfactory in South Sudan. Within the seven Directorates of the MoFEP, for example, there is a myriad of small and un-coordinated interventions in PFM. There is the Capacity Building Trust Fund (CBTF), which is a pooled fund financed by seven donors namely Norway, Denmark, Sweden, The Netherlands, Spain, Canada and the United Kingdom. The first phase supported capacity building operations of about US$30 million, while the second 5

19 phase envisions providing about US$75-90 million for institutional capacity development. The Joint Donor Team (JDT) acts as the secretariat for the fund. It focuses essentially on improving civil service capacities in PFM Various aspects of PFM are supported by Other Donors. Norway and the United States Agency for International Development (USAID) are supporting the Management of oil revenues, while the process of budget preparation is being funded by USAID. The World Bank and UNDP are supporting the improvement of procedures for public expenditure, and the payroll and payment systems and procurement audit is funded by the Multi Donor Trust Fund (MDTF) and the World Bank The Bank and the World Bank assisted in preparing the South Sudan Integrated Fiduciary Assessment (SSIFA) and Public Expenditure and Financial Accountability (PEFA) assessment. The Bank further supported the preparation of the PFM Bill. Moving forward, the GRSS has requested that more support be provided by the Bank in implementing some aspects of the PFM Bill. The IMF launched a trust fund amounting to about US$10 million that aims at developing various aspects of PFM and strengthening the Central Bank with the objective of ensuring that it discharges its constitutional responsibilities more effectively. The support from the IMF will also contribute to building the country statistical capacity and putting in place the legislative framework required for effective economic and financial management. Annex 3 provides a matrix showing the main areas of donor intervention in the South Sudan PFM system The Bank is further providing support to the University of Juba, in PFM with resources in the amount of UA0.482 million provided under the Bank s Governance Trust Fund. The objective of this project is to enhance the capacity of the University of Juba to provide training in auditing, fiduciary management and resource mobilization with a view to enhancing functional capacities of public sector officials, in improving public service delivery. The target beneficiaries include the academic staff/faculties (e.g., social science, management and education) of the university of Juba and public sector officials of various ministries and departments of the (GoSS) dealing with auditing, fiduciary management and resource mobilization. The South Sudan PFAID will complement the Bank s support to the University of Juba (see Annex 4) II. PROJECT DESCRIPTION 2.1 Project Components Project Objectives: The project s broad objective is to support the recovery and development efforts of South Sudan through the effective implementation of the SSDP, The specific objectives of the PFAID are to (i) build and enhance transparency and accountability in the use of public resources through training, skills transfers in the OAG and MoFEP; ii) improve aid coordination; and iii) enhance the operational effectiveness of beneficiary institutions by providing basic office equipment, including ICT Project Components: The project has four (4) mutually reinforcing components including: (i) building state capacity and accountability in public finance management in South Sudan; ii) improving aid coordination and effectiveness; iii) enhancing domestic revenue mobilization; and iv) strengthening capacity for project management. The support will be channeled through i) large-scale training of staff in beneficiary institutions; ii) providing Technical Assistance (TA) and consultancy services; iii) providing office equipment and ICT assistance to enhance the operational effectiveness of the beneficiaries ; and iv) strengthening project management in the MOFEP. The major activities under each component are summarized in Table 2.1 while the detailed description of project components and costs is presented in Technical Annex B2. 6

20 No Component Costs (UA million) 1 Building State Capacity and Accountability in Public Finance management Table 2:1 Project components Description Support will enable State institutions to undertake in a timely manner the audit of all Government Ministries and Departments, and to act as useful watchdogs over the utilization of public finance resources. Planned training programs will aim at upgrading skills of staff in both organizations by providing them with relevant professional courses in accounting methods and systems, systems audit, certificate audit, fraud and irregularity audit, performance audit, computer audit, and personal effectiveness skills. The component will further provide the OAG and the Internal Audit Department with modern auditing soft-wares and other ICT complemented by short-term local and overseas training programs for selected professional staff. The component will further provide technical assistance to both the Internal Audit Department and OAG that will assist in drafting internal audit bill and internal audit regulations and for engaging reputable auditing firms to assist in clearing the existing backlog of unaudited public sector accounts. 2 Improving Aid Coordination and Effectiveness Local area networks enhance the operational effectiveness of beneficiary institutions by facilitating access and sharing of operational information and data Support for improving aid coordination and effectiveness shall translate to: a) enhancement of the Aid Information Management System (AIMS) database and rolling it out to donor community for data entry and line ministries for enhanced access to donor information; b) advise on decentralization of donor programs to States and Counties as proposed by the MoFEP in the Development of Aid Instruments and c) assisting in formulating specific sector programs for donor support, particularly in infrastructure. 3 Enhancement of Domestic Revenue Mobilization Relating to the DMD, the support will involve the procurement of software for debt management and the training of staff in short Debt Management courses and in more specialized overseas training programs. Support will further facilitate training-by-secondment of selected DMD staff to similar institutions in neighboring countries in the region to learn from best practices in debt management To minimize heavy dependency on oil revenues, the Bank with other partners will help revive and capacitate the Customs and Excise Department by providing working tools, including ICT, equipment, such as cargo scanners and the large scale training of staff in the Department in courses such as l basic and advanced Customs and Excise Administration. Support study tours to neighboring countries with the objective of learning about the management of their taxation policies and procedures. 7

21 4 Project Management Hiring project coordinator, a project accountant and procurement expert, who will be entrusted with the responsibility of implementing the PFAID and other Bank-funded operations for South Sudan. The experts will be trained on programs focused on various aspects of the project cycle, including project identification, preparation and appraisal, as well as project monitoring and evaluation. In addition, the PCU team will receive the normal training on Bank rules of procedures for auditing, procurement, disbursement and general policies on portfolio management. The training for the PCU will mainly be conducted with the assistance of the Bank and is expected to be offered three times during the life cycle of the PFAID project. In partnership with the Bank, the staff of the PCU will be expected to organize training programs for public service staff on Bank s project implementation policies and procures. The PFAID will also provide basic equipment consisting of two desktop computers, a fax machine and telephone connection for the unit and oversee the TAs provided in South Sudan. TOTALS Technical Solution Retained and other Alternatives Explored During project preparation, several options were explored, including the i) scope of the support to be provided to the MoFEP; ii) Departments in the MoFEP that should benefit from the operations; iii) modalities of the capacity building to be provided, i.e. whether training should be provided at regional/international training institutions or in-country through specifically designed, short-term training courses provided by local/regional experts or through local training institutions. On the choice of the executing agency, the options considered were either to establish a dedicated Project Coordination Unit (PCU) within the MoFEP or to have the project implemented by the PCU of the ongoing Institutional Capacity Building for Poverty Reduction and Good Governance (ADF/BD/WP/2007/17). Management, in close collaboration with the GRSS, opted to establish a new PCU in the MoFEP, because the implementation of the on-going institutional support project will be completed in December The PCU is fully justified on grounds of the weak project implementation capacity in South Sudan, and will have several functions, including i) assisting in implementing Bank Group s operations; ii) providing training on Bank Group s implementation policies and procedures; iii) overseeing the technical assistance provided by the PFAID; and iv) assisting in the preparation of South Sudan PFM training needs assessment and design a training program to inform future donor interventions. The proposed PFAID will be implemented over a twoyear period after effectiveness, which is expected in the first quarter, Project Type The proposed operation is an investment operation financed by grant resources from the Technical Assistance and Capacity Building Window (Pillar III) of the FSF. The project focuses on four inter-related areas that are outlined in Table 2.1, and is part of the on-going efforts by the international community, including the Bank, to assist in rebuilding the PFM systems of South Sudan. The project is designed to provide synergic linkages to the Bank s on-going Institutional Capacity Building for Poverty Reduction and Good Governance and other capacity building support provided to South Sudan. Annex 4 provides information with respect to Bank Group Operations by fourth quarter of

22 2.4 Project Cost and Financing Arrangements The estimated total cost of the project, net of taxes and duties, is UA million or approximately US$ million 1. A contingency of 9% have been factored in the project cost that comprises 7% and 2% for physical and prices contingencies, respectively. Tables 2.2 and 2.3 below present the estimated project cost by component and sources of finance, whereas Tables 2.4 and 2.5 present the estimated project costs by Category of Expenditure. Details of the project cost by component and expenditure categories are presented in Technical Annex B The Bank will finance the entire cost of the project. This is consistent with the Bank s Policy on Expenditures Eligible for Bank Group Financing 2, which permits the Bank to finance 100% of the total cost of projects and programs for fragile regional member states. South Sudan is eligible for Pillar III of the FSF, but access to Pillar I will have to be established through a relevant programming document that is approved by the Boards of Directors. Components Building State Capacity and Accounability for Public Finance Management Improving Aid Coordination and Effectiveness Enhancing Domestic Revenue Mobilization Project Management TOTAL BASILINE COSTS Physical Contingencies Price Contingencies TOTAL PROJECT COSTS Table 2.2: Project Cost Estimates by Component (in 000) (US$ '000) (UA '000) Local Foreign Total Local Foreign Total % Foreign Exchange % Total base Costs 512, , ,55 323, , , ,57 967, ,41 206,55 610,28 816, , , ,85 279, , , ,52 750, ,00 369,83 473,22 843, , , , , , ,47 379,32 509,79 82,27 239,18 321, ,82 102,91 160,72 36,46 64,89 101, , , , , , , Table 2.3: Sources of Financing (in 000) PROJECT COST SUMMARY Building State Capacity and Accountability Improving Aid Coordination and Effectiveness Enhancement of Domestic Revenue Mobilization Project Management TOTAL PROJECT COSTS Cost Including % of AfDB % Contingencies Total Financing Financing 1 568,99 32, ,57 99,3 899,62 18,7 893,36 99, ,67 29, ,28 99,0 921,72 19,2 894,77 97, ,00 100, ,99 98,8 1 Local costs are estimated in United States Dollars (US$) because during the appraisal of the PFAID operation, South Sudan was in the process of introducing a new currency that was rolled out after independence in July See African Development Bank Policy on Expenditures Eligible for Bank Group Financing ADB/BD/WP/2007/106/Rev.1 - ADF/BD/WP/2007/72/Rev.1, 12 February

23 Table 2.4: Project Cost by Category of Expenditure (in 000) Category of Expenditures A. Investment Costs 1. GOODS Equipment 2. WORKS 3. SERVICES Training Technical Assistance Studies Subtotal 3. SERVICES Total Investment Costs B. Recurrent Costs 1. Personnel 2. Daily Subsistence Allowance 3. OPERATION & MAINTENANCE Office Equipment Facilities Subtotal 3. OPERATION & MAINTENANCE 4. General Operating Charges Total Recurrent Costs Physical Contingencies Price Contingencies Total PROJECT COSTS (US$ '000) (UA '000) % Foreign Foreign Local Total Foreign Local Total Exchange % Total Base Costs 745,19 319, ,55 469,88 201,38 671, ,00 105,00 420,00 198,63 66,21 264, ,75 826, , ,99 521, , , ,00 760,45-760, ,00 120,00 300,00 113,50 75,67 189, ,75 946, , ,94 596, , , , , ,45 864, , ,20 211,20-133,17 133, ,80 63,80-40,23 40, ,80 25,20 56,00 19,42 15,89 35, ,55 47,90 106,46 36,92 30,21 67, ,80 16,80-10,59 10, ,35 89,90 179,26 56,34 56,69 113, ,60 134,40 192,00 36,32 84,75 121, ,95 499,30 646,26 92,66 314,84 407, , , , , , , ,32 130,47 509,79 239,18 82,27 321, ,91 57,82 160,72 64,89 36,46 101, , , , , , ,

24 Table 2.5: Expenditure Schedule by major Component COMPONENTS I. Investment Costs A. GOODS Equipment B. WORKS C. SERVICES Training Technical Assistance Studies Subtotal SERVICES Total Investment Costs II. Recurrent Costs A. PERSONEL B. DAILY SUBSISTENCE ALLOWANCE C. OPERATION & MAINTENANCE Vehicle Equipment Facilities Subtotal OPERATION & MAINTENANCE D. GENERAL OPERATING CHARGES Total Recurrent Costs Physical Contingencies Price Contingencies TOTAL Taxes Foreign Exchange BUILDING STATE CAPACITY & ACCOUNTABILITY FOR PUBLIC FINANCE MANAGEMENT IMPROVING AID COORDINATION AND EFFECTIVENESS ENHANCEMENT OF DOMESTIC REVENUE MOBILIZATION PROJECT MANAGEMENT Physical Contingencies Total % Amount 214,70 128,07 298,57 29,92 671,26 5,0 33, ,83 264,83 8,0 21,27 794,50 599,03 655,78 34, ,99 8,0 167,39 272,40 45,40 272,40 170,25 760,45 8,0 61,08 126,11 31,53 31,53-189,17 5,0 9, ,01 675,96 959,71 204, ,61 7,8 237, ,72 804, ,28 499, ,70 7,4 292, ,17 133,17 5,0 6, ,23 40,23 8,0 3, ,31 35,31 8,0 2,84 21,47 12,81 29,86 2,99 67,13 8,0 5, ,59 10,59 8,0 0,85 21,47 12,81 29,86 48,90 113,03 8,0 9, ,07 121,07 8,0 9,72 21,47 12,81 29,86 343,37 407,50 7,0 28, ,19 816, ,13 843, ,20 7,3 321,45 104,46 60,77 93,45 62,77 321, ,34 22,02 28,08 15,90 101,34 7,0 7, ,99 899, ,67 921, ,00 6,8 328, ,87 669, ,16 518, ,18 7,0 243,79 Table 2.6: Expenditure by years (UA '000) Base Costs Components Total Building State Capacity and Accountability for Public Finance Management 842,30 584,86 2, ,19 Improving Aid Coordination and Effectiveness 434,22 380,04 2,57 816,83 Enhancement of Domestic Revenue Mobilization 887,87 399,88 0, ,13 Project Management 605,16 237,89-843, , ,67 4, ,20 Physical Contingencies 197,36 123,69 0,40 321,45 Price Contingencies 37,73 63,22 0,39 101,34 TOTAL 3 004, ,58 5, ,00 Taxes Foreign Exchange 2 187, ,12 3, ,18 11

25 2.5 Project s Target Area and Beneficiaries This project will benefit the Government and the people of SS in several ways. First, the project will significantly assist in building the weak human and institutional capacity in the public sector financial management system in SS. Second, the project will contribute to promoting good economic governance and the fight against abject poverty. Third, the project will result in improved service delivery in the country arising from efficiencies in PFM. Finally, the project is expected to result in an increase in non-oil revenue thus availing much needed additional reesources to finance the government s development agenda, as outlined in SSDP, Participatory Process for Project Identification, Design and Implementation Consultations with stakeholders were undertaken during the appraisal of the project in June- July The Bank Group consulted widely with several Senior Government officials, including the then Minister of Finance and Economic Planning. The consultations centred on the policy and/or legislative constraints, human capacity development needs, and the equipment and working tools required for facilitating productivity in key public finance management institutions in the GRSS. Within the MoFEP, the Bank Group held detailed consultations with senior staff of the following Departments i) the Aid Co-ordination; ii) Accountant General; iii) Internal Audit; iv) Income Tax; v) Macroeconomic Policy; and vi) Customs Department. The Bank Group also undertook extensive dialogue with the OAG and the Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE) The Bank Group also held detailed consultations with partners, including the UNDP, USAID, DFID and the Joint Donor Team (JDT) that comprises the United Kingdom (UK), Canada, Norway, Sweden, Denmark and the Netherlands. The consultations focused on the central role, and longstanding experience of the Bank and the Fragile States Facility (FSF) in supporting institutional capacity development in fragile and conflict-affected countries in Africa, and the synergy of the proposed operation with the ongoing assistance being provided by the Bank and other partners to the GRSS. Consultations with donors also focused on the way forward with respect to addressing the huge capacity building challenges in South Sudan. The dialogue initiated with the South Sudan Authorities and in-country donors was enhanced during the preparation of the project and will continue in the implementation phase. 2.7 Bank Group Experience and Lessons Reflected in Project Design The proposed PFAID is the first operation submitted for consideration by the Bank Group s Board of Directors for the new state of South Sudan. The Bank Group, as is the case with other donors, has been inactive in Sudan since 1995 due to conflict and sanctions induced by outstanding arrears to the International Finance Institutions (IFIs) and the wider donor community. The Bank s re-engagement started after 2005 and focused mainly on i) fostering national dialogue; ii) providing capacity building; and iii) knowledge generation through economic and sector work The on-going operations in South Sudan are: (i) Institutional Capacity Building for Poverty Reduction and Good Governance Project (ICBPRGGP), approved in March 2007 for UA 9.62 million in the form of an ADF grant (ADF/BD/WP/2007/17); and, (ii) the FSF pillar III grants supporting various capacity building and technical assistance activities in South Sudan. The ICBPRGGP supports activities both in the North (30%) and South (70%) with three major outputs: carrying out Household Survey, supporting the preparation of the Poverty Reduction Strategy Paper (PRSP) and providing support at the State levels. The ICBPRGGP, disbursed at 82.5%, is expected to be completed by December

26 2.7.3 A Project Completion Report (PCR) for the on-going institutional support project (ICBPRGGP) will be prepared in early Nonetheless, the lessons and experiences of implementing the operation have informed the PFAID. Besides, the Bank has also prepared several institutional support projects for post-conflict countries such as Sierra Leone, Liberia and Burundi that have been vital in informing the proposed PFAID. The PCRs of some of these operations conclude that the Bank s capacity building and institutional support interventions have made significant contributions, particularly in rebuilding and strengthening PFM in beneficiary countries. The Bank s specific intervention in the case of Liberia and Sierra Leone was in strengthening the institutional capacity of the Office of the Auditor General and selected departments in the MoFEP involved in PFM Key lessons learned from the Institutional Support Projects in fragile and conflict affected Regional Member Countries (RMCs) of the Bank include: i) Ensuring strong country commitment and ownership of operation: This lesson is clearly reflected in the design of the South Sudan Operation given that the project s components and beneficiaries were negotiated directly with the government. The GRSS also continues to express strong commitment to building PFM systems, as reflected in the SSDP and the MDTCDS. Management therefore hopes that this demand driven intervention in the high priority area of strengthening the PFM will assist in improving the fiduciary environment in South Sudan; ii) iii) iv) Flexibility and simplicity of project design: The operation is small and the project design made very simple. It involves direct class-room type training, the provision of technical assistance and consultancy to undertake specific functions with on-the-job training, as well as the provision of IT and other office equipment aimed at enhancing the operational efficiency of beneficiaries; Need to ensure a clear transitional strategy to consolidate the gains made: The operations will provide on-the-job training of incumbent and new staff joining the civil service of South Sudan from Sudan (Khartoum). It will also provide training-of-trainers to ensure that the OAG and the MoFEP are able to continue training staff after the end of the project; and Aid coordination and management is critical in countries with weak institutional and human capacity, such as South Sudan, and could contribute to significantly improving the effectiveness and impact of donor engagement, reduce duplication and wastage of scarce public sector resources, and assist in creating synergies between donor operations. It s against this background that the GRSS has requested the assistance of the Bank to strengthen the aid coordination function of the MoFEP These lessons are clearly reflected in the design of the South Sudan PFAID. The operation was fully negotiated by the Bank Team and the GRSS, and the agreements reached have captured key recommendations and understandings reached with respect to the design of the PFAID. Further, an advanced PAR was forwarded to the South Sudan Authorities for their review and consideration. Overall, the GRSS was satisfied with the design of the PFAID and made some minor adjustments that have been reflected in the current PAR that is presented for review and consideration by the Board of Directors. 2.8 Key Performance Indicators The key performance indicators identified and the expected outcomes at project completion are presented in the results-based logical framework (page viii). The expected outcomes under the first component improving state capacity and accountability in public finance management includes, inter-alia, clearing the backlog of unaudited public sector accounts, significantly improving coverage of the Annual Auditor General Reports and related follow up actions. The second component relating to improving aid coordination and effectiveness will translate into improved service delivery and 13

27 uplifting of the standard of living of the population. The third component of enhancement of domestic revenue mobilization will result in improved non-oil revenue collection to finance budgetary operations. The outcomes will be monitored using progress reports, qualitative assessments through regular monitoring and evaluation through field supervisions by Project Task Team and Field office Staff, mid-term review report, and financial auditing by appropriate Bank staff and external auditing firms. These will be supplemented by other assessments that will emerge from the continuous stakeholder consultation process that is incorporated throughout the project. III. PROJECT FEASIBILITY 3.1 Economic and financial performance The expected economic and financial benefits of the PFAID by far outweigh the investment cost of the operation in the amount of UA 4.80 million. However, paucity of data in South Sudan makes it difficult for the Bank to identify and quantify the direct and indirect economic, financial and social benefits of the intervention. However, beyond the cost-benefit analysis, the payoff of the PFAID is enormous. While the costs are quantifiable (section 2.4), the benefits are indirect and result in improved economic and social benefits, ultimately seen in the context of reduced leakages in the country s fiscal budget, improved productivity and improved service delivery as budgetary resources reach the intended beneficiaries, and better performance of the public financial management institutions leading to reduced costs of service delivery in this case the OAG and several critical Departments in the MoFEP. Effective implementation of the project will further contribute to improving the credibility of the fiscal budget through better internal controls, enhanced oversight and increased transparency and accountability. The project will also support the development of human resource capacity leading to higher lifetime income earnings, thereby ensuring that the benefits will last over a long-term period. 3.2 Environmental and Social Impacts The project has been classified as Category III by ORQR and will therefore have no adverse effect on the environment. This category III classification implies that the project is not expected to have any adverse environmental impact for which an environmental assessment is normally necessary. Indeed, the project may impact positively on the environment through the deployment of additional resources into the sector resulting from improved fiscal performance Gender: Gender inequality is a critical challenge in South Sudan. The literacy rate for males is 55% compared to 28% for females. Women also have unequal access to education, control over assets and decision-making. However, the GRSS has shown the political will to empower women by putting the right policies and laws in place to promote gender equity. As a consequence, the ratio of girls to boys in primary, secondary and tertiary education has been rising. Similarly, the proportion of posts held by women in the GRSS has increased. However, challenges remain. The proposed operation will support government s plans to enhance gender mainstreaming into its development programs by aiming to ensure that at least twenty-five percent of the participants of each course offered by the PFAID are women and by introducing and strengthening gender responsive budgeting in the MoFEP to ensure gender concerns are not left out in economic planning and budgeting Social: The Institutional Support Project will contribute to improved social services through increased non-oil fiscal revenues for financing the SSDP. Strengthening PFM systems will help improve the capacity of the beneficiary institutions, significantly improve revenue performance and contribute to the fight against poverty reduction which is a compelling development objective. The net effect of this intervention is that additional resources will be available that could benefit the poor directly through increased budgetary allocation for the social sectors of health, education and rural infrastructure. In addition, as development partners move towards budget support, 14

28 an overall improvement in PFM systems would provide the required assurance that public resources are being used for their intended purposes. IV. IMPLEMENTATION 4.1 Implementation Arrangements Executing Agency (EA): The MoFEP is the lead agency which will be responsible for project implementation of PFAID in collaboration with the beneficiary institutions. Overall implementation of the PFAID project will take place under the supervision and guidance of the Project Steering Committee (PSC) which is expected to have representation of the various beneficiaries of the PFAID in partnership with the Bank s South Sudan Field Office. Management further proposes that the chairmanship of the PSC be held by the Under-Secretary, MoFEP. A Project Coordinating Unit (PCU) is to be established within the MoFEP to undertake the day-to-day implementation of the project. The PCU will be headed by the Project Coordinator (PC), who will also be the Secretary of the PSC. A professional accountant and a procurement expert will be recruited to strengthen the PCU, which will be responsible for procurement, financial management, monitoring and evaluation in accordance with the Bank s rules and regulations. The project will be implemented over a period of two years after effectiveness, which is expected to commence in the first quarter, Financial Management: The financial management capacity of the MoFEP was assessed in October The assessment showed that subject to some prior actions being undertaken, the PFM system in South Sudan could meet the Bank s requirements for ensuring that the funds made available for the financing of the PFAID will be used economically and efficiently for the intended purposes. Some of the prior actions required are to i) establish a PCU; ii) ensure work-plans and yearly budgets are prepared and strictly monitored on a quarterly basis in the course of implementing the PFAID; and iii) include the PFAID in the Bank s Internal Audit Work program, along with ensuring that the Project is supervised on-site at least twice a year. At the entry level, the financial management risk is rated as moderate, primarily because of skill-mix that will be recruited for the PCU. Further, a financial management and project implementation course will be offered by the Bank to the staff of the PCU and the MoFEP Procurement: The PCU will be responsible for the procurement of goods, consultancy services and training as presented in Table 4.1 below. All procurement will be carried out in accordance with the Bank s Rules of Procedure for the Procurement of Goods, and the use of consultants, using standard bidding documents. The PCU will prepare a Procurement Plan for an initial period of at least 12 months. The Beneficiary shall update the Procurement Plan on an annual basis or as needed covering the next 12 months period of project implementation. Any revisions proposed to the Procurement Plan shall be provided to the Bank for its prior approval. Technical Annex B5 provides details on procurement arrangement relating to goods, consulting services, and training. Technical Annexes A3 and provides details of the challenges in South Sudan s Public Finance Management systems, while Technical Annex B3 provides the financial and procurement arrangements that will apply in implementing the PFAID. As indicated in para 4.1.1, a procurement expert will be hired to strengthen the PCU, assist in the procurement activities and provide training to public sector staff on procurement. 15

29 A. GOODS Equipment B. WORKS C. SERVICES Training Technical Assistance Studies Audit D. PERSONEL E. OPERATING COSTS Table 4.1: Procurement arrangements National Competitive Bidding Consulting Services Procurement Method Local Shopping Direct Contracting N.B.F. 717, ,04 (717,04) (717,04) 289, ,82 (289,82) (289,82) , ,93 (2 306,93) (2 306,93) - 838, ,56 (838,56) (838,56) - 201, ,45 (201,45) (201,45) ,83-139,83 (139,83) (139,83) , ,37 (306,37) (306,37) 1 006, ,94 306,37 139, ,00 (1 006,86) (3 346,94) (306,37) (139,83) - (4 800,00) Disbursement: The FSF grant is anticipated to be disbursed over a period of 24 months, from January 2013 to December The project will use both the Special Account (SA) and the direct payment methods of disbursement as prescribed in the Bank s Disbursement Handbook. The Government will operate one foreign currency denominated Special Account into which the proceeds of the grant will be deposited and further to a local currency denominated special account. The opening of a foreign and local currency denominated Special Accounts will be a condition precedent to first disbursement of the grant. An initial deposit for an amount corresponding to 6 months of activities as justified by a work program approved by the Bank will be made into the Special Account. Subsequent replenishments of the account will be subject to the PCU having provided sufficient justifications for the use of at least 50% of the previous advance and 100% of all older advances. Disbursements with respect to contracts for equipment, supplies, auditing service and consultancy services will be done using the direct payment method Audit: The accounts will be audited annually by an independent and reputable audit firm from within the sub-region and audit reports will be submitted to the Bank not later than six months after closure of the fiscal year. 4.2 Monitoring MoFEP will be responsible for the overall monitoring and evaluation of activities in collaboration with the Heads of beneficiary institutions and the Coordinator, PCU and the South Sudan Field Office. The MOFEP through PCU shall be responsible for reporting on the progress made in the implementation of the project and shall submit quarterly progress reports on all aspects of project execution. The reports will cover aspects related to project implementation, including project status, disbursements, work program, monitoring of performance indicators, analysis of slippages in implementation, potential problems and proposed solutions. The report will also include an overview of activities planned for the forthcoming quarter. Particular attention will be devoted to outputs as set out in the project logical framework. The Bank will also monitor project implementation through 16 Total

30 supervision missions and a mid-term review. A project completion report will be undertaken to evaluate progress against outputs and outcomes and draw lessons for possible follow-up operation. Table 4.1 presents the project implementation schedule. 4.3 Governance Table 4.2: Project Implementation Schedule Task Responsible Start Date Party Preparation/Appraisal OSFU/OREB June/July 2011 Grant Approval ADF November 2012 Grant Effectiveness ADF/GRSS December 2012/January 2013 Procurement of goods and services GRSS January 2013 September 2014 Commencement of Training programs GRSS January 2013 October 2014 Deployment of Technical Assistances (TA) GRSS January 2013 October 2014 Submission of Annual Audit Report GRSS December 2013, 2014 Supervision Mission ADF June 2013 and September Mid-term Review ADF December 2013 Project Completion Report ADF/GRSS February As mentioned earlier, the Bank has been inactive in Sudan since 2005 due to the prolonged conflict and arrears-induced sanctions. However, since the signing of the CPA, the MoFEP, which is the implementing agency of the PFAID, has substantially invested in developing good governance structures and financial management policies and procedures that enhance transparency and accountability in its financial operations. The proposed PFAID will contribute to further strengthening financial management policies and procedures in the MoFEP. 4.4 Sustainability The project has several potential factors which will contribute to the sustainability of its envisaged outcomes. The first is the government s strong commitment to policy and institutional reforms for improving transparency and accountability in the PFM. This commitment is reflected in the enactment of the PFM bill. This commitment of the government to capacity building, especially in key areas such as PFM will contribute immensely to the successful implementation of the PFAID and its sustainability. In addition, the government will ensure that technical assistance personnel engaged by the project transfer skills to national counterparts. Each technical assistance personnel will have at least three (3) counterparts from the beneficiary institution. The various reforms and intiatives being undertaken by the GRSS including enactnment of the PFM Bill will also contribute towards the sustainability of the project The second factor for guaranteeing sustainability is the focus of the project on national capacity building through human resources development within South Sudan. Sustainability of the outcomes is ensured mostly through design of tailor -made short-term (one to two weeks) courses. Use of the national training institutions (Institute of Public Administration and Management) will also strengthen the training institutions themselves. 4.5 Risk Management Risk # 1: Although there seems to be a semblance of peace in the immediate post-independence era, there is the possibility of either internal or external conflict, due to the unresolved post - independence issues, including the sharing of oil revenue. The government is making every effort to mitigate internal conflict through a combination of measures, including and partnering with the 17

31 international community, the African Union High Level Implemention Panel (AUHIP) and the the United Nations in negotiating and resolving post- independence issues. The government has also prepared a comprehensive National Development Program (NDP) as the vehicle for delivering the peace dividend in the form of broad based and inclusive growth. The proposed project will contribute to implementing the NDP through strengthened PFM, thus reviving service delivery and addressing the abject poverty in the country. Risks # 2: Weak procurement and implementation capacity in the public sector will be mitigated by implementing the operation through the PCU. Further, the ongoing Bank supported Institutional Support Project, support from various donors, and the proposed capacity building project will help strengthen capacity, especially for PFM. Risk # 3: Mismanagement of resources could derail the implementation of the operation or lead to shortfall in donor funding for PFM reforms. Government ownership and support for ongoing PFM reforms, and the desire to create the enabling environment for economic growth and poverty reduction will mitigate this risk. 4.6 Knowledge Building The PFAID will help build knowledge and develop skills in specific areas relating to PFM in fragile and post-conflict settings. The knowledge in PFM would be acquired through technical assistance and training in a range of areas, including financial accounting and auditing; specialized audit; budgeting and financial reporting; records management; fraud investigation and prevention, corruption diagnostic studies and business management. Knowledge in PFM will also be acquired through on-the-job skills transfer using seasoned experts. V. LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal instrument The Grant Protocol of Agreement between the Republic of South Sudan and the African Development Bank for an amount of ADF Grant of UA 4.8 million from the Pillar III of the Fragile State Facility. 5.2 Conditions associated with Bank s intervention The ADF Grant Protocol of Agreement shall enter into force on the date of signature by the Government of the Republic of South Sudan (GRSS) and the African Development Bank Group. The first disbursement of the grant shall be subject to effectiveness of the Grant Protocol of Agreement and fulfillment by the Guarantee, to the satisfaction of the Bank of the following specific conditions: (i) A letter from the MoFEP providing evidence for having opened a foreign currency denominated account at a bank acceptable to the Fund to receiving the proceeds of the Grant; (ii) A letter from MoFEP transmitting the membership of the Project Steering Committee (PSC) comprising representatives of the beneficiary institution namely the Office of the Auditor General and the selected Departments in the MoFEP, and headed by the Under-Secretary, MoFEP; (iii) A letter from the MoFEP providing evidence for the establishment of the Project Coordination Unit (PCU) made up of a Project Coordinator (PC), a Project Accountant, Procurement Expert, and a Secretary. The PC is expected to serve as the Secretary to the PSC. 18

32 5.3 Compliance with Bank Policies This project complies with all applicable Bank policies. VI. RECOMMENDATION 6.1 Management recommends that the Board of Directors approve the proposed Grant of UA 4.80 million to the Government of South Sudan from the FSF-Pillar III for the purposes of this operation and subject to the conditions stipulated in this report. 19

33 Annex 1: Map of South Sudan