Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY PROJECT PAPER FOR A PROPOSED GRANT USS4.0 MILLION FROM THE TRUST FUND FOR LEBANON TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY PROJECT PAPER FOR A PROPOSED GRANT IN THE AMOUNT OF USS4.0 MILLION FROM THE TRUST FUND FOR LEBANON TO THE LEBANESE REPUBLIC FOR THE Report No LB EMERGENCY FISCAL MANAGEMENT REFORM IMPLEMENTATION SUPPORT PROJECT March 24,2009 Social and Economic Development Group Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mav not otherwise be disclosed without World Bank authorization

2 CURRENCY EQUIVALENTS (Exchange Rate Effective, February 26,2009) Currency Unit - Lebanese Pound 1 US$ 1,512 LL FISCAL YEAR January 1 - December 3 1 BdL CAS CDR CFAA DA DECDG EdL EFMIS-TA EPCA ESIA FO GCA GDP GOL HRC IBRD IDA IDF IFC IFR IMF I SN MNA MoF METAC MTEF PCF PIU PO SOEs TFL WA ABBREVIATIONS AND ACRONYMS Banque du Liban Country Assistance Strategy Council for Development and Reconstruction Country Financial Accountability Assessment Designated Account Development Data Group Electricite du Liban Emergency Fiscal Management Reform Implementation Support Project Emergency Post-Conflict Assistance Economic and Social Impact Assessment Financial Officer Grant Control Arrangements Gross Domestic Product Government of Lebanon High Relief Commission International Bank for Reconstruction and Development International Development Association Institutional Development Fund International Finance Corporation Interim Financial Reports International Monetary Fund Interim Strategy Note Middle East and North Africa Ministry of Finance Middle East Technical Assistance Center Medium-Term Expenditure Framework Post Conflict Fund Project Implementation Unit Procurement Officer Statement of Expenses Trust Fund for Lebanon Withdrawal Applications Country Director: Sector Director: Sector Manager: Hedi Larbi Ritva S. Reinikka Farrukh Iqbal

3 FOR OFFICIAL USE ONLY LEBANESE REPUBLIC EMERGENCY FISCAL MANAGEMENT REFORM IMPLEMENTATION SUPPORT PROJECT (EFFMIS-TA) MIDDLE EAST AND NORTH AFRICA REGION EMERGENCY PROJECT PAPER DATA A. B. C. D. E. F. G. Table of Contents SHEET... i... 1 CHALLENGE... 2 INTRODUCTION EMERGENCY I. I1 Country Context Recovery Strategy... 3 I11. Rationale for Proposed Bank Emergency Project... 4 BANK RESPONSE: THE PROJECT... 5 I. Brief Description of Bank s Strategy for Emergency Support... 5 I1. Project Development Objectives... 5 I11 Summary of Project Components... 5 IV. Eligibility for Processing under OPBP V. Consistency with Country Strategy (CAS or ISN)... 8 VI. Expected Outcomes... 8 APPRAISAL OF PROJECT ACTIVITIES... 9 IMPLEMENTATION ARRANGEMENT AND FINANCING PLAN I. Implementation Arrangements I1. Financial Management Arrangements Procurement Arrangements Disbursement Arrangements I11 IV. V. PROJECT RISKS AND MITIGATING MEASURES TERMS AND CONDITIONS FOR PROJECT FINANCING Project Supervision and Monitoring ANNEXES: ANNEX DETAILED DESCRIPTION OF PROJECT COMPONENTS ANNEX 2:RESULTS FRAMEWORK AND MONITORING ANNEX 3:SUMMARY OF ESTIMATED COSTS ANNEX 4:FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENT ANNEX 5:PROCUREMENT ARRANGEMENTS ANNEX 6:IMPLEMENTATION AND MONITORING ARRANGEMENTS ANNEX 7:PROJECT PREPARATION AND APPRAISAL TEAM ANNEX 8:DOCUMENTS IN PROJECT FILE ANNEX 9:STATEMENT OF LOANS AND CREDITS ANNEX 10: COUNTRY AT A GLANCE ANNEX 11: RlAP MAP IBRD This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 LEBANON EMERGENCY FISCAL MANAGEMENT REFORM IMPLEMENTATION SUPPORT PROJECT MIDDLE EAST AND NORTH AFRICA REGION EMERGENCY PROJECT PAPER DATA SHEET Date: March 24, 2009 Country Director: Hedi Larbi Sector ManagedDirector: Farukh Iqbal / Ritva S. Reinikka Project ID: P Borrower: Government of Lebanon Responsible Agency: Ministry of Finance Team Leader: Sebnem Akkaya Sectors: General Public Financial Management Themes: Public Expenditure, Debt and Aid Management Environmental Category: C Total amount: US$4.0 million Expected effectiveness date: March 16, 2009 Expected implementation period: March 16, 2009 through March 16,201 1 Expectedhevised closing date: September 30, Financing plan (US$m.) Source I Local I Foreign Borrower Total IBRDADA Trust funds Others Total Total i

6 Have these been approved by Bank management? Are any critical risks rated substantial or high? What safeguard policies are triggered, if any? Yes [ ] No [XI NIA.. 11

7 A. INTRODUCTION 1. This project paper seeks the approval of the Regional Vice President to provide a grant in the amount of US$4.0 million from the Trust Fund for Lebanon (TFL) for a proposed Emergency Fiscal Management Reform Implementation Support Project (EFMIS-TA). 2. The proposed grant will support the implementation of the reforms in the public expenditure and debt management system, as part of the broader program of reforms presented to the international community by the Government of Lebanon (GoL) in the Donor s Conference held in Paris (henceforth Paris 111) on January 25, The Paris I11 program builds on the Government s efforts to launch a reform program prior to the July-2006 hostilities, taking into account unforeseen economic and fiscal impacts that resulted. It is a comprehensive and feasible program that covers areas critical for Lebanon s growth, fiscal and social welfare prospects. Key pillars of the program are: (i) fiscal adjustment to reverse Lebanon s presently unfavorable debt dynamics and reduce the debt-to-gdp ratio through rationalization of expenditures, improved efficiency and enhancement of revenues; (ii) growth-enhancing structural reforms to strengthen the business environment; and (iii) social sector reform to strengthen social safety nets to reduce poverty and vulnerability and increase efficiency and effectiveness of social spending including in health and education. 3. The World Bank has been supporting the implementation of the program through technical and financial assistance (including development policy-based lending assistance) to contribute to the initiation of the implementation process and its advancement. The emphasis of the Bank assistance is currently on the medium-term public expenditure and social reform agenda, with a particular focus on energy and social protection reforms. 4. Greater transparency and efficiency in the management of public financial resources are important to robust and transparent implementation of the GoL s overall program and its deepening over the longer-term. In this regard, the GoL s program includes a number of core inter-linked improvements ranging from budget preparation and execution to debt and aid management both in the context of the broader fiscal and budgetary reform program. Among the primary objectives is to link policy with the budget while fostering a gradual reorientation of the budgeting process toward the achievement of results on the ground. The GoL s program was informed by the Economic and Social Impact Assessment (prepared jointly by the Bank and the GoL in coordination with key donors) that analyzed macroeconomic and sector development challenges in the aftermath of the 2006 hostilities and outlined sector reform priorities. The GoL would like to stay engaged with the Bank in translating these reform priorities into action including through more efficient and effective management of public resources. To this end, the Bank and the GoL have agreed that the proposed EFMIS-TA will provide analytical and advisory assistance to help strengthen public resource management processes both by facilitating rapid implementation and by identifying medium-term actions for broadening and deepening key reforms over time. 5. The grant is prepared under emergency procedures, as stipulated in the Trust Fund for Lebanon (TFL)--created with a transfer of US$70 million from IBRD surplus in September To date, the TFL has helped rehabilitate damaged infrastructure and provided technical assistance for jump-starting economic activity. The TFL is also providing capacity building to advance critical components of the reform program in the areas of distinct Bank comparative advantage, such as energy, social protection and private sector development. The proposed project will complement these efforts through its cross-cutting elements. The Government will be responsible for the execution of the proposed project.

8 B. EMERGENCY CHALLENGE I. Country Context 6. From a political perspective, the summer 2006 hostilities accentuated long-standing political disaffection among several groups. From an economic perspective, the summer 2006 hostilities had a tragic human effect and made achieving sustainable growth in the medium term even more challenging. Though estimates vary, it is likely that total direct damages were around US$2.8 billion, with a further US$ million in indirect damage.' More than 100,000 housing units were damaged or destroyed representing the single largest loss, followed by losses in the agriculture, and irrigation, and transport sectors. Furthermore, approximately 30,000 jobs have been permanently lost2, adding 3 percent to the unemployment rate. Economic performance has been negatively affected with a significant loss of output from the hostilities and slow recovery in the aftermath. 7. With the assistance of the international donor community, Lebanon coordinated an efficient response to the crisis. Building on its efforts to launch a reform program prior to the 2006 hostilities and informed by the findings of a multi-sector Economic and Social Impact Assessment (ESIA) carried out by the World Bank (in coordination with local counterparts and the key donors), the GoL presented a comprehensive Reconstruction, Recovery and Reform Program to the donor community at Paris 111. Donors responded favorably and generously to the program, pledging a total of US$7.5 billion assistance of which 59 percent were signed into agreements by the end of the first quarter of However, recovery from the summer 2006 hostilities has been overshadowed by prolonged political turmoil, which involved the resignation of opposition members from the Cabinet and demonstrations in front of Government headquarters in Beirut. Political tension further increased with the failure of the legislators to agree on a new President following the expiry of the former President's term in the office in November This prolonged political turmoil has now been resolved through the Doha Accord that has been concluded in May 2008, which paved the way for the election of a new President and provided the framework for the composition of a new Government. After more than 18 months of legislative lockout, during which the Government focused on implementing reform initiatives that did not require legislative action, Lebanon now finds itself presented with an opportunity to advance much needed difficult reforms. 10. Despite the protracted crisis, the economy showed some signs of recovery since Available data suggest better than expected real GDP growth at over 7.0 percent in 2007 and 6.0 in Inflation increased at an accelerated pace between the last quarter of the 2007 and 2008 due to sharp increase in international fuel and food price, reaching 10.7 percent (year-on-year) in 2008 and triggering adoption of fiscal mitigation measures, including public sector wage adjustments in Despite increased expenditures as a results of these measures as well as higher debt service payments and transfers to the electricity company, strong domestic revenue collection resulted in a higher than expected primary surplus after grants (at 2.1 percent of GDP) in The fiscal outturn partially checked the growth in debt although gross public debt remains very high at 166 percent of GDP at end Looking forward, continuing spending pressures from debt service and transfers to the electricity company are likely to sustain the fiscal pressures over the period ahead. Significant levels of new growth and fiscal effort are required to stabilize Lebanon's presently unfavorable debt dynamics in the medium-term. Over 1,000 people were killed, 5,000 were injured and close to 1 million (a quarter of the population) were internally displaced. Additionally, brain drain accelerated as up to 200,000 people left the country - Economic and Social Impact Assessment, The World Bank, November 2006 At its peak during the hostilities, it is estimated that job losses reached 120, Economic andsocial Impact Assessment, The World Bank, November

9 11. Recovery Strategy 11. The objective of the Government s Paris I11 reform program is to reduce fiscal imbalances, stimulate growth and reduce poverty and income disparities. While the program reflects much of the discussion surrounding reform that has been ongoing for many years, it emphasizes the urgency of fiscal consolidation and debt reduction measures. The program is broadly articulated around five key pillars: 0 Phased fiscal adjustment to increase primary surplus and reduce debt through the streamlining of expenditures and raising revenues; e 0 A privatization program directed at increasing investment, spurring economic growth, and retiring debt; Prudent monetary and exchange rate policy to maintain price stability and a sound banking system, while reducing the Government s reliance on central bank financing; e Growth-enhancing structural reforms to improve the business climate and competitiveness; and. e Social sector reforms to improve the efficiency and targeting of social expenditures and reform the pension system. 12. The fiscal adjustment program aims to generate a primary fiscal surplus sufficiently high to sustain debt reduction efforts. The program outlines measures to turn the primary fiscal deficit into a surplus through the rationalization of current expenditures, improved efficiency of capital expenditures and revenue-enhancing measures. The expenditure measures include containing the wage bill, limiting administrative expenditures, and closing two large extra-budgetary funds - the Council of the South and the Fund for the Displaced. Additionally, structural fiscal reforms in the energy sector will help rationalize Government spending. These measures are complemented by revenue generating reforms, where it is envisaged to introduce a Global Income Tax, gradually increase VAT, increase income tax and adjust the excise tax on gasoline. The privatization program envisages the sale of the mobile telecommunications licenses and the corporatization (and eventual privatization) of Electricte du Liban (EdL) -the national electricity utility. 13, These reforms are accompanied by growth-enhancing structural reforms focusing on improving governance and the competitiveness of Lebanese business to create employment, improve living standards and facilitate debt sustainability, and by social sector reforms, including measures in education, health, pensions and safety nets to alleviate poverty and reduce regional income disparities. 14. Despite the difficult political environment, GoL has persevered in the implementation of the Paris I11 program. With the Parliament out of session from December 2006 to May 2008, reforms requiring legislative approval were stalled. This did not, however, prevent the Government from moving forward with measures that do not require legislative action and/or that are of a technical nature, while taking preparatory measures for those reforms requiring legislative action to allow for timely implementation once the authorizing environment allows. Progress has been achieved in the energy sector towards corporatizing EdL. Similarly, technical work for social insurance reform (including an assessment of Government arrears and unfunded liabilities in the system and the preparation of a re-financing plan) and for strengthening social safety net (including development of a targeting system) is progressing. Promising steps towards the privatization of telecoms have also been taken, including the creation of a Telecoms Regulatory Authority, the appointment of its Board, and the issuance o f three new regulations. 15. On the fiscal, side, the Ministry of Finance has drafted laws on tax reform procedures and the Global Income Tax, while taking steps to improve its budget formulation and debt management. For the first time, the Ministry issued budget caps and specific measures for expenditure reduction in its budget 3

10 circular, initiated preparation of an aggregate medium-term expenditure framework, some extra-budgetary funds were partially included in the latest budget, steps towards integrating CDR-the largest extrabudgetary entity-are underway, and quarterly debt newsletters and reports have been published. 16. To support the macro-fiscal reforms of the Paris I11 program, the IMF approved an Emergency Post-Conflict Assistance (EPCA) program for US$77 million in April 2007, covering the remaining eight months of The IMF s March 2008 performance review on EPCA implementation concludes that the economic performance in 2007 was significantly better than expected despite the difficult political conditions, and that indicative macro/fiscal targets of the EPCA program were met with significant margins. The structural reform elements of the EPCA took into account the political impasse and were conservative-they were mostly met. This was followed by approval by the IMF of a second EPCA program in November 2008 for US$37.6 million, focusing on fiscal results during December 2008 and June The Bank has been collaborating closely with the IMF to ensure the consistency of their respective programs, including for the proposed project Rationale for Proposed Bank Emergency Project 17. Lebanon s huge public debt is a key binding economic constraints to future growth and social progress, which needs to be contained and reversed by deep-seated fiscal adjustment. The Bank s most recent Public Expenditure Review and the ESIA provide an urgent menu in this respect. In the area of expenditure reform key recommendations comprise changing the management and control over large loss-making public autonomous agencies and enterprises such as the EdL, reforming the civil service system and pension schemes, improved public resources management (through wide ranging reforms in budget preparation and execution and improvement of transparency and accountability in public resources use), and expanded social protection. As described in the above section, the GoL s Paris I11 reform program covers large portion of these key areas of expenditure reform. 18. Improved efficiency of public resource management along with strengthened debt management are among the key factors that will facilitate and ensure the sustainability of the needed fiscal adjustment while improving public services. Moreover, experience in post-conflict countries demonstrates the critical importance of transparency in all government operations, and particularly in public financial management. Some of the reform options can be implemented rapidly and some requires fundamental choices that Lebanon will have to make regarding the future role and responsibilities of the State. The several initial steps taken over the past year to improve public expenditure management (see Annex 1)- demonstrate the GoLs commitment to move forward the reform agenda by both taking those actions that can be implemented in the current difficult political circumstances and preparing the technical ground for future reforms when the circumstances will permit. The EFMIS-TA responds to the Government request to support these reform efforts. 19. In addition, the proposed project is complementary to other ongoing Bank-financed operations. The first Reform Implementation Development Policy Loan (RIDPL) is broadly supporting the Government s implementation of the Paris I11 reform program, with a particular focus on essential energy sector reforms, and social safety net reforms. The efforts to reduce the high fiscal pressures from Lebanon s energy sector are further supported by the Emergency Power Sector Reform Capacity Reinforcement Project, providing technical assistance to the Ministry of Electricity and EdL to improve the generation capacity and facilitate corporatization of EdL. 4

11 c. BANK RESPONSE: THE PROJECT I. Brief Description of Bank s Strategy for Emergency Support 20. The deterioration in fiscal performance as a result of the summer 2006 hostilities precluded any further lending to Lebanon as had been foreseen in the previous Country Assistance Strategy. In order to respond to the unforeseen circumstances, the World Bank approved the creation of the Trust Fund for Lebanon with a transfer of US$70 million from IBRD surplus in September The strategic objective of the TFL is to assist in the reconstruction of essential infrastructure, jump-starting the economy, and bringing Lebanon back on a sustainable fiscal and debt path. 21. The World Bank s dialogue with GoL has been focused around the Paris I11 reform program. In August, 2007, the Board approved an Interim Strategy Note (ISN) for Lebanon, which outlines the Bank s support through the end of Anchored in the GoL s reform program, the ISN aims at providing a transitional framework of technical and financial assistance. The ISN emphasizes the medium-term public expenditure and social reform agenda (particularly energy and social protection reforms) to support quick and demonstrable reform actions given their importance for: (i) commencing a transition to fiscal sustainability over the medium term; (ii) garnering support for the Government s growth and social reform agenda; and (iii) galvanizing donors to disburse their Paris I11 pledges to underpin reform implementation (see para.26 for further discussion). 11. Project Development Objectives 22. The objective of the project is to contribute to improving the control, allocation and use of public financial resources, by implementing a number of inter-linked measures in budgeting, debt and aid management designed to improve efficiency and transparency in government financial management Summary of Project Components 23. The proposed EFMIS-TA would include five core technical assistance components and a project management component. The technical assistance components include: Component 1 - Macro-Fiscal Analysis and Policy Advice Function: This component will help the Ministry of Finance (MoF) strengthen its macroeconomic policy evaluation capacity and the preparation of the medium-term macroeconomic framework, within which a medium-term fiscal framework is formulated-in turn providing the foundation for the preparation of the disaggregated expenditure framework needed to provide a multi-annual perspective to the annual budget decisions. Component 2 - Public Expenditure Management: This component will provide technical assistance to further key improvements in the management of public expenditures under two sub-components. J Sub-component 1 would provide assistance and advice to both the Ministry of Finance and line ministries to improve their capacity and understanding in all areas of expenditure programming and budget preparation. More specifically, it will help: (i) specify in the next budget circular and thereafter the expenditure ceilings for each ministry and spending agency; (ii) formulate guidelines for the preparation of fully-costed expenditure programs by each ministry and agency, with a view to improving preparation of the budget; (iii) implement initial steps towards the introduction of some results-orientation in the budget process; (iv) improve the transparency of the operations of extra-budgetary funds; (v) move toward the integration of capital and current budgeting by introducing monthly reporting of investment expenditure; (vi) define basic procedures for the programming of public investment and the estimation of recurrent costs; (vii) cooperate with the Middle East Technical Assistance Center (METAC) and other partners in reviewing the budget 5

12 classification, with the view to bringing it into line with GFS 2001 standards, and the chart of accounts; and (viii) review the consistency of all of the above and of other reform measures with the existing legislation-proposing necessary legislative changes and leading to the eventual formulation of a comprehensive Budget System Law, as called for in the Paris I11 program. J Sub-component 2 would focus on identifying key areas of improvement and implementing them as feasible, in budget execution, Treasury management functions, and the public audit function (key to improving public financial governance), which will collectively enhance the control environment. More specifically, it will help: (i) with a rapid diagnostic of the functioning of the budget execution, reporting and monitoring system in actual practice, with appropriate recommendations for further development and implementation as feasible; (ii) linking the business processes and information systems for debt management and cash forecasting, and more broadly, initiating the process of strengthening the Treasury management functions; (iii) identifying modalities for introducing internal audit in the MoF on a pilot basis while also reviewing external audit organizational arrangements to eventually bring them into line with international standards. Component 3 - Debt Management: This component will provide essential advisory services to strengthen the debt management function of the Ministry of Finance and improve coordination with the Central Bank (BdL). More specifically, it will help: (i) develop a clear and publicly available debt management strategy with a medium term horizon and launch its implementation; (ii) design tools that can help identify and quantify costs and risks, which, in turn, can provide high-quality input to macrofiscal analysis; (iii) strengthen the coordination with BdL through a high-level committee with representation from the MoF and BdL; (iv) improve data and debt recording (a function that is the backbone of strategy development and risk analysis), including through a detailed review of current processes and procedures; (v) strengthen reporting and investor relations, including through more detailed information on risks in the quarterly report; and (vi) development of the legal function to provide specific legal advice related to debt management issues. Component 4 - Aid Coordination and Management: This component will build on the MoF s efforts to improve aid coordination and manage donor relationships for effective collaboration. It will aim to further the successful and valuable work started under the Bank s project supported by the Post Conflict Fund (PCF), which set the stage for effective organizational and aid-reporting arrangements. In line with this, the project would initially support creation of an Aid Management and Coordination functiodteam based in the MoF as a step towards building capacity sufficient to establish a fully functioning dedicated unit once the necessary legislation is adopted over the period ahead given the normalization of the political environment. The team is envisaged to: (i) be small and structured along donor lines; (ii) act to coordinate and facilitate contacts between ministries and donors; (iii) serve as a technical secretariat for high-level meetings with donors; and (iv) perform other functions outlined by the PCF consultants in this area, particularly to facilitate the incorporation of all foreign-financed expenditure into the budget. Component 5 - Training and Capacity Building: This component will assist in the provision of targeted training and other capacity building specifically connected to the other components of the project. Training would be mostly channeled through and organized by the Institute of Finance with short-term contributions by international experts as required. Such training would be targeted to both MoF staff and staff in the budget offices of line ministries. Alongside formal courses, coaching and mentoring would be an explicit core requirement in the TORS of international experts as well as the local consultants. Also, the experienced budget staff and local consultants in the MoF are expected to contribute and interact regularly with the line ministry staff responsible for budget matters. Finally, a series of workshops would be organized, to bring together MoF, line ministry, procurement and accounting staff, and if appropriate concerned donors, to brainstorm about practical problems in budget execution and to find solutions consistent with existing legislation. 6

13 24. The project would finance international and local advisory services (with a small provision for office equipment essential for the effectiveness of the project), as well as training and capacity building directly related to the envisaged reform measures. The following table is a summary of the specific activities to be financed under the EFMIS-TA. A detailed description of the project components is provided in Annex 1. Table 1. Components and Activities to be Covered under EMIS-TA Component 1 - Macro-Fiscal Analysis and Policy Advice Function 1. Provision of technical support for macroeconomic programming and policy analysis to guide fiscal choices. Component 2 - Public Expenditure Management 1. Provision of technical assistance for expenditure programing and budget preparation 2. Provision of technical assistance for strengthening budget execution, monitoring and audit. Component 3 - Debt Management 1. Provision of technical assistance for capacity building towards fully operational debt management function. Component 4 - Aid Coordination and Management 1. Provision of technical assistance for improved aid management and effectiveness. Component 5 - Training and Capacity Building 1. Provision of technical assistance for targeted continued-training in areas supported under the EFMIS-TA Operating Costs 1. Provision of project implementation support. Total (including contingency funds) I US$305,000 US$ 1,784,000 US$535,000 US$292,000 US$366,000 US$354,000 US$4,000,000 IV. Eligibility for Processing under OPBP The proposed project is a grant from the TFL. The Board resolution establishing the TFL stipulates that all projects be prepared under OP/BP These policies have been replaced by the new policy on Rapid Response to Crises and Emergencies OP/BP 8.00 issued in March The proposed project is fully consistent with OP 8.00 criteria, and, in fact will address the following priorities (as defined in para.4 of O.P.800): (i) preserving or restoring essential services; (ii) establishing and/or preserving human, institutional and/or social capital; and (iii) supporting measures to mitigate potential effects of imminent emergencies or future emergencies or crises in countries at high risk The project responds to a request from the Government for assistance in implementing critical public financial management reforms in a timely manner. The progress achieved over the past year has provided a basis for deeper reforms that require technical assistance and implementation support. With the parliament once again convening and general elections scheduled for Summer 2009, it is essential to The World Bank, Towards a New Franzework,for Rapid Response to Crises and Emergencies, revised March

14 maintain the reform momentum and capitalize on early reform efforts towards the implementation of structural reforms requiring legislative approval. Furthermore, rapid implementation of the activities financed under the project will contribute to improvements and transparency in public resource management in Lebanon at a time when the Government is increasingly stretched to provide for safety nets in the face of the rising cost of living. This, in turn, will pave the way for improved service provision over time. As such, the time sensitive nature of the assistance to be provided under the project necessitates flexible and accelerated procedures as allowed under the Bank s policies for emergency response. V. Consistency with Country Strategy (CAS or ISN) 27. Fiscal consolidation and debt reduction measures are the critical underpinning backbone of the Government s reform agenda to facilitate the planned longer-term structural growth-enhancing initiatives. Sustainability of these efforts, in turn, hinges on steady improvement in fiscal management and governance, particularly through public expenditure policy and institutional reforms and improved debt management. The ISN emphasize these priorities in its first pillar - Governance, Economic Management and Growth Support. Additionally, both the First Reform Implementation Development Policy Loan (RIDPL) currently under implementation, and the planned RIDPL-2 put their emphasis on high priority actions in energy and social protection sectors to reduce costs and improve governance and services. The Emergency Power Sector Reform Capacity Reinforcement Project is further assisting in the restructuring and corporatization of EdL, to reduce its dependence on Government subsidies. The project is therefore not only critical to the GoL s medium-term reform program and fully consistent with the ISN; it is complementary to the instruments of assistance planned and underway. VI. Expected Outcomes 28. The eventual outcome is a more efficient and effective management of public resources, with an ensuing improvement in access to and quality of public service provision. Progress towards this under the project will be measured by improvements in the budget, debt and aid management systems through the following key indicators, which are discussed in more detail in Annex 1-2: Component I - Macro-Fiscal Analysis and Policy Advice Function 0 Macroeconomic programming and policy evaluation function is deepened for better aligning both revenue and expenditure with the GoL policies while providing a stronger basis for expenditure control and strategic resource allocation, including through the establishment of hard budget constraints for each ministry and spending agency. Component 2 - Public Expenditure Management: 0 Following the first attempt in the budget circular 2009 to set expenditure limits, binding expenditure ceilings for each ministry and spending agency, including the CDR, will be prepared by the MoF, consistent with the macroeconomic framework, and presented to the Council of Ministers for approval, upon which they will be incorporated into the circular for the budget, to be issued in April e e Guidelines are formulated for the preparation of selected fully-costed expenditure programs, including a simple and realistic result-monitoring and evaluation framework, and implementation of such programs is initiated; Guidelines for public investment programming, of a periodicity equal to that of the aggregate MTEF, are defined; and a review is undertaken of the accumulated stock of program authorizations ( loi-programme ) for water and roads; 8

15 0 An implementation plan for strengthening treasury management is developed and put in place, including provisions for linking business processes with information systems for debt management and with the treasury system for cash forecasting; 0 An integrated.review of the audit function, taking a holistic view of internal and external audit is undertaken, including identification of modalities for introducing internal audit in the MoF on a pilot basis that will take into consideration the envisaged move to a more results-based budget management. Component 3 - Debt Management: 0 A medium-term debt management strategy is developed, published, and put into implementation, providing a solid framework for day-to-day borrowing decisions and supporting a clear cost-risk trade-off and debt sustainability; 0 A comprehensive cost-risk scenario-analysis model is developed; software that facilitates easy access to comprehensive debt data in a format needed for cost-risk analysis is developed; 0 Coordination between the MoF and BdL in debt management area is improved through establishment of a high level committee with participation from both institutions based on a Memorandum of Understanding; Component 4 -Aid Coordination and Management: 0 Aid Coordination and Management functionheam appropriately developed and fully operational. Component 5 - Training and Capacity Building: 0 A trainingkapacity-building program for key project components is defined, curriculum prepared and courses initiated. D. APPRAISAL OF PROJECT ACTIVITIES 29. Fiduciary aspects. The financial management and procurement aspects of the project are described below and in detail in annexes 4 and 5, respectively Environmental Assessment. The proposed project will finance international and local advisory services as well as training and capacity building directly related to the envisaged reform measures under its scope. There will no impact on the environment Lessons Learned and reflected in Project Design. The Bank s involvement in post-conflict Lebanon dates back to the recovery from the civil war in the early 1990s and has been scaled up since the summer 2006 hostilities. The Bank s experience in the implementation of sector reform projects in Lebanon (accounting for a major portion of the current portfolio) shows mixed results. Reforms have been slow to be designed and/or endorsed, partially due to the political fragmentation of the country. In these circumstances, it is especially important to support concomitant actions to maintain reform momentum and build capacity. By focusing on deepening essential reforms through a combination of advisory and capacity building support, the project will not only help consolidate steps taken in the past 18 months, but will ensure reform momentum is carried forward. 32. The Bank s experience in implementing projects in post-conflict countries has highlighted the importance of simple, well defined, and flexible project design to allow for adaptation to changing. 9

16 circumstances in a context of participation from the donor community. In line with this, the design of the proposed project has been kept simple and concrete, supporting both the implementation of measures that emerged from earlier work and the key reforms that have been initiated. 33. Over the years, the Bank has also learned lessons on public resource management reform. The main lessons learnt that are relevant for Lebanon and reflected in the design of the proposed project are: (i) putting the emphasis on systems and institutions rather than narrow technical reforms; (ii) thorough monitoring of progress in a way to allow for learning; (iii) encouragement of a focus on results; and, as noted, (iv) realistic actions to build capacity. E. IMPLEMENTATION ARRANGEMENT AND FINANCING PLAN I. Implementation Arrangements 34. The Ministry of Finance, as the grant recipient, will have primary responsibility for overseeing project implementation and ensuring the Bank s guidelines and procedures are adhered to. To facilitate comprehensive and continuous oversight, MoF has established a Project Implementation Unit (PIU), financed by grant proceeds, with primary responsibility for daily project implementation. 35. The Project Implementation Unit. The PIU is comprised of three full-time dedicated staff persons. A project manager will be serving as the key interlocutor for the Bank s Task Team Leader and ensuring consistency between the beneficiary departments within the Ministry. The project manager will be supported by a Financial Officer (FO) and a Procurement Officer (PO). The FO and PO will be managing the daily financial management and procurement activities of the project as outlined in the sections below and in further detail in Annexes 4 and 5, respectively. 36. The PIU has been established and fully staffed as of February 5, 2009, i.e. prior to the project approval. It will be financed retroactively, and is in the process of producing a Project Implementation Manual (PIM) covering all the implementation, financial management, procurement, disbursement, and monitoring and evaluation arrangements under the project (which are among its responsibilities under the project). The PIM shall be acceptable to the Bank and finalized prior to three months from the effectiveness date of the project. 37. In order to ensure the project is being implemented in a manner consistent with the GoL s overall reform efforts, the PIU will be overseen by the MoF and the Minister of Finance will be informed of progress under the project on a regular basis and consulted as needed. 11. Financial Management Arrangements 38. Financial management. While the project has been approved by the Council of Ministers, it will be implemented as an extra-budget activity. As such, there will be no formal national procedures and controls applicable to the grant which create significant risks. To mitigate such risks, the following measures will be implemented: (i) the recruitment of a financial officer to the PIU to ensure that Bank financial management regulations are complied with; (ii) agreement with MoF on the procedures, controls and safeguards to be applied during the grant implementation; (iii) financial recording in a ring-fenced accounting system independent from other systems in the Ministry; (iv) annual project audit by an independent external auditor, acceptable to the Bank. Subject to these mitigating measures, the financial management risks for the project are rated moderate. 39. The financial management arrangements will be agreed upon with the Ministry of Finance and detailed in Grant Control Arrangements (GCA), which will be drafted by the FO of the PIU and will form

17 an integral part of the PIM. The expenditure cycle will be detailed in the GCA, and shall include the following approvals: (i) technical approval by the spending department; (ii) administrative approval by the PIU project manager; and (iii) accuracy and consistency check by FO. Payments will be signed by two officials and the Designated Account (DA) will be reconciled on a monthly basis. In addition, the PIU will be responsible for preparing Quarterly un-audited Interim Financial Statements (IFRs) detailing: (i) sources and uses of funds; (ii) contract expenditures; and (iii) use of funds by grant activity. The IFRs will be submitted to the Bank no later than 45 days after the end of the quarter to which they relate. 40. Audits. The financial statements, including Statement of Expenses (SOEs), and the DA will be audited annually by an independent auditor acceptable to the Bank, in accordance with internationally accepted auditing standards and terms of reference cleared by the Bank. The PIU at MoF will be responsible for preparing the Terms of References (TORS) for the auditor and submitting them to Bank for clearance at least 9 months prior to end of the project fiscal year. The audit report will be sent to the Bank no later than six months following the end of the fiscal year. The report shall include a separate opinion on the project financial statement, with accuracy and reliability of internal control procedures of the SOEs submitted during the fiscal year to support related withdrawals. Additionally, a separate opinion reconciling opening and closing balances of the DA shall be included in the audit report. Finally, a management letter shall accompany the audit report, identifying any deficiencies in the control system the auditor finds pertinent, including recommendations for their improvement. (Annex 4 details the Financial Management and Disbursement arrangements) Procurement Arrangements 4 1. Procurement subject to Bank tendering requirements will consist principally of consultancy and training services, which shall be carried out in accordance with the World Bank s Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 and revised in October A relatively small amount of essential office equipment may also be procured under the project, which shall be subject to the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 and revised in October Any additional provisions stipulated in the grant agreement will equally guide procurement under the project. Detailed arrangements, including thresholds for procurement methods and prior review by the Bank, are presented in Annex Consultancy and Training services. The project will finance mainly consultants services to the Ministry of Finance and selected line Ministries as well at the Council for Development and Reconstruction and the Central Bank of Lebanon. It is expected that a majority of the services will be contracted to individual local and international consultants. However, where appropriate, a firm may provide services for a range o f activities. While the majority of the procurement of these services will follow competitive procedures, single sourcing of firms and sole sourcing of individual consultants may be exceptionally used as per the Bank s guidelines. The selection of staff to the PIU was also, similarly, governed by these regulations. 43. Goods. Any goods essential to the success of the project may also be financed. It is expected that these would be exclusively procured through national shopping for off-the-shelf products. Specific cases may warrant the use of direct contracting as detailed in the Bank s guidelines. 44. Operating Costs. The operating costs to be financed under the project would include: (i) maintenance of office equipment; (ii) office supplies, utilities, and office administration costs, including translation, printing and advertising; (iii) communication costs; (iv) costs associated with the production of bidding documents; and (v) commercial bank charges. The procurement of these items would follow the Borrower s administrative procedures, satisfactory to the Bank. The project would not finance the salaries of the Borrower s civil servants. 11

18 45. Procurement process. The PIU, under the oversight of its project manager, would be responsible for the procurement of goods and services financed by the grant. A procurement officer has been specifically recruited to the PIU to manage the process, including the preparation and updating of the procurement plan, managing expressions of interest and requests for proposals (RfP), evaluation of proposals, and contract award and management. The PIU project manager will send to the Bank all requests for no objection on contracts, which are subject to prior review (as defined by the procurement thresholds in Annex 5), before contract signature. 46. The overall procurement risk for the project is moderate. The Ministry of Finance has experience with Bank guidelines through its experience in implementing an ongoing Post-Conflict Fund grant. In addition, the majority of the procurement under the project is fairly simple, involving the selection of individual consultants. IV. Disbursement Arrangements 47. The proceeds of the grant will be disbursed through a US Dollar denominated Designated Account (DA) opened at the Central Bank of Lebanon. The DA will have three (or four) authorized signatories, of which two will both need to sign each withdrawal application. The details and corresponding specimen signatures will be submitted to the Bank prior to the first replenishment if the DA, 48. Fund withdrawal will follow standard disbursement procedures, as outlined in the Bank s Disbursement Guidelines for Projects, by means of reimbursements and replenishment of the DA based on documented SOEs, special commitments and direct payments. The supporting documentation will be retained by the PIU, will be made available to the Bank during its supervision missions, and will be reviewed during the annual audit of the financial statements. V. Project Supervision and Monitoring 49. The PIU will be responsible for the daily project implementation. The PIU will prepare quarterly progress reports, including updates on the indicators identified in Annex 2. The World Bank Task Team leader is located in Beirut and will follow up on implementation matters regularly as part of the ongoing dialogue with the Ministry of Finance. The team leader is supported by a strong and experienced fiduciary and operational team in the World Bank s Office in Beirut. Full supervision missions will be carried out semi-annually. 50. The closing date of the project would be September 30, F. PROJECT RISKS AND MITIGATING MEASURES 5 1. The challenging political environment makes reform implementation risky and could impact the implementation of the proposed EFMIS-TA. Some of the preparatory effort supported by the project will be wasted if the political circumstances do not permit legislative action as required for actual implementation of some of the reforms over time. The recent stabilization of the political environment and the resumption of the legislative process provide some mitigation of the inherent risks. Over the past year, several of the complementary recommendations of the recent IMF and the Bank analytical reports4 have already been put in place by the Government, starting with the formulation of the budget for 2008 The IMF-led METAC undertook an assessment of the budget preparation system in April 2007 and the World Bank assessed the options for phasing-in the MTEF process and capacity-building needs in summer 2007, and supported preparation of a pilot education MTEF; a Bank PCF is supporting improvements to aid reporting system. 12

19 and continue to date. These efforts, in addition to the Government s determination to maintain overall reform momentum, with regular reporting on progress to the key stakeholders (through quarterly reports/presentation), provide clear indication of its commitment to modernization and reform, notwithstanding the political difficulties. These factors, in turn, also provide some mitigation of the inherent risk. 52. There is also a risk stemming from lack of coordination among ministries in implementing the EFMIS-TA activities that require line ministry participation. The GoL instituted a monitoring, evaluation and coordination system to facilitate implementation of the Paris I11 reform program in early The coordination of the cross-cutting reforms is undertaken through three specialized Inter-Ministerial Committees on economic, social, and infrastructure and privatization pillars of the program. This structure is aimed at strengthening the ownership and sustainability of the reform program and is already showing encouraging improvements in this respect. 53. While there is reform vigor in Lebanon, delay in implementation may also result from lack of capacity at some of the beneficiary agencies. This is addressed by keeping the project activities realistic, and by allocating a portion of the project funds for complementary and highly targeted capacity-building. The Bank will also provide regular supervision of activities and will dedicate resources at the Lebanon Country Office to undertake day-to-day monitoring and coordination of the project activities. 54. Finally, some uncertainty derives from the possible changes in government assignments following the election of the new President. and the resumption of Parliamentary activities. This uncertainty potentially affects all Bank activities in Lebanon, but it is unlikely that it would significantly affect this proposed project, as the improvements in budgeting, debt and aid management are technical and necessary for the good functioning of the Ministry of Finance. G. TERMS AND CONDITIONS FOR PROJECT FINANCING 55. The project is a grant from the Trust Fund for Lebanon, and the disbursement percentage will be 100 percent. Retroactive financing will be provided to support the establishment and staffing of the Project Implementation Unit in the Ministry of Finance prior to the Bank s final approval, which has been fully put in place as of February 5,

20 Annex 1 Lebanon Emergency Fiscal Management Reform Implementation Support Project Detailed Description of Project Components Component 1 - Macro-Fiscal Analysis and Policy Advice Function 1. In keeping with the Paris I11 program, the Ministry of Finance (MoF) has broadened its work on medium term fiscal framework by initiating the preparation of an aggregate medium-term expenditure framework (MTEF) to guide annual budget preparation. A more comprehensive linkage between policy and revenue and expenditure decisions, however, remains to be developed, and the implications of revenue and expenditure policies for economic growth and financial stability call for more systematic attention. 2. In this context, the project will help strengthen within the MoF the preparation of the mediumterm macroeconomic framework, within which a medium-term fiscal framework is formulated-in turn providing the foundation for the preparation of the disaggregated expenditure framework needed to provide a multi-annual perspective to the annual budget decisions. The established good practice in middle-income countries could provide guidance concerning functions and responsibilities in this regard. Similarly, the project will help strengthen the policy evaluation capacity, including through the macroeconomic and distributional impact analysis of cross-cutting policies, consistent with the line ministries responsibility to estimate the sector impact of sector policies, based on established international practice in this respect. Eventually, the project envisages formal establishment of a small dedicated unit within the MoF to house the team undertaking the macro-fiscal analysis and policy advise function, when the legislative system resumes its work. 3. In order to facilitate the development of a dedicated macro-fiscal analysis and modeling functiodteam within the Ministry of Finance to provide input in budget preparation and debt management, the project would fund necessary advisory services to strengthen the capacity in the MoF, including through providing orientation to the new recruits in MoF of which a small group is envisaged to be assigned for undertaking macro-fiscal analytical work. This will be complemented by systemic training under Component 5. Component 2 - Public Expenditure Management 4. Following the broad Paris I11 reform directions, diagnoses of the budget preparation processes were conducted by the IMF-led Middle East Technical Assistance Center (METAC) in April and by the World Bank in July 2007 (building on earlier such diagnostic work most recently under the 2006-Public Expenditure Review). Several of the recommendations o f these reports, which are complementary, have already been put in place by the Government, starting with the formulation of the budget for 2008 and continue to date. The most important of these initial steps that are taken include: (i) (ii) Specific and important changes in the budget circular, including particularly the annexing of the MTEF to the budget circular, and specification of a global expenditure ceiling, including the foreign financed capital spending managed by the Council for Development and Reconstruction (CDR) and conflict-related spending managed by the High Relief Commission (HRC); The introduction of regular reporting by the CDR of investment expenditure, and by the HRC of housing compensation with a one-month lag; 14

21 Introduction of a principle that prohibits budget carry-overs of expenditures for which no third liability already exists-effectiveness of this principle awaits resumption of the Parliamentary process, however, it already triggered the absorption of bulk of the carry-overs accumulated over the past years, hence, eliminating future carry-overs. The automation of payroll (including both the basic wages and the various allowances) which, combined with the similar measure taken earlier with respect to pensions, has led to eliminating irregularities and now permits a realistic estimate of the wage and pension bill; The initial preparation of an aggregate medium-term expenditure framework (MTEF) and MTEF for the Ministry of Education. A. Subcomponent 1 - Expenditure Programming and Budget Preparation The reforms undertaken by the Government to date have significantly improved the clarity and credibility of the budget preparation process, but need to be consolidated and expanded over the next 18 months, particularly to foster closer integration of capital and current expenditure, and to introduce some orientation to actual results combined with a gradual deepening of the MTEF process toward a genuinely programmatic approach. The progress already made permits to envisage the following activities over the next two budget cycles: (i) (ii) Specify in the April 2009 budget circular (for the 2010 budget) and thereafter the expenditure ceilings for each ministry and spending agency, including the CDR. Formulation of guidelines for the preparation of fully-costed expenditure programs and, learning from the experience in the Ministry of Education, progressive extension of the process to other programs in selected key ministries with a view to informhmprove preparation of the budget by these ministries. On an indicative basis, experience suggests that 2-4 additional programs may be added each year. In this manner, the capacity to move progressively towards the objective of performance budgets can be built permitting the achievement of this objective in due course; (iii) Initial steps to introduce some results-orientation in the budget process (without modifying the line-item, cash-based budget system), including the choice-through a participatory process-of a few key performance indicators and the specification of a monitoring mechanism suitable to the ministry s capacity, in respect of the specific programs chosen for this purpose; (iv) (v) (vi) Improving the transparency of the operations of extra-budgetary funds; Moving toward the integration of capital and current budgeting by introducing monthly reporting of investment expenditure, with a maximum lag of onsweek; Defining basic procedures for the programming of public investment and the estimation of recurrent costs. Although the Government has decided against initiating large projects at this time, when circumstances will permit doing so it will be important to already have in place robust procedures for investment programming and financing; (vii) Related to the above, the disconnect between current budgetary provisions and the need for multiyear contractual commitments for investment projects should be remedied. A first step in this direction (which would not require parliamentary approval), would be a review of the accumulated stock of multi-year project authorizations (loi-programmes), with a focus on water and roads, and recommendations for disposing of the obsolete overhang; (viii) Coordinate with METAC and other partners concerning the review of the existing budget classification, with the view to eventually bringing it into line with GFS 2001 standards, and chart of accounts; 15

22 (ix) Reviewing the consistency of all of the above and other reform measures with the existing legislation-possibly drafting necessary legislative changes to be proposed at a future time and leading to the eventual formulation of a comprehensive Budget System Law, as called for in the Paris I11 program. 6. This subcomponent of the project would provide assistance and advice to both the Ministry of Finance and line ministries to improve their capacity and understanding in all areas of expenditure programming and budget preparation, including the formulation and dissemination of guidelines for fullycosted expenditure programs. This will be complemented by systemic training under Component 5. B. Subcomponent 2 - Budget Execution, Monitoring and Audit 7.. The weaknesses of budget preparation have made it impossible to have good budget execution, monitoring and control. With the improvements already made and those expected in budget preparation as noted above, it is important to move to strengthening budget execution, particularly in the interrelated areas of improving cash management and reactivating the Treasury single account. Concerning these latter interrelated areas, the ongoing technical support by the IMF-led METAC should provide good basis to build on and achieve progress. In addition, few initiatives can be contemplated, to prepare the ground for other necessary improvements in budget execution, monitoring and audit: (i) (ii) A rapid diagnostic of the functioning of the budget execution, reporting and monitoring system in actual practice, with appropriate recommendations for further development and their implementation as feasible; Building on the METAC technical assistance for cash management, assist the process of strengthening the Treasury management function, including better linking the business processes and information systems for debt management and cash forecasting; (iii) An integrated review of the audit function, taking a holistic view of internal and external audit. With respect to internal audit, such a review would identify modalities for introducing internal audit in the MoF on a pilot basis that will take into consideration the envisaged move to a more results-based budget management. With respect to external audit, the review would define a complete revamping of the institutional and organizational arrangements in line with contemporary good practice. The aim would be to replace over time the current antiquated system with an independent auditor-general office, responsible to Parliament for ex post financial, compliance and value-for-money audit, and without any role in ex ante controls. (Naturally, such a fundamental change would require extensive discussion and could only be actively considered when the political and social circumstances will permit). 8. Under this subcomponent, the project would provide assistance and advice to both the Ministry of Finance and, as relevant, line ministries to improve their capacity and understanding in budget execution, to strengthen Treasury management functions, and enhance the control environment. In addition, the public audit function will be key to improving budget execution. This will be complemented by systemic training under Component 5. Component 3 - Debt Management 9. The level of public debt in Lebanon remains extremely high at 166 percent of GDP. The outstanding debt is evenly distributed on debt denominated in Lebanese pounds, and debt denominated in foreign currencies. The size of the debt, the share of debt in foreign currencies, and the very short Including, preparation of the budget in a medium-term and results oriented framework. 16

23 maturity of the domestic debt implies that the risks to the budget stemming from the public debt are very substantial. In addition, the degrees of freedom in implementing a medium term debt management strategy are limited at present. 10. In this context, the debt management technical assistance would be focused on initial priority initiatives towards building sufficient capacity to establish a fully functioning debt management office once the political environment allows the passage of necessary legislation (which is currently before the Parliament). In this context, the implementation arrangements envisages (in addition to proposed mix of international and local advisory assistance) the secondment to MoF of Banque du Liban staff during the life of the project to create the necessary synergies and knowledge transfer that would ensure success. The outline of proposed activities are as follows: Medium term debt management strategy. A clear and publicly available debt management strategy with a medium term horizon (3-5 years) is a cornerstone of any government debt management operation. The strategy would outline the preferred composition, and thereby risk exposure of the public debt-initally, a formal strategy could be a description of current practices expressed as the preferred direction for specific risk indicators to be refined over time. The development of a medium term debt management strategy would complement and support the ongoing work on developing short term (tactikal) debt management strategies and, by its nature, needs to be coordinated with medium term macroeconomic policy analysis and modeling work. Cost-Risk analysis. An important task for a debt manager is to provide input to the formulation of the strategy for debt management (the cost-risk trade-off) and to ensure that risks remain within boundaries agreed to (risk monitoring and control)-these parameters will be suggested by the Middle Office and be included in the Debt Management Strategy. To be able to fulfill these functions effectively the debt manager needs tools that can help him identify and quantify costs and risks. Furthermore, cost-risk tools will support improved reporting of debt and risks. The cost-risk tools would enable the debt manager to provide high-quality input to the dedicated team of Macro-Fiscal Analysis. Strategy implementation. When the debt management strategy, based on a tradeoff of cost and risk, and taking into account macroeconomic and market development constraints, is designed and approved there are choices as to how to implement the strategy. The key aspects of implementing a debt management strategy relate to the development o f the funding plan and the preparation of liability management operations. A central part of that is identifying suitable instruments and facilitating their introduction. Examples include financial derivatives and Islamic finance. Coordination with BdL. Careful coordination with fiscal and monetary policy is essential in management of Lebanon s high debt. One way of ensuring coordination is through a high-level committee with representation from the MoF and BdL. Such a committee should meet on a regular basis (initially with a relatively high frequency); minutes from the meetings should be agreed by the participating parties. In addition, an effective way of ensuring a clear agreement between the MoF and the central bank is through a Memorandum of Understanding clearly outlining the roles and responsibilities of the two parties in the area of debt management. Data and debt recording. High quality debt recording and debt date is the back-bone of strategy development and risk analysis. And essential part of this is easy access to complete public debt data in formats facilitating both reporting and risk analysis. While debt recording in Lebanon seems to be working well, a detailed review of current processes and procedures would provide suggestions for improvement in harmony with the other proposed activities under this Component. No need for acquiring systems is envisioned, but a local IT-expert could develop software that would enable easy access to data for the debt manager. Work on establishing an aid 17

24 (vi) (vii) and donor coordination system is underway, and any initiatives on the debt management side should be closely coordinated with these activities, including analyzing the possibilities of using the same or similar IT-platform. Reporting and investor relations. Transparency is essential for sound public debt management. The high debt and risk levels in Lebanon make this even more important. The initiatives already taken by the MoF are clearly in line with international best practice, but could be further strengthened and improved. Examples would include including more detailed information on risks in the quarterly report, and the preparation of an annual report. Legal issues and negotiations. The legal function in a debt office is a typically small in staff size, but very important. Development of this function would contribute towards ensuring that the debt management operations are conducted according to the law, and do not breach any contracting obligations. In addition, the legal staff will provide assistance in the form of legal research and advice; participate in the drafting of the regulations governing the activities of the debt management function; take an active part in negotiations of contracts, ensure that the legal clauses do not tie the borrower unnecessarily and involve in monitoring of the execution of debt transactions. 11. A number of the proposed initiatives under the Debt Management subcomponent do not require specific assistance as they mostly require a Government decision and stakeholder commitment-e.g. establishment of the high-level coordination committee with Banque du Liban. The other planned interventions to build the capacity of staff towards the establishment of a fully functioning debt office, require advisory services. This will be complemented by systemic training under Component 5. Component 4 - Aid Coordination and Management 12. The aid coordination and management function has been rapidly developing since the Paris I11 conference in January Over the period ahead, it will be critical to further improve systematic interaction with donors, assembling and maintaining a comprehensive aid database, and facilitating the dialogue between donors and the concerned line ministries. 13. The aid management activities supported by the technical assistance project would aim to further the successful and valuable work started under the Bank s Post Conflict Fund (PCF) supported project setting the stage for effective organizational and reporting arrangements. It is especially valuable that the GFS classification has been taken as the starting point, which will permit in time to unify the CDR and other databases into the uniform budgetary classification and lead to an integrated presentation of capital and current expenditure. With the activities scheduled for completion and roll out between September and November 2008, it is now essential to build structures to carry these early steps forward. 14. In line with this, the project would initially support the creation of a dedicated Aid Management and Coordination team based in the Ministry of Finance towards building sufficient capacity to establish a fully functioning dedicated unit once the necessary legislation is adopted given the normalization of the political environment. The team is envisaged to be small, structured along donor lines to coordinate contacts between ministries and donors, and staffed by newly recruited staff (led and advised by an external advisor and with appropriate training, proposed under Component 5). The team would act as a technical secretariat for high-level meetings with donors and perform the other functions outlined by the PCF consultants in this area, particularly to facilitate the incorporation of all foreign-financed expenditure into the budget. 15. The establishment of a small, dedicated aid management team will facilitate the efficient implementation of Paris I11 pledges. The project would support advisory services to build on the 18

25 Ministry s current good relations with donors and build specific capacity to manage aid. This will be complemented by systemic training under Component 5, Component 5 - Training and Capacity Building 16. Relevant training will be critical to enhance all of the activities supported under the Project. Training would be mostly channeled through and organized by the Institute of Finance, in an effort to maximize the transfer of capacity to the Institute, with short-term contributions by international experts as required. Such training would be targeted mainly at new recruits in the MoF and line ministries and existing staff in the budget offices of line ministries. Short courses would be provided in such topics as: (i) Budget management (ii) Introduction to macroeconomic and financial programming (iii) Performance measurement (iv) (v) (vi) Monitoring and evaluation Policies and procedures of major donors Cash forecasting and cash management (vii) Debt management and debt sustainability modeling (viii) Other topics directly related to the implementation of the budget reforms 17. Alongside formal courses, coaching and mentoring would be an explicit core requirement in the TORS of international experts as well as the local consultants. Also, the experienced budget staff and local consultants in the MoF are expected to contribute and interact regularly with the line ministries staff responsible for budget matters. Finally, a series of workshops would be organized, to bring together MoF, line ministry, procurement and accounting staff, and if appropriate concerned donors, to brainstorm about practical problems in budget execution and to find solutions consistent with existing legislation. 18. An IDF grant is in place to finance a variety of training activities closely related to the components of this project and to be organized through the Institute of Finance. It is clear, however, that-in addition to Institute resources-an international training advisor and local training coordinator need to be hired for a limited duration to develop the curriculum and the course/workshop program, in close consultation with all stakeholders. 19

26 Consolidate initial progress in improving budget, debt and aid management while building capacity and introducing orientation to results. * A significant and durable improvement in budget execution (including debt), made possible through a more realistic budget preparation as well as better treasury management and appropriate training. e Monitor progress o f public resource management reforms under Paris 111. Component 1: Macro-Fiscal Analysis Function Component 2: Public Expenditure Management * Macro-Fiscal analysis function further developed and fully operational. 0 Medium-term macro-economic framework and the medium-term fiscal framework are prepared in coordination with relevant bodies and reflecting GoL policies. Fiscal target closely monitored against quarterly projections and corrective measures are identified as necessary. 0 Selective policyiimpact evaluation exercise is undertaken on cross cutting issues with high budgetary impact. Expenditure Planning & Budget Preparation: 0 Formulation of guidelines for the preparation of fully-costed expenditure programs and their implementation as much as possible to inform the budget preparation process. 0 Formulation of a result-monitoring and evaluation framework for the selected expenditure programs. 0 Inclusion in the budget documentation of financial operations of extra-budgetary funds, in accordance with international good practice. * Define guidelines for public investment programming, of a periodicity equal to that of the aggregate MTEF. e Review of accumulated stock of loiprogramme for water and roads. 0 Coordinate with the efforts done by the other TA providers to review existing budget classification, to bring it into line with GFS 2001 standards, linked with the expected revisions in the chart of accounts. a Improved macroeconomic programing and policy analysis to guide revenue and expenditure choices and to facilitate integration of planning and budgeting functions. * Building the foundation for systematic linkage between policy and the budget, in a multiyear perspective. 0 Introducing an orientation toward results in major expenditure programs. 0 Improving fiscal transparency. * Improving the efficiency of public investment. * Improved procedures for integrating investment and current expenditure. 20

27 Component 2: Public Expenditure Management (contd.) Component 3: Debt Management Budget Execution and Audit Control: 0 Development of a budget execution reform strategy and implementation plan. e Development and implementation of an action plan for strengthening treasury management functions, including for linking business processiinformation systems for debt management and the cash forecasting capacity. e Integrated review of internal and external audit, and recommendations on modalities for introduction of internal audit in MoF and for establishment of a modern auditorgeneral ofice. Medium-Term Debt Management Strategy: A Debt Management Strategy is published. e An updated and refrned strategy is published. Cost-Risk analysis: e A comprehensive scenario analysis model. e Relevant cost-risk tools are identified and developed. Strategy implementation: Identification of existing fmancial instruments, loans as well as derivatives that are currently available. * Identification of new financial instruments, loans as well as derivatives. Coordination with BdL: A high level committee with participation from MoF and BdL. A Memorandum of Understanding between MoF and BdL, formalizing the relationship in debt management area. e Strengthening public fmancial management and accountability. e A solid framework for day-today borrowing decisions is provided, supporting a clear cost-risk trade-off and debt sustainability. e Cost-risk tools supporting the development of a sound debt management strategy. 0 More cost-risk effective strategy implementation. 0 More cost-risk effective strategy implementation and better coordination between the MoF and BdL. Data and debt A thorough review of processes and procedures related to the recording of domestic and external debt, and a project plan for possible improvements. Software that facilitates easy access to comprehensive debt data in a format needed for cost-risk analysis. 0 Reduced operational risks related to debt recording, and high-quality debt data that is easily accessible. 21

28 Component 3: Debt Management (contd.) Component 4: Aid Management Reporting and investor relations: 0 Improved reports on outstanding debt and risks with higher frequency. 0 An annual report for debt management, 2008, is published. 0 A web-site dedicated to public debt is established. Legal Issues and Negotiations 0 Legal staff contributes to development of regulations underlying the debt management functions, take active part in the negotiations of contract and in monitoring and evaluation of debt transactions, undertake legal research and provide advice. 9 Aid Coordination and Management functionheam appropriately developed and fully operational. 0 Improved transparency supporting a higher degree of accountability. Reduced legal risks in debt management. Improved aid effectiveness and reduce transaction costs for donors and government. Component 5: Training and Capacity Building 0 Time-bound training program defined. 0 Curriculum prepared and courses initiated. 0 Provide specific skills critical to defined aspects of budget and financial management reform program. 22

29 Emergency Fiscal Annex 3 Lebanon anagement Reform ~mp~ementat~on Support Project Summary of Estimated Costs Component 2 - Public Expenditure Viinagcmcnt Cross-cutting Issues International Advisory Services Legal Consistency Advisor (2 months) Travel Senior Advisor [PIP / Loi-Programme] (3 months) Travel Subcomponent A: Expenditure Planning and Budget Formulation Internationcil AdviJory Services Resident Budget Planning Advisor (1 2 months) Tra\el/ Living Allowance Visiting Budget / Sectoral M1 EF Advisor (6 months) Travel Subtotal I I $40,000 $19,000 $ $19,000 $ $ $32,000 $120,000 $51 nnn 23

30 24

31 Annex 4 Lebanon Emergency Fiscal Management Reform Implementation Support Project Financial Management and Disbursement Arrangement I. Country context 1. Improving the public financial management system has been at the core of Lebanese priority reforms for many years. The Government o f Lebanon has actively been working with its international development partners, including the World Bank, the International Monetary Fund and the French authorities, to design and implement systems to reduce overall fiduciary risks and improve accountability. Donor assistance has helped Lebanon make substantial improvement to its budgeting, accounting, auditing and internal control mechanisms. However, reform efforts continue to be frustrated by the difficult political environment preventing the passage of essential legislation. 2. The latest Country Financial Accountability Assessment (CFAA), conducted in the first half of 2006, identified a number of key inherent risks in the public financial management system and concluded that overall fiduciary risk of the public financial management system in Lebanon is significant. A high proportion of Government spending occurs through extra-budgetary funds and entities, which fall outside the budget oversight and control framework. The expenditure control framework is weak, with duplicative functions, overlapping accountability, and inadequate internal controls. The absence of an internal audit function to check Government spending further undermines accountability. Finally, the Court of Accounts, responsible for the external audit of Government finances, is not empowered to carry out its function and is in need of significant amounts of capacity building. As discussed in Annex 2, the GoL has taken several initiatives to address some of these weaknesses over the last few years; and the proposed project will help consolidate and further these initiatives. 11. Implementation Arrangements 3. Organization and Staffing. The Ministry of Finance (MoF) will bear primary implementing responsibility for the project. To this end, a Project Implementation Unit (PIU) has been established within the Ministry under the supervision of a project manager. A financial officer (FO), financed by grant proceeds, has been recruited to follow-up on the grant s financial management aspects. The tasks include the daily management of the grant account, the processing of payment orders and the preparation of quarterly un-audited Interim Financial Reports (IFR). The FO will receive training on World Bank financial management and disbursement arrangements. 4. Risks and Mitigation Measures. While the project has been approved by the Council of Ministers, it will be implemented as an extra-budget activity. As such, there will be no formal national procedures and controls applicable to the grant which create significant risks. To mitigate such risks, the following measures will be implemented: (i) the recruitment of a financial officer to the PIU to ensure that Bank financial management regulations are complied with - this officer will be subject to training on Bank procedures and guidelines; (ii) agreement with MoF on the procedures, controls and safeguards to be applied during the grant implementation; (iii) financial recording in a ring-fenced accounting system independent from other systems in the Ministry; (iv) annual project audit by an independent external auditor, acceptable to the Bank. Subject to these mitigating measures, the financial management risks for the project are rated moderate. 5. Internal Controls. The project s financial controls will be agreed upon with the Ministry of Finance and detailed in the project Grant Control Agreement (GCA), which will be drafted by the FO of the PIU and form an integral part of a Project Implementation Manual (PIM). The expenditure cycle will 25

32 follow controls specified in the GCA, and will include: (i) technical approval of the department involved in the activity; (ii) approval of the PIU s project manager; (iii) verification by FO of payment accuracy and compliance with the grant activities; (iv) signature by two officials of each payment; (v) monthly reconciliation of Designated Account; and (iv) satisfactory archiving of supportive documents at the MoF. 6. The project will finance mainly consultants services. These can be classified either as delivering a set output, or as supporting the delivery of an output. Payments will be made against the delivery of outputs for the first category, as detailed in their contracts. For the second category of consultants, payment will be made against the submission of a time sheet and a summary o f activities performed. 7. Flow ofji-nds. To expedite the flow of funds a Designated Account (DA) denominated in US dollars will be opened at the Central Bank of Lebanon. Deposits into and payments from the DA will be made in accordance with the disbursement letter. The FO in the PIU will be responsible for preparing payment requests from the DA and submitting them to the Central Bank of Lebanon for payment. The PIU will be responsible for preparing Withdrawal Applications (WA) for replenishment of the DA and for direct payment by the Bank. 8. Accounting. To facilitate implementation, grant accounts will be compiled in a spreadsheet in a ring-fenced accounting system independent from other systems in the Ministry. A template of a suitable spreadsheet will be provided to the project FO to allow the satisfactory reporting of transactions by component, activity, contract and category. 9. Project Reporting. The MoF through the PIU will prepare quarterly un-audited Interim Financial Reports (IFRs) and submit them to the Bank no later than 45 days after the end of the period to which they apply. These IFRs will include (i) sources and uses of funds statement; (ii) contract expenditures report detailing all signed contracts and amounts paid under each; (iii) use of funds by grant activity and the DA reconciliation statement reflecting the opening and closing balances for the period. The format of the IFRs has been agreed upon with MoF during negotiations. 10. Auditing arrangements. The financial statements, including SOEs, and the DA will be audited annually by and independent auditor acceptable to the Bank, in accordance with internationally accepted auditing standards and terms of reference cleared by the Bank. The PIU at MoF will be responsible for preparing the TORS for the auditor and submitting them to the Bank for clearance at least 9 months prior to the end of the project fiscal year. The audit report will be sent to the Bank no later than 6 months following the end of the fiscal year. The report shall include separate opinions on project financial statement, with the accuracy and reliability of the internal controls procedures of the SOEs submitted during the fiscal year to support related withdrawals. Additionally, a separate opinion reconciling opening and closing balances of the DA shall be included in the audit report. Finally, a management letter shall accompany the audit report, identifying any deficiencies in the control system the auditor finds pertinent, including recommendations for their improvement Supervision. The project will require intensive supervision during the start-up phase to ensure that the fiduciary requirements of the PIU are completed in a timely manner, minimizing project fiduciary risk. The field-based staff will also be available for any guidance during this period. Throughout project implementation, supervision will be conducted every six-months to ensure compliance with Bank requirements and to develop financial management ratings. 26

33 Recruit Financial Officer Finalize the Grant Control Arrangements Provide template for record keeping Engage Auditor Immediately By 3 months from project effectiveness Negotiations By 3 months from project effectiveness 12. Disbursement. Fund withdrawal will follow standard disbursement procedures, as outlined in the World Bank s Disbursement Guidelines for Project, by means of reimbursements and replenishment of the DA, special commitments and direct payments. Replenishment of the DA will be against withdrawal applications, based on documented statement of expenditures (SOE). The minimum amount for applications for direct payment and special commitments, if any, would be 20% of the authorized allocations to the DA. Requests for replenishment of the DA will be submitted on a monthly basis. 13. Authorized signatories. Two officials, designated by the Minister of Finance, will be authorized to sign for the DA. Names and corresponding specimens of their signatures will be submitted to the Bank prior to the receipt of the first replenishment application. Each WA will be authorized and signed by two officials. 14. Statements of Expenditures. Consultants firms shall provide SOEs for all expenditures incurred up to US$lOO,OOO equivalent. The limit for individual consultants shall be US$50,000. The supporting documentation would be maintained by MoF and made available for review by Bank supervision missions upon request, documentation relating to SOEs would be retained for up to one year from the date the Bank receives the audit report for the fiscal year in which the last withdrawal from the loan account was made. 27

34 Annex 5 Lebanon Emergency Fiscal Management Reform Implementation Support Project Procurement Arrangements I. Procurement Country Context 1. The Public Accounting Law of 1963, supplemented by several decrees, constitutes the legal foundation of Lebanon s organizational and institutional framework for procurement - to this day. In concert with this more than 40-year old law, the current system has remained entirely centralized, with the Department of Tenders (DOT) being in charge of public procurement. 2. Unlike the Project Implementation Units (PIUs) in other Middle East and North Africa (MNA) Region countries, Lebanese PIUs handle only specific project components and have limited responsibilities for procurement, which has largely remained with CDR. In ongoing discussions between the Bank and Government, the risk of continuing and even expanding project management through PIUs has been questioned, because this practice may delay the strengthening of project management. capabilities in the line ministries. 11. Implementation arrangements and procurement capacity 3. Primary responsibility for project implementation will reside with the Ministry of Finance (MoF). Since the project is not foreseeing execution of works and large purchase of goods, the implementation responsibility will reside with the Ministry of Finance through a Project Implementation Unit (PIU) which will have a key supporting role on sector reform related efforts and program fiduciary aspects and which has now been fully established. 4. Stafing. A rapid assessment of the capacity of MoF to implement procurement actions has been carried out. MoF has not currently a procurement staff to assign to, the project. Outsourcing such staff is mandatory for the diligent procurement processing. Hence, a procurement officer (PO) has been recruited for the PIU for procurement and contract management, the details of which will be outlined in a Project Implementation Manual. 5. Record keeping. MoF is advised to provide reasonable space for electronic and in paper filing. The filing, from advertisement till payment invoices copy, including correspondence with consultants and suppliers, and submitted deliverables and reports, is to be chronological and well maintained. The procurement documents shall be consulted during supervision missions and for the contracts that are below the review thresholds in ex-post reviews missions. 6. Capacity Building: Training and professional development will increase the performance of staff. In-service support shall be provided ad hoc to the procurement staff by the country office of Beirut. 7. Overall Procurement Risk Assessment: In view that the procurement transactions are covering, in majority, selection of individual consultants, and since MoF is being implementing satisfactorily a World Bank grant for the Establishment of a mechanism for national reconstruction, thus the procurement risk is rated moderate. 8. Procurement of Goods will be carried out in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits (May 2004; revised October 1,2006). 28

35 9. Procurement of Services will be carried out in accordance with the Guidelines for the Selection and Employment of Consultants by World Bank Borrowers (May 2004; revised October 1, 2006). The Standard Request for Proposals (RFP) for the selection of consultants (May 2004; revised October 1, 2006) and the Standard Form of Contracts will be used for firms contracts above US$200,000 equivalent. For the selection process of firms, the Sample Form of Evaluation Report for the Selection of Consultants (October 1999) will be used. Selection of individual consultants will be in accordance with section V of the Guidelines using simplified forms of contracts that are acceptable to the Bank Advertising 10. A General Procurement Notice (GPN) has been published online in the United Nations Development Business (UNDB), and the dgmarket. The GPN provides a description of the Project to solicit expressions of interest on an international basis. Additionally, for building a substantial data base, assignments that are likely to attract international consultants shall be advertised using the Specific Procurement Notice format. The advertisement may be posted on dgmarket and in national newspapers. IV. Procurement Methods 11. Goods. It is anticipated that the procurement method that will be used is exclusively the shopping for off-the-shelf products. Direct contracting may be used in very specific cases as per section I and 3.7 of the guidelines Procurement under IBRD Loan and IDA Credits 12. Consultancy and training services. (a) Consultant Services for firms will be selected using the Quality-and Cost-Based Selection (QCBS) for value of contracts estimated at more than US$lOO,OOO equivalent or more; (b) For assignments for consultant firms estimated at less than US$lOO,OOO equivalent, the short list may be comprised entirely of national firms, provided at least three qualified local firms are available and competition including foreign consultants is not justified. However, international firms, which have expressed interest, will not be excluded from consideration; (c) Selection of Individual Consultants will be conducted in accordance with section V of the Guidelines. Single sourcing of firms and sole sourcing of individual consultants shall be exceptionally used respectively as per paragraphs 3.9 till 3.13 and 5.4 of the guidelines Selection and Employment of Consultants. Also, selection under a Fixed Budget and Least Cost Selection may be used for procurement of consultants services for those assignments which are specified in the Procurement Plan. 13. Operating Costs. The grant will finance expenditures directly related to the management of the project, such as: (a) maintenance of office equipment; (b) office supplies, utilities and office administration, including translation, printing and advertising; (c) communication costs; (d) costs for production of bidding documents; and (e) commercial bank charges, but excluding salaries of the Borrower s civil servants. These items will be financed by the project and will be procured using the Borrower administrative procedures for shopping, satisfactory to the Bank. V. Frequency of procurement supervision missions 14. Frequency of procurement supervision mission will be one every six months. The first year will require three missions to ensure proper implementation start-up since the majority of procurement packaging, launching and processing will be taking place in the first year o f the project implementation cycle. An ex-post review will be conducted once a year for contracts that have not been reviewed prior to contract signature. 29