PROJECT : Public Finance Modernization Support Project (PAM-FP)

Transcription

1 Language: ENGLISH Original: French AFRICAN DEVELOPMENT FUND PROJECT : Public Finance Modernization Support Project (PAM-FP) COUNTRY : Democratic Republic of Congo APPRAISAL REPORT Date: October 2011 Team Leader: A. C. TOTO SAME, Principal PFM Expert, OSGE.1 Appraisal Team Team Members: Mrs. S. WAKANA, Principal Economist, (ORCE) Mr. D. MARINI, Procurement Expert, CDFO Mr. V. LOSSOMBO, Financial Management Expert, CDFO Mr. S. OUSMANE, Consultant, OSGE.2 Mr. O. BEKALE, Operations Officer, OSGE. 1 Sector Director: Mr. I. LOBE NDOUMBE, Director, OSGE Regional Director: Mrs. M. KANGA, Director, ORCE OIC: Mr. A. COULIBALY, OSGE.1 Regional Office: Mrs. S. WAKANA, Acting Resident Representative CDFO Peer Reviewers Mr. A.I. MAHDI, Chief Financial Analyst OSGE.2 Mr. T. GUEZODJE, Principal Macro-economist ORWB Mr. K. LUMBILA, Senior Economist OSGE2 Mr. R.A. DOFFONSOU Senior Country Economist ORWA M. T. DAYO, Macro-economist BFFO

2 TABLE OF CONTENTS Project Brief... iii Project Summary... iv Results-based Logical Framework... v Project Implementation Schedule... vii I Strategic Thrusts and Rationale Project Linkages with Country Strategy and Objectives Rationale for Bank s Involvement Aid Coordination... 4 II Project Description Project Components Technical Solutions Adopted and Alternative Explored Project Type Project Costs and Financing Arrangement Project Target Area and Beneficiaries Participatory Approach for Project Identification, Design annd Implementation Bank Group Experience and Lessons Reflected in Project Design Key Performance Indicators III Project Feasibility Economic and Financial Performance Environmental and Social Impact IV Implementation Implementation Arrangements Monitoring Governance Sustainability Risk Management Knowledge Building V Legal Framework Legal Instrument Conditions Associated with Bank s Intervention Compliance with Bank Policies VI RECOMMENDATION... 19

3 LIST OF ANNEXES Annex I. Country s Comparative Socio-economic Indicators Annex II. Table of Bank Portfolio in DRC as at 4/10/ Annex III. Map of Project Area Annex IV: Summary Table of Donor Operations LIST OF TABLES Table 1.1: TFP Involvement in Planning and Public Finance Management in the Provinces Table 1.2: Aid Coordination Table 2.1: Project Components Table 2.2: Project's Overall Cost Estimate by Component [in UA thousand] Table 2.3: Project's Overall Cost Estimate [in UA thousand] Table 2.4: Project Cost by Expenditure Category [in UA thousand] Table 2.5: Expenditure Schedule by Component Table 4.1: Monitoring Milestones and Feedback Loop Table 4.2: Risks and Mitigative Measures This report was drafted by A. C. TOTO SAME, Principal PFM Expert, OSGE.1, P. MARINI, Procurements Expert CDFO, V. LOSSOMBO Financial Analyst, CDFO and O. SOMALI, Consultant, OSGE.2 following a post-appraisal mission to the DRC from 20 June to 2 July The report was also enriched by discussions with Mr. M. TANGARA, Acting Resident Representative and inputs from Mr. O. SOMALI, Consultant OSGE.2. Questions on this report should be referred to Mr. I. LOBE NDOUMBE, Director, OSGE (Ext. 2077), Mrs M. KANGA, Director ORCE, (Ext. 2060) and Mr. A. COULIBALY, OIC, OSGE.1 (Ext. 3536).

4 CURRENCY EQUIVALENTS August 2011 UA 1 = USD USD 1 = UA USD 1 = CDF 910 Fiscal Year From 1 January to 31 December Weights and Measures 1 metric tonne = 2204 pounds 1 kilogramme (kg) = 2.2 pounds 1 metre (m) = 3.28 feet 1 millimetre (mm) = inch 1 kilometre (Km) = 0.62 mile 1 hectare (ha) = acres Km² = square kilometre m 3 = cubic metre m² = square metre m = linear metre Mm 3 = Millions of cubic metres m 3 /h = cubic metre per hour l/s = litre per second l/day/inhab. = litre per day per inhabitant i

5 ADF BTC CIDA COREF CPC CPLCP CSMOD CSP CTAD DFID DTE ESIA ETCD EU HIPCI IMF KFW LC MDG MTEF MTR MUA ORCE PAIM PAM-FP PAP PAP-CB PARER PARSAR PEFA PMDE PMURIS PRGSP PRONAREC PRSP PSRFP PUAICF RAP SENAREC TFP UA UCOP UNCDF UNDP UPPE-SRP WB ACRONYMS AND ABBREVIATIONS African Development Fund Belgian Technical Cooperation Canadian International Development Agency Public Finance Guidance and Reform Committee Provincial Coordination Committee Provincial Poverty Reduction Committee Strategic Decentralization Implementation Framework Country Strategy Paper Technical Decentralization Support Unit Department for International Development Decentralized Territorial Entities Environmental and Social Impact Assessment Exclusive of Taxes and Customs Duty European Union Heavily Indebted Poor Countries Initiative International Monetary Fund Kreditanstalt für Wiederaufbau Local Currency Millennium Development Goals Medium-Term Expenditure Framework Mid-Term Review Million Units of Account Countries Department Centre Region Multi-sector Institutional Support Project Local Economic Governance Support Project Priority Action Programme Priority Action Programme Capacity-building Project to Provide Institutional Support for the Economic Recovery and Reunification Support Programme Agricultural Sector Rehabilitation Support Project Public Expenditure and Financial Accountability Project to Rehabilitate and Strengthen the Ingra Hydro-electricity Power Plant and Kinshasa Network Multi-sector Emergency Project to Rehabilitate Socio-economic Infrastructure Poverty Reduction and Growth Strategy Paper National Capacity-building Programme Poverty Reduction Strategy Paper Strategic Public Finance Reform Plan Programme to Mitigate the Impact of the Financial Crisis Public Administration Reform National Capacity-Building Secretariat Technical and Financial Partner Unit of Account Project Coordination Unit United Nations Capital Development Fund United Nations Development Programme Steering Unit of the PRGSP Design Process World Bank ii

6 PROJECT BRIEF DONEE : Democratic Republic of Congo EXECUTING AGENCY : Project Implementation Unit Financing Plan Source Amount (UA) Instrument ADF 10,000,000 Grant TOTAL COST 10,000,000 Key ADB Financial Information Loan/Grant Currency Type of Interest* Interest Rate Margin* Commitment Fee* Other Costs* Maturity Grace Period FRR, NPV (baseline case) ERR (baseline case) Unit of Account NA NA NA NA NA NA NA NA *if applicable Duration Milestones (Expected) Concept Note Approval August 2010 Project Approval February 2012 Effectiveness March 2012 Last Disbursement 2015 Completion 2015 Last Reimbursement NA iii

7 PROJECT SUMMARY Programme Overview Needs Assessment Target Beneficiaries Comparative Advantage and Bank s Value Added Knowledge Building After several years of political instability and armed conflicts, the Democratic Republic of Congo (DRC) is heading towards the gradual restoration of social peace, ushering in conditions for a gradual improvement of the macro-economic environment. However, the country s institutional capacity, especially to manage public finances, has been weakened. Thus, the Poverty Reduction and Growth Strategy Paper (PRGSP, extended to 2011), which is Government s reference framework for promoting good governance, has two priorities: (i) consolidate reforms engaged to modernize fiscal management; and (ii) help the provinces to tackle constraints that hamper local economic and financial governance, especially those linked to their weak capacity to mobilize local revenue and execute budgetary expenditure. The Public Finance Management Support Project (PAM-FP) amounting to UA 10 million falls within this context. The aim of PAM-FP is to contribute to improve economic and financial governance by strengthening tax administration in order to: (a) consolidate fiscal reforms initiated; and (b) strengthen local public finance governance in three provinces. Years of political instability in DR Congo weakened institutional capacity for economic and financial management in central Government departments and provincial services. This weak capacity compounded public finance governance problems and continues to impede the efficient implementation of the country s development strategy. These years of political instability also weakened revenue collection capacity, mostly in the provinces where the administrative infrastructure of devolved structures was either badly damaged, obsolete or virtually non-existent. It is essential for the country to address the challenges of economic and financial governance at both central and provincial levels, particularly those linked to inadequate capacity to mobilize domestic revenue and execute budgetary expenditure. However, the country s domestic resources are not commensurate with the scale of these challenges. This is where the support of technical and financial partners, especially the Bank, is important. The project area covers Kinshasa, the taxation centres of West Kasaï, East Kasaï and South Kivu Provinces as well as 8 combined taxation centres and lastly the Bas-Congo, Province Orientale and Maniema Provinces. The project s end beneficiaries are the population of the whole country, particularly those of directly targeted provinces. The latter will enjoy better living conditions made possible by macro-economic stability and more efficient budgetary management that prioritizes pro-poor expenditure. The key targeted intermediate beneficiaries are: (i) the devolved services of the Ministries of Budget and Finance; (ii) the private sector which will operate in a better environment as seen (among other things) in a rise in public procurements at provincial level and shorter payment deadlines, thanks to the computerized expenditure chain. Since resuming cooperation with DR Congo in 2002, the Bank has gained institutional experience in building public finance governance capacity in fragile States, which proved useful for this project. Moreover, the project activities are complementary with those of other partners. The Bank operates in three provinces that have not yet received assistance to set up a minimum public finance governance platform. The Bank s value added lies in the synergy of its operations, characterized by a combination of several instruments (reform support programme and institutional capacity-building) through PMR-RH approved by the Board in January 2011 and a reform support programme being finalized. The key knowledge built on this project relates to local governance in a post-conflict country with weak institutional capacity. Secondly, it concerns managing public finances at the provincial level in fragile States. iv

8 OUTPUT IMPACT 2 OUTCOMES Results-Based Logical Framework Country and Project Name : DEMOCRATIC REPUBLIC OF CONGO, PUBLIC FINANCE MODERNIZATION SUPPORT PROJECT (PAM-FP) Aim of Project : Contribute to accelerate economic growth and thereby reduce poverty. RESULTS CHAIN Indicators (including ISC) PERFORMANCE INDICATORS Baseline Case Target MEANS OF VERIFYING RISKS/ MITIGATIVE MEASURES Impact Improved capacity to mobilize domestic resources. Total revenue as a percentage of GDP % in % in 2015 Min Fin; IMF Report Risks - Socio-political risks: Insecurity and political instability. - The reversibility of Government s commitment to public service and decentralization reforms. Result 1 The tax administration s services are reorganized and domestic resource mobilization capacity improved. Total tax revenue as a percentage of GDP % in % in 2015 Reports of the General Directorate of Taxation/ Ministry of Finance (MDF). Reports of the Ministry of Budget and the Ministry of Finance. Mitigation Measures The country s commitment to continue consolidating peace and security. The commitment of TFPs to support the appeasement process and improve donor coordination and their support to the country, especially in terms of capacitybuilding - The continuation of economic and structural reforms and the IMF programme. -PAM-FP will be directly implemented by the Ministry of Finance, with a self-driven team thoroughly acquainted with Bank procedures. Procurements will be grouped into lots; annual procurement plans and monitoring arrangements will be designed, and the executing agency subjected to performance obligations. Result 2 The provincial administration has means to efficiently manage public finances. The share of State resources transferred to the provinces. Efficiency in public finance management in the three provinces (Maniema, Bas- Congo, and Orientale Province). 10% in 2010 Absence of procedures and adequate systems 20% in Systems and procedures are adequate in Component 1 Output 1.1 Capacity of taxation centres in five provinces improved 1.1Training of tax employees from five provinces in tax collection procedures, fiscal control, and audit techniques. 1.1 Number of employees trained 1.1 All employees of taxation centres in five provinces are trained before end Activity report of PAM-FP/ DGI Report. Output 1.2 Modernization of 8 combined taxation centres 1.2 Eight (8) combined taxation centres (CIS) modernized. 1.2 The 8 CISs identified are archaic. 1.2 The 8 CISs identified are rehabilitated and equipped before end Reports of the General Directorate of Taxation (DGI). v

9 Component 2 Output 2.1 Increase in local revenue 2.1 Local revenue of the three provinces increases 2.1 Average increase (three provinces) in local revenue 2.1 Average rate increases by at least 35% from 2011 to Report of the Ministry of Budget (MB). Output 2.2 Putting in place of the expenditure chain in the 3 provinces. 2.2 Expenditure chain improves 2.2 Average rate of expenditure passing through the expenditure chain 2.2 Average rate increases from 0% to 50% from 2011 to Activity Report of PAM-FP/MDB Output 2.3 Computerization of the payroll system in the three provinces 2.3 Payroll system is computerized in the three provinces. 2.3 Payroll system is manual in the three provinces. 2.3 Installation of a computerized payroll system before end Activity Report of PAM-FP/MDF Output 2.4 Adoption of an institutional framework in the three provinces. 2.4 Suitable legal and institutional framework put in place in the three provinces. 2.4 Absence of a suitable legal and institutional framework in the three provinces. 2.4 Putting in place of a suitable legal and institutional framework in the three provinces. 2.4 Report of the Ministry of Finance and COREF Output 2.5 Application of budgetary procedures. 2.5 Budgetary procedures manual applied 2.5 Ineffective budgetary procedures 2.5 Budgetary procedures manual implemented by end Activity Report of PAM-FP. Ministry of Budget (MB). Component Component 1: Support in reorganizing and modernizing tax administration. Arrange buildings to accommodate taxation centres in West Kasaï, East Kasaï, Maniema, South-Kivu and Orientale Provinces. Organize training sessions for employees in the Provinces: West Kasaï, East Kasaï, Maniema, South-Kivu and Orientale Provinces. Modernize 8 combined taxation centres. Support the operation of bodies tasked with steering and managing the reform in Kinshasa. Component 1: UA 2.65 million Component 2: Support in modernizing local public finance management in the three provinces Build capacity to manage the public finance reform at the central level (COREF) Put in place the Minimum Public Finance Platform in Orientale Province. Implement the Minimum Public Finance Platform in Bas Congo. Put in place the Minimum Public Finance Platform in Maniema Province. Component 2: UA 5.47 million Component 3: Project Management and Coordination Provide logistic support to the Project Implementation Unit and provincial PEAs to adequately implement project components Finance operating costs linked to implementation at the central and provincial levels Conduct project audits Prepare the completion report. Component 3: UA 1.88 million vi

10 PROJECT S TENTATIVE IMPLEMENTATION SCHEDULE Year Activities / Months J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Prior to start-up Board presentation Grant effectiveness Set up of the Project Ream Set up of the Project CPP Preparation, FSRC Users Manual Project launch mission Works Bid invitation-works Woks implementation Plan - Bas-Congo Works implementation-repere Works implementation- Orientale Works implementation DRPO Equipment and supplies Bid invitation - IT and office autom, equip, Software procurement Bid invitation -vehicules et motocycles Bid invitation - other equipments Goods delivery and start-up Consultants BD preparation and constit, of SLs Bid invitation appraisal and aword Consultancy services Set up of expenditure chain Set up of PTS Strengthening of financial services Steering of COREF Training and Miscl. Training Operating expenses Mid-term review Monitoring/evaluation Meeting of the steering committee Audit Annual audit accounts Final audit accounts vii

11 REPORT AND RECOMMENDATION OF BANK GROUP MANAGEMENT TO THE BOARD OF DIRECTORS CONCERNING THE AWARD OF A GRANT TO THE DEMOCRATIC REPUBLIC OF CONGO (DRC) FOR THE PUBLIC FINANCE MODERNIZATION SUPPORT PROJECT (PAM-FP). Management hereby submits this proposal to award an ADF grant of UA 10 million to the Democratic Republic of Congo (DRC) to finance the Public Finance Modernization Support Project (PAM-FP). This is an institutional support operation that will be executed over the period. PAM-FP is consistent with the country s development thrusts defined in the Poverty Reduction and Growth Strategy Paper (DSCRP) which was extended to 2011 and whose objective is to consolidate macro-economic stability and growth. The project is also consistent with the thrusts of the new PRGSP being finalized. Moreover, it is in line with the priorities of the Bank s Results-based Country Strategy Paper (RBCSP), which focuses on promoting good governance and pro-poor growth. I. STRATEGIC THRUSTS AND RATIONALE 1.1. Linkages between the Project and Country Strategy and Objectives PAM-FP is in line with the country s development thrusts as defined in the Poverty Reduction and Growth Strategy Paper (extended to 2011), which aims to consolidate macro-economic stability and growth. The National Poverty Reduction and Growth Strategy Paper (PRGSP) rests on five pillars: (i) promoting peace and good governance, including decentralization; (ii) consolidating macro-economic stability and promoting economic growth; (iii) improving access to social services; (iv) HIV/AIDS control; and (v) promoting the community dynamics. PAM-FP falls squarely in line with the first pillar of this strategy and is also consistent with the thrusts of the new PRGSP, being finalized, which will cover the period Furthermore, the project is consistent with the priorities listed in the Bank s Results-Based Country Strategy Paper (RBCSP) which lays emphasis on promoting good governance and pro-poor growth, especially under its Pillar I: Support to good governance based on building Government s capacity to formulate, implement and monitor macro-economic and sector policies, and make public finance management more transparent Rationale for Bank s Involvement The DRC is a fragile State. The havoc wreaked by several years of conflict weakened the administration s physical and functional capacity at the central and provincial level, thereby impeding the efficient implementation of Government s poverty reduction strategy. The Congolese authorities are working to normalize the situation and have made significant progress in this regard. However, much remains to be done to sustainably take the country out of its fragile situation since it continues to face daunting challenges. These include especially consolidating social peace, making the macro-economic framework more stable, speeding up growth to create jobs likely to address unemployment and improving the lives of the populations. To address these challenges, the Government plans to, among other things, focus on improving public finance management and the business climate with a view to promoting private investments. Despite progress made in public finance, serious 1

12 weaknesses persist in terms of efficient resource allocation and budget implementation. Poor control of the staff strength and the practice of global non nominative envelopes affect payroll consistency. Revenue protection is also still a major challenge due to many malfunctions compounded by the plethora of regulations and stakeholders and the institutional weaknesses of Government departments concerned. To remedy these weaknesses, the Government adopted a Strategic Public Finance Reform Plan in March The Bank s intervention falls within this context. It will adopt an integrated approach, characterized by a combination of instruments, namely: (i) a reform support programme; and (ii) an institutional building support project (PAM-FP) The Bank s intervention is an integrated response and a way to help the Government to tackle the above challenges, seen in the preparation of a reform support programme. The general objective of the programme is to contribute (through better economic and financial governance) to setting up conditions for accelerated, private sector-driven growth capable of creating jobs. It requires strengthening social inclusion through economic growth that can have an impact by reducing poverty and inequalities. The programme s key objectives are to contribute to: (i) strengthening public finance management and reducing the risk of corruption; and (ii) modernizing the legal and regulatory framework in order to improve the business climate and generate private investments capable of creating jobs. Through PAM-FP (an institutional support operation), the Bank will contribute to effectively implementing the reforms envisaged under the proposed reform support programme s first component, which is based on the Public Finance Reform Strategic Plan (PSRFP), and outlines Government s vision and objectives for public finance management as well as the key reforms it plans to implement in this regard Furthermore, Government decided as part of its implementation of the Public Finance Reforms Strategic Plan (PSRFP) adopted in March 2010 to put in place a harmonized public finance management minimum platform in all provinces with the support of TFPs. During a donor workshop in October 2010, emphasis, with regard to provincial public finance support, was on the need for operations to henceforth be guided by the concern to put in place the said minimum platform. The platform comprises four blocs namely: (i) constitution of provincial and local taxation; (ii) provincial expenditure management, which is sub-divided into three sub-blocs (support the establishment of the public expenditure chain in the provinces and in the Decentralized Territorial Entities (DTE), install a computerized provincial payroll and procurement procedure; (iii) planning, budgeting and monitoring/evaluation support, and lastly; (iv) establishment of a legal and regulatory framework in the provinces and DTEs. The Bank s intervention under PAM-FP will make it possible to continue the re-organization and modernization of the Tax Administration and set up the public finance minimum platform in Bas-Congo, Orientale and Maniema Provinces. These are the only three provinces not yet covered by the support of the other TFPs in the above areas. Thus, at Government s request and with the support of this PAM-FP, all the provinces will be fully covered, as shown in Table 1.1 below. The Reform and Public Finance Guidance Committee (COREF), which brings together representatives from the Ministries of Finances and Budget, and sixteen sector ministries especially the Ministry in charge of decentralization, is tasked with coordinating the introduction of the minimum public finance management platform in the provinces. 2

13 Table 1.1: TFP Operations in Public Finance Planning and Management in the Provinces 1 (Based on the Minimum Platform s Matrix of Activities Prepared in February 2011) TFP Provinces Covered Public Finance Management 3 Planning ( PRSP-PAP) World Bank 4 Katanga, Bandundu, South Kivu, West Kasaï* 5 UNDP 6 Equateur, North Kivu, East Kasaï 7 Katanga, North Kivu, South Kivu, Bandundu, Maniema, West Kasaï 8 European Union 9 Kinshasa, North Kivu. 10 Belgian Cooperation 11 Kinshasa 12 USAID 13 Maniema, East Kasaï, West Kasaï, Bandundu, Katanga, South Kivu 14 ADB 15 Bas-Congo, Oriental and Maniema Note: The intervention areas are the same for all TFPs since the objective is to implement the minimum platform. The Bank will support the three provinces not covered by other TFPs. The provincial distribution of coverage is based on the partners choice of action in agreement with the Government, depending on their operations in the country and the accessibility of the provinces. At the request of the Government and other TFPs, the Bank will cover Maniema, Bas-Congo and Orientale Provinces for a hitch-free rollout of the public finance minimum platform in the whole country. Since the matrix of activities under the minimum platform was only approved in February 2011, it is still too early to assess its implementation. Source: COREF (2010), TFPs commitments are detailed in Annex IV In 2003, Government launched the Tax System Modernization Programme consisting in: (i) re-organizing and modernizing the tax administration, by reconfiguring taxation services into three levels based on taxpayer turnover; (ii) revising laws and regulations, especially modifying the turnover tax ahead of the introduction of value added tax (VAT); (ii) improving tax management by putting in place a new tax identifier (NTI); (iii) modernizing customs procedures; (iv) introducing one-stop shops in some customs posts; and (v) computerizing customs offices. The tax system reform introduces a system whereby taxpayers are managed based on the tax stake and the principle of a single tax interlocutor. Thus, big taxpayers are managed by the Large Tax Unit (DGE) and medium taxpayers by Taxation Centres which must be established in every provincial headquarters, large urban centres and localities with high tax potential, to consolidate Government s capacity to mobilize domestic tax revenue. For their part, small businesses are managed by combined taxation centres (CIS) 2 which replace the former jurisdictional taxation services. In maintaining structural reforms under PAM-FP, the main need is to continue putting in place Taxation Centres in the provinces and modernizing 8 Combined Taxation Centres (CIS) Although the Constitution provides the formula for distributing tax revenue collected by the central Government, this provision is not yet effective 3. The main reason is that the State itself has serious cash-flow constraints stemming from the weak resource mobilization capacity of Government revenue services both at the level of the capital (Kinshasa) and devolved structures. This is seen in the country s total tax revenue which represented only 12.8% of GDP in 2010, (against the minimum level of 17% of GDP required for WAEMU countries). This explains why total transfers to the provinces are hardly up to 10% of national revenue instead of the expected 40% 4, showing that taxation centres in the provinces need strengthening See also Annex IV summarizing donor operations in this area. The Large Tax Unit (DGE) launched its activities since March 2003, while only two Taxation Centres are operational to date the first in Kinshasa since 2004 and the second in Lubumbashi since July This distribution should be as follows: 50% of national revenue remains at the central level, 40% is transferred to the provinces and 10% goes to the National Equalization Fund to finance provincial investments. However, this figure does not include education, health and agriculture staff salaries which the central Government continues to pay on behalf of the provinces. 3

14 1.2.6 The internal revenue of the provinces (derived mainly from land tax and income tax) is low due to the weak revenue-collection capacity of provincial structures. Provinces have set up their own revenue services to administer and grow their internal resources. Bas-Congo created a Provincial Revenue Supervision and Collection Service (REPERE), while Orientale set up the Provincial Revenue Directorate (DRPO). These structures not only collect revenue payable to the province but also supervise such revenue. This means that they monitor on behalf of the provincial government, all tasks executed by the devolved structures of State Revenue services. However, provincial financial services have scant resources to operate, which explains the low level of revenue they collect Public finance management is virtually non-existent or poorly known at local level where financing is mainly limited to the payment of civil servants salaries and capital expenditure is very marginal. The current public finance management system at provincial level is characterized by: (i) the absence of a suitable legal and institutional framework; (ii) inefficient budgetary procedures; (iii) absence of revenue collection procedures and structures; (iv) absence of a reliable and rational payroll system; and (v) absence of a computerized expenditure chain. All partners recognize that the installation of a results-based system for managing provincial and local public finances is a logical consequence of the financial autonomy vested in the Provinces and the Decentralized Territorial Entities in DR Congo, by virtue of Sections 3 and 171 of the 18 February 2006 Constitution. As a result, the Public Finance Modernization Support Project falls in this overall context and is complementary to a reform support programme Three factors explain why the Bank should step in now. The first is the need to support the implementation of both the Public Finance Reform Strategic Plan (PSRFP) adopted by Government in 2010 and Government s Programme to Modernize the Tax Administration and System. The second is helping to put in place the local public finance minimum platform aimed at strengthening financial governance at the provincial and local level. The third is PAM-FP s complementarity to the reform support programme. Through PAM-FP, the Bank will contribute to effectively implement reforms that are also under the reform support programme, especially the component related to the continued re-organization of the services of Tax Administration in the Democratic Republic of Congo Aid Coordination Aid coordination is important for a country like the DRC whose external assistance needs are immense in view of the challenges it has to tackle. This coordination is indispensable to create synergy and tap complementarities among development partners in order to help the country to efficiently meet these challenges. At the moment, aid coordination is through thematic consultative groups bringing together the public sector, civil society and TFPs. These groups meet regularly to monitor the implementation of reforms. Policy dialogue is conducted through the Country Assistance Framework, which brings together the heads of missions In line with the principles of the Paris Declaration, PAM-FP was developed and prepared closely with all partners, especially the EU and the World Bank. Furthermore, as part of the implementation of the Public Finance Reform Strategic Plan (PSRFP), the Government decided to put in place a harmonized public finance management minimum platform in all provinces with the support of TFPs. During the workshop that brought 4

15 together partners in October 2010, the need was emphasized for their interventions to be henceforth guided by the concern to put in place this minimum platform. PAM-FP (which is complementary to the interventions of the other TFPs) will cover the three remaining provinces, thereby contributing to implementing the minimum platform. Table 1.2 Aid Coordination: Governance Thematic Group and Stakeholders THEMATIC WORKING GROUP LEAD Security (Army and Police) 16 EDSEC & EDPOL 17 Justice and Human Rights 18 European Union 19 Local and Decentralized Governance 20 UNDP 21 Economic Governance and Public Finance 22 European Union 23 Elections and Parliament 24 UNDP 25 Business Climate and the Private Sector 26 French Development Agency (AFD) 27 Media and Culture 28 French Embassy 29 Statistics, Prospective Studies and Energy 30 ADB 31 Community Dynamics 32 Japan Source: Government (2011) Information collected during consultations with the other development partners was taken into account in defining project objectives and components. The targeted support is complementary to Bank interventions and those of key partners actively involved in economic and financial governance and local development, especially the World Bank, the UK Department for International Development (DFID), the UNDP, the European Union (EU), Belgian Cooperation, French Cooperation, German Cooperation (GTZ), the Canadian International Development Agency (CIDA) and Sweden. II. PROJECT DESCRIPTION 2.1. Project Objectives and Components The end objective of the project is to contribute to enhancing domestic resource mobilization capacity. The specific objective of the project is to continue the re-organization of the Tax Administration s services, better resource allocation and more efficient public finance management in three provinces Bas-Congo, Orientale and Maniema by putting in place the minimum local public finance platform. The project has two key components presented in the following table: 5

16 # Name of Component Support in reorganizing and modernizing tax administration Support in modernizing local public finance management in three provinces Project management and coordination Estimated Cost UA 2.65 M UA 5.47 M UA 1.88 M Table 2.1 Project Components Description of Components (i) Rehabilitation of buildings to accommodate 5 taxation centres under the authority of the Central Administration (West Kasaï, East Kasaï, Maniema, South-Kivu and Orientale Provinces). (ii) Training of employees in provinces: 5 taxation centres under the Central Administration (West Kasaï, East Kasaï, Maniema, South-Kivu and Orientale Provinces). (iii) Modernization of 8 combined taxation centres. (iv) Support in building the capacity of the Tax Reform Directorate. (i) Strengthening of COREF s capacity (ii) Putting in place of the minimum platform in Orientale Province. (iii) Implementation of the minimum public finance platform in Bas Congo. (iv) Putting in place of the minimum public finance platform in Maniema. (i) Support in project implementation (ii) Project audit. Detailed Project Description Component 1: Support in re-organizing and modernizing tax administration Key Challenge of Component 1: The main challenges confronting the tax administration are: (i) the need to provide these Government departments with material resources necessary for the effective implementation of institutional and organizational reforms. The havoc wreaked by several years of conflict in the DR Congo weakened the physical and functional capacity of central and provincial Government departments. The premises of most tax administration services are in dire need of rehabilitation or modernization; (ii) the need for urgent action to build internal resource mobilization capacity at the central level and in the devolved structures of financial services; and (iii) the need for a realistic programming and better coordination of the implementation of constitutional provisions governing the transfer of resources to the provinces and the establishment of provincial financial services. With tax revenue representing only 12.8% of GDP in 2010, resource mobilization was not commensurate with the significant economic growth recorded by the country. Responsible tax behaviour should be improved and revenue mobilization capacity strengthened particularly in the provinces, where administrative infrastructure of devolved structures is virtually absent or completely dilapidated. Government s Tax Administration Reform and Modernization Programme has two main thrusts, namely: (i) the reform of structures; and (ii) the reform of regulations. The reform of structures was concretized by the signing of Decree No. 017/2003 of 2 March 2003 to set up the General Directorate of Taxes, as amended and supplemented by Decree No. 04/099 of 30 December The reform of structures aims to re-organize the tax administration into: (i) strategic services tasked with guiding, coordinating and supervising (central Administration and urban/provincial directorates); and (ii) operational services responsible for the day-to-day management of taxes. The reform introduces a system whereby taxpayers are managed according to tax stakes based on the principle of single tax interlocutor. Thus, big taxpayers are managed by the Large 6

17 Tax Unit (DGE) and medium ones by taxation centres, which must be set up in provincial capitals, large urban centres and localities with a high tax potential. Lastly, small businesses are managed by combined taxation centres (CIS) which have replaced the former tax jurisdictions. The Large Tax Unit launched its activities in March. In contrast, only two taxation centres are operational to date the first in Kinshasa since 2004 and the second in Lubumbashi since July The reform of regulations comprises the following two thrusts: (i) tax procedures, regulations governing the tax status of small- and medium-sized enterprises; and (ii) indirect taxation. The first two thrusts of this reform were concretized by the enactment of Law No. 004/2003 of 13 March 2003: Reform of tax procedures, as amended and supplemented by Law No. 06/003 of 27 February 2006, and Law No. 06/004 of 27 February 2006 to lay down tax regulations governing the professional income levy and internal turnover tax of small- and medium-size enterprises. The indirect tax system is characterized by a cascading of the turnover tax, a very narrow tax base and a multitude of tax exemptions. The VAT Law and Customs Code were enacted in August 2010 by way of enabling powers. While VAT effectiveness is planned for January 2012, the new Customs Code has been in force since February The World Bank s Governance Capacity-Buiding Programme (PRCG) already covers initial training for all workers of the General Directorate of Taxes and in-depth training intended for employees who will be involved in VAT. These training sessions will be preceded by the training of trainers conducted by the International Monetary Fund (IMF). Component 1 Activities: In continuing the strengthening of structures begun in 2002, the support listed under PAM-FP mainly comprises setting up taxation centres in the provinces and modernizing some combined taxation centres (CIS). This mostly involves: (i) rehabilitating buildings accommodating taxation centres in West Kasaï, East Kasaï, Maniema, South Kivu and Orientale Provinces; (ii) strengthening the capacity of taxation department workers in the above five Provinces; (iii) modernizing 8 CISs; and (iv) supporting the operation of bodies that steer and manage the tax reform process. Key Expected Outcomes of Component 1: (i) The tax administration operates under better conditions; (ii) tax collection capacity is strengthened; and (iii) the internal resource mobilization capacity increases alongside an increase of tax revenue to 17% of GDP in

18 2.1.3 Component 2: Support in modernizing the management of local public finances in three provinces Key Component 2 Challenges: Generally, the provincial administration lacks internal resources for an orderly implementation of Government action. No decentralized administration per se exists as yet at the provincial and local level. The central government covers over 90% of the bills of State services in the current provinces. The new provinces and Decentralized Territorial Entities lack their own staff and property, and continue to use the staff and movable and immovable property of the central authority. The provincial government relies almost exclusively for its operation on the devolved services. Provincial revenue services have scant resources for their operation, which dims prospects for increasing the little resources they collect. Furthermore, the current system of public finance management at the provincial level is characterized by: (i) inefficient budgetary procedures; (ii) the absence of revenue collection procedures and structures; (iii) the absence of a reliable and rational payroll system; and (iv) the absence of a computerized expenditure chain. Component 2 Activities: This involves implementing the minimum public finance management platform at the provincial and local level by: (i) introducing a computerized expenditure chain in line with the provisions of the new expenditure procedures manual and connecting it to the central Government; (ii) installing a computerized payroll system; (iii) strengthening the capacity of provincial revenue services; (iv) further equipping provincial divisions of the Budget and the Public Service tasked with the expenditure chain and payroll computerization; and (v) strengthening the tax collection capacity of revenue services in the three provinces by: (a) procuring means of transportation to facilitate access to collection points and hence broaden the tax base; (b) computerizing the processing of tax files which is now done manually with the risk of delays, errors and fraud; (c) rehabilitating and equipping existing buildings to make them more functional; (d) opening revenue services in the other large towns; and lastly (e) training employees, especially tax inspectors and controllers, to fight tax evasion, under-taxation and fraud. Key Expected Outcomes of Component 2: The implementation of the local public finance management component will make it possible to address the following constraints: (i) poor coherence between public finance management at the central level and in the three provinces, and inadequate control of expenditure in the provinces; (ii) low revenue in the three provinces; (iii) the use of manual procedures to execute public expenditure; and (iv) lack of control of the payroll. 8

19 2.1.4 Component 3: Project Management and Coordination Managing and monitoring project implementation: The Project Implementation Unit (PIU) will manage and coordinate the project. To make it efficient, the project must provide the necessary equipment for the proper operation of its central structure and the provincial PIUs to be set up in the three provinces. In carrying out its mission, the Project Implementation Unit will work closely with COREF which, pursuant to its mandate, steers and coordinates the implementation of public finance reforms in the country, especially in the three provinces concerned by the project. Component 3 Activities consist in: (i) installing a computerized project accounts and financial management system based on an updated procedures manual; (ii) putting in place the project s monitoring/evaluation system; (iii) submitting regular technical and financial reports; (iv) regularly organizing and participating in project coordination meetings; and (v) conducting an annual audit of project accounts. Box 1: Role of COREF Aware of the importance of managing a reform, the Government made appropriate institutional arrangements in 2009, especially by setting up the Public Finance Reform Guidance Committee (COREF). COREF is responsible for impelling, facilitating, coordinating and monitoring the implementation of reforms, while the various ministries and bodies ensure the thorough preparation and daily implementation of reform components falling within their respective areas of jurisdiction. Besides, the Government included training, information and communication activities in this programme to limit the risk of misunderstandings and resistance that are inherent in reforms of such scope. COREF brings together representatives from the Ministries of Finance and Budget as well as sixteen sector ministries including the Ministry in charge of decentralization, tasked with putting in place the minimum public finance management platform in the provinces. 9

20 2.2. Technical Solutions Adopted and Alternatives Explored The technical solution adopted for this project was presented in paragraphs 2.1.1, and The country s RBCSP clearly identifies the main obstacles to poverty reduction in the DRC and proposes a set of coherent measures to revive growth and reduce poverty. The Strategic Public Finance Reform Plan (PSRFP) and Government s Tax Administration Reform and Modernization Programme were also clearly defined. However, their implementation might be impeded by weak national capacity. Therefore, it is imperative to strengthen institutional capacity in economic and financial governance. To support Government s reform efforts, the Bank resolved to provide support to Congo, through its integrated approach under this project and the reform support programme Project Type This project is an institutional support financed by an ADF grant. This type of intervention was chosen because of its relevance to implement capacity-building activities in provincial administrations with limited experience in project implementation. Since it is complementary to the proposed reform support programme, PAM-FP will also contribute to the effective implementation of reforms envisaged under the proposed reform support programme, especially the component having to do with continuing the reorganization of the Tax Administration in the DRC. The Bank s intervention is part of an integrated approach characterized by a combination of instruments, namely: (i) a reform support programme; and (ii) an institution building support project (PAM-FP) Project Cost and Financing Arrangement The total cost of the project, inclusive of taxes and customs duties, is estimated at UA 10 million, of which UA 6.78 million in foreign exchange (68%) and UA 3.21 million in local currency (32%). ADF will bear 100% of the project cost, inclusive of customs duties and taxes. Since the DRC is a fragile State, no counterpart contribution is required from the Government. This arrangement stems from the analysis of the country s financing parameters for cost sharing and payment of taxes and duties, the still fragile status of public finances, the country s low tax revenue level (about 12.8% of GDP) as well as the fact that project implementation will lead to additional loss of tax revenue since PAM-FP will be exempted from taxes and customs duties. These costs also include a 10% provision for physical contingencies and an 8% provision for price escalation per year. Below is a summary table of the project s total cost by project component: 10

21 COMPONENTS Table 2.2 Project Cost Estimate by Component [in UA thousand] Total Cost in USD Thousand Total Cost in UA Thousand % For. For. Exch. LC Total For. Exch. LC Total Exch. A. SUPPORT IN RE-ORGANIZING AND MODERNIZING THE TAX 3, ,737 2, ,42.2 2, % ADMINISTRATION B. SUPPORT IN MODERNIZING LOCAL PUBLIC FINANCE MANAGEMENT IN 5, , , , , , % THREE PROVINCES Strengthening capacity to manage public finance reform at the central level (COREF) % Support in improving public finance management in Orientale Province. 1, , , , % Support in improving public finance management in Bas Congo Province. 1, ,335 1, , % Support in improving public finance management in Maniema Province. 1, , , % C. MANAGEMENT AND COORDINATION ,729 2, , , % TOTAL BASE COST 8, , , ,738 2, , % Physical contingencies (10%) , % Price escalation (8%) , % PROJECT TOTAL COST 10, , , , , ,000 68% Note: The exchange rates used are indicated in the introduction of this report (page (i)) [UA 1 = USD ] The Bank s financing is UA 10 million, of which UA 6.78 million in foreign exchange and UA 3.21 million in local currency. Project costs by source of financing, expenditure category and expenditure schedule are presented in the following tables. SOURCE OF FINANCING Table 2.3 Project Cost Estimate [in UA Thousand] Total Cost in USD Thousand For. Exch. LC Total Total Cost in UA Thousand For. Exch. LC Total In % For. Exch. ADF 10, , , , , ,000 68% Total Project Cost 10, , , , , ,000 68% EXPENDITURE CATEGORIES Table 2.4 Project Cost by Expenditure Category [in UA Thousand] Total Cost in USD Thousand Total Cost in UA Thousand In % For. For. Exch. LC Total For. Exch. LC Total Exch. Works 3, , , % 25% Goods 3, , , , % 25% Services , , , % 14% Operation , , , , % 20% TOTAL BASE COSTS 8, , , , , , % 85% Physical contingencies , (10%) 68% 8% Price escalation (8%) , % 7% TOTAL PROJECT COST % Total 10, , , , , , % 100% 11

22 Table 2.5 Expenditure Schedule by Component [in UA Thousand] Total Cost in USD Thousand Total Cost in UA Thousand COMPONENT Total Total A. SUPPORT IN RE-ORGANIZING AND MODERNIZING THE TAX ADMINISTRATION 4, , , ,760.3 B. SUPPORT IN MODERNIZING LOCAL PUBLIC FINANCE MANAGEMENT IN THREE PROVINCES 5, , , , ,506.1 C. PROJECT MANAGEMENT AND COORDINATION 1, , ,733.8 TOTAL PROJECT COST 11, , , , , , , , Project Area and Beneficiaries Target Beneficiaries: The project area covers Kinshasa, the taxation centres of West Kasaï, East Kasaï and South Kivu, 8 combined taxation centres and lastly, Bas-Congo, Orientale and Maniema Provinces. Project end beneficiaries are the population of the whole country, especially those of provinces directly targeted. The latter will enjoy better living conditions enabled by macro-economic stability and more efficient budget management that prioritizes pro-poor expenditure. The key targeted intermediate beneficiaries are: (i) the devolved services of the Ministries of Budget and Finance; and (ii) the private sector, which will operate in a better environment reflected in more public procurements at provincial level and shorter payment deadlines - thanks to the computerized expenditure chain Participatory Approach for Project Identification, Design and Implementation Consultations were organized during the project identification and preparation phases, and involved discussions between the Bank and stakeholders. The stakeholders are the authorities of central ministries (Decentralization and Regional Development, Planning, Budget and Finances), officials of Bas Congo, Orientale and Maniema Provinces and the officers of COREF and the Decentralization Technical Support Unit (CTAD). These consultations with partners were continued during the appraisal mission through combined dialogue as part of the reform support programme s preparation process, jointly with the preparation of PAM-FP. Thus, the mission consulted beneficiary institutions on the project design. It met civil society organizations (CSOs), the association of women s organizations networks 5, the private sector 6 and TFPs. Their views (on accelerating the decentralization process, developing responsible tax behaviour and strengthening financial governance in the provinces) were considered during the design and formulation of project components. 5 6 CAFCO (Standing Consultative Framework on the Congolese Women) FEC (Federation of Businesses of Congo). 12

23 2.7. Bank Group Experience and Lessons Reflected in Project Design Lessons drawn: Since resuming cooperation with the country in 2002, the Bank has initiated a series of operations to build good governance capacity in the public sector. Although these operations were part of recent capacity-building projects (PAIM in 2002 and PARER in ), the Bank has no interventions yet dedicated to local governance in the DRC. The lessons drawn from PAIM implementation (detailed in Annex B1 of this appraisal report s technical annexes) were considered during the project design. These key lessons, based on the completion report, are a necessity for future operations. They include: (i) better targeting of beneficiary structures and enhanced coordination of capacity-building interventions; (ii) greater stakeholder participation; and (iii) appropriate measures to mitigate threats to the sustainability of project outputs Consideration of lessons: The above lessons were leveraged into the project design. As mentioned earlier, PAM-FP was prepared closely with bilateral and multilateral partners operating in the DRC. With regard to risk management, PAM-FP aims to strengthen public finance management systems as this will lessen the risk of corruption and poor management of public funds. Apart from measures intended to mitigate the identified governance (section 4.3) and other residual risks (section 4.5), Government s commitment to carry through reforms in central and provincial Government departments was underlined. Lastly, after project completion, the recurrent expenses of beneficiary structures, estimated at USD 1.7 million, could easily be defrayed by the expected increase in local revenue collected by provincial revenue services Key Performance Indicators The logical framework will be the basis of project monitoring/evaluation. The key indicators for monitoring project impacts over the period are: (i) the launching of tax administration re-organization; (ii) the strengthening of tax collection capacity; (iii) the average increase of the internal revenue of the three provinces; and (iv) the rate of execution of programmed expenditure passing through the computerized expenditure chain. III. PROJECT FEASIBILITY 3.1. Economic Benefit Being an institution building project, PAM-FP is not the kind of productive project that seeks immediate financial profitability and a return on investments. For that reason, the financial analysis usually done for projects will not apply to PAM-FP. Building institutional capacity does not generate cash-flow (expenditure and proceeds) that enables financial analysis. As a result, considering the project s specific nature and objectives, only an economic analysis will reflect the overall economic benefits generated by the project and how such benefits are distributed among beneficiaries The project aims to achieve outputs having medium- and long-term economic profitability. Thus, by building institutional capacity in tax administration, PAM-FP will directly contribute to mobilizing domestic resources and increasing public revenue from 7 PAIM: Multisector Institutional Support Project. PARER: Institutional Support Programme of the Economic Recovery and Reunification Support Projet. 13

24 12.8% of GDP in 2010 to 17% in The implementation of the PAM-FP component on local public finance management will allow for more efficient management of local public finances in the target provinces and hence help to rationally allocate resources and channel them optimally in the social sectors. Lastly, better tax and financial governance will contribute to reviving the private sector and business operators by reducing arrears and domestic debt Environmental and Social Impact Environment: Since the project has no negative impact on the environment, it was classified under environmental category III Climate Change: Project activities aimed at building human and institutional capacity have no negative impact on the environment and climate change Gender: Women account for about 3 to 4% of the staff strength of Government departments at the central and provincial level. They make up 52% of the population of Bas Congo Province, 51.1% in Orientale and about 51.3% in Maniema. Increasing the resource level and improving the quality of expenditure allocation will help to offer quality public health (lower infant mortality rate) and education (higher primary enrolment rate) to the population of targeted provinces, thereby contributing to improving the living conditions of women and girls. Provisions will be made in the project procedures manual to allocate 10% of slots under the training programme to women Social: As mentioned above, the project will have a positive impact on women and girls who represent a sizeable percentage of the poor. Efficient public spending, particularly in health and education, will help to improve progress towards achieving the Millennium Development Goals (MDGs). Lower infant mortality, higher primary enrolments and provision of other basic social services will contribute to reducing poverty in the three provinces. Lastly, positive impacts are expected from the execution of the project s own activities (recruitment of national consultants, on-site training, local procurement of goods and conduct of development works). These activities will have an impact on growth and income distribution Forceful Relocation: The project will not cause any population displacement. IV. IMPLEMENTATION 4.1. Implementation Arrangements Institutional Framework: The project is under the supervision of the Ministry of Finance the executing agency. The project implementation institutional framework will have the following structure: (i) at the central level, the FSF Implementation Unit designated as the Project Implementation Unit and a Steering Committee; and (ii) at the provincial level, three Provincial Project Implementation Units, which report to the Central Project Implementation Unit based in Kinshasa. Provincial units are the field organs of the Central Unit. The PIU will be directly under the Minister of Finance. 14

25 4.1.2 At the Central Level: PAM-FP will be implemented by the FSF Implementation Unit referred to as the Project Implementation Unit (PIU). The PIU will be the operational structure of project management. It will implement all project components and prepare periodic progress reports. It will be managed by a full-time Project Manager who will be the Bank s main interlocutor during monitoring and supervision missions. Before assuming duty, s/he will sign a performance contract with the Ministry of Finance, the terms and conditions of which must be approved beforehand by the Bank. In the day-to-day discharge of his/her duties, the Project Manager will be assisted by: (i) a procurement officer; (ii) an accountant or administrative and financial officer (AFO); (iii) an administrative assistant; (iv) a messenger; and (v) a driver. Training on Bank procurement and disbursement procedures will be given to the PIU. Evidence of the designation of the FSF implementation unit as Executing Agency of PAM-FP and designation of its members and focal points in every Directorate involved in the project to serve as interlocutor to PIU shall be a condition precedent to first disbursement To guarantee the efficient guidance and coordination of PAM-FP activities, a Project Steering Committee (PSC) will be set up to supervise and monitor project implementation. The PSC will validate the budgets and progress reports prepared by the PIU. PSC will comprise: (i) the Director of Cabinet of the Minister of Finance (or his/her representative), who will chair the Committee; (ii) one representative of the Minister of Budget; (iii) the Deputy Director of DGI or a representative of DGI; (iv) one representative of COREF, to oversee quality assurance and ensure that PAM-FP activities are consistent with the public finance reform strategy adopted by the Government; (v) one representative of the Ministry in charge of Decentralization; and (vi) one representative of CTAD. The PSC will take measures it deems necessary for a hitch-free implementation of the project components and will be contacted on any jurisdictional matter to ensure that project implementation is smoothly coordinated. The secretariat of PSC meetings will be managed by the Project Manager at the central level. The establishment of this structure shall be a condition precedent to first disbursement of the grant At the provincial level: A Provincial Project Implementation Unit (PPIU) will be set up in each province. The PPIU will be the operational structure for managing the project at the local level and will coordinate and implement all project activities as well as prepare periodic progress reports on project activities in the province for submission to the Project Implementation Unit (PIU) in Kinshasa. The project manager at the provincial level will be assisted by: (i) a procurement assistant to the project manager; (ii) an administrative and financial assistant who will report to the central accountant; and (iii) a driver. The PPIU will be trained in Bank procurement and disbursement procedures. Furthermore, focal points will be designated in every provincial Directorate involved in the project to serve as interlocutor at PPIU. Evidence of creating three PPIUs (Bas Congo, Maniema and Orientale Provinces) shall be a condition precedent to first disbursement Financial Management: Financial management will be pursuant to Bank guidelines and requirements, and undertaken by the PIU at the central and provincial level. In this regard, the central accountant or AFO will be responsible, with support from the administrative and financial management assistant at the provincial level, for keeping the project s financial and cost accounting based on standards in force, and for preparing periodic financial statements (quarterly and annual). A computerized accounting system will be put in place at project start-up. A project management expert/public accountant (financed by ADF resources) will support the PIU in setting up the financial management information 15

26 system. A consultancy firm will be recruited to prepare the administrative, financial and accounts procedures manual. Together with the recruited expert, the coordinator will put in place internal audit procedures for purchases/procurements, protection of capital assets and bank account transactions (see annex B4) Procurement Arrangements: Goods, works and services financed by ADF resources will be procured pursuant to Bank Rules and Procedures for Procurement of Goods and Works or Rules and Procedures for the Use of Consultants, as the case may be, using standard Bank bidding documents (BD). A Procurement Plan (PP) will be prepared by the country and submitted to the Bank, which will ensure that it complies with the grant protocol and its relevant Rules. The PP will be prepared for an initial period of 18 months and updated by the Donee every year or whenever necessary. Prior to its deployment, any proposal to review the PP must be approved by the Bank. Strengthened with a procurement specialist, the Project Implementation Unit (PIU) will be responsible for the procurement of goods, works and consultancy services as well as training sessions as detailed in Technical Annex B Disbursements: Disbursements will be made in line with the provisions of the Bank s disbursement manual. These will be by direct payment to suppliers and service providers or by deduction from the special project account. Provision has been made to open a special account in a local commercial bank acceptable to the Bank to receive part of the grant resources. Evidence of opening the special account shall be a condition precedent to first disbursement Audit Arrangements: Audits will be conducted annually by an external audit firm to be recruited on a competitive basis and in accordance with the Bank s standard terms of reference. Audits will follow IFAC s international ISA audit standards and Bank requirements. Financial statements audited by the independent audit firm will be forwarded to the Bank not later than six (6) months after the end of the fiscal year concerned Monitoring The project will be monitored by the Bank through sustained dialogue between the authorities and the Bank, especially through the Bank Field Office in the DRC (CDFO) and during half-yearly or quarterly supervision missions of PAM-FP, as the need arises. The physical implementation of the project is expected to cover 48 months from December 2011 to December This timeframe is deemed reasonable, considering the nature of capacitybuilding activities to be carried out, the action plan of public finance reforms and the time needed to set up the public finance management systems. The tentative milestones are presented in the following table: 16

27 Table 4.1 Monitoring Milestones and Feedback Loop Schedule Milestones Monitoring Activities / Feedback Loop Dec.-11 Board approval of the grant Notification to Government Dec-11 to Jan-12 Grant effectiveness Jan-12 Start-up mission Training of project officials Signing of grant agreement and fulfilment of conditions precedent to first disbursement Jan-12 NGA and NSA UNDB; national and regional newspapers Feb.-12 Feb.-12 April-12 May -12 June-12 Compliance with first disbursement conditions Start of first activities Design and launch of BDs Review of bids and award of contracts Execution of development works Opening of special account, creation and decision on members of PIU Design of working programme and formation of the Project Implementation Unit Design by beneficiary structures and the Project Implementation Unit Review by the Project Implementation Unit and approval by the authorities Performed by contractors, verified by the Project Implementation Units and focal points Implementation of other project activities Quarterly and annual progress reports Supervision missions and mid-term review mission (early 2011) 33 Mission reports Annual project audits 34 Audit reports Dec-15 Project completion Completion report 4.3. Governance Project implementation might encounter governance problems (fraud, corruption) mainly at the procurement and financial management level. The procurement-related risk will be mitigated by the following provisions: Bank oversight over the procurement process through its non-objection opinion on bidding documents and contracts and through project supervision and procurement audits. For financial governance, see paragraphs and for the adequate provisions made for financial management and audit. 4.4 Sustainability Country commitment and ownership of project and policy justifying support: As indicated in Section 1 of this report, the project is in line with the RBCSP extended to 2011 and the preliminary thrusts of the PRGSP being validated. As earlier mentioned, the project was the subject of a financing request from the Government. Beneficiary institutions took an active part in project preparation and appraisal. Project activities fall squarely in line with the economic and financial reforms supported, among others, by the IMF s Extended Credit Facility (ECF), implemented satisfactorily overall Apart from measures to mitigate identified governance (Section 4.3) and residual risks (Section 4.5), Government s commitment to carry through public administration reforms at the central and provincial level was underlined. This mitigates the risk that the project will not be the only action to strengthen the three provincial administrations. During project implementation, computer hardware and other logistic materials will be procured and their maintenance will generate recurrent expenses. Such expenditure will be financed by the project and incorporated in the beneficiary structures recurrent budget at the end of the project. 17

28 4.4.3 At the end of the project, the beneficiary structures recurrent expenditure, estimated at USD 1.7 million, could easily be covered by the provincial governments with: (i) an expected increase in local revenue collected by provincial revenue services; (ii) the passing and implementation of the Finance Law in 2012, which will endow provinces with more resources by transferring 40% of national revenue to the provinces; (iii) an improvement in the country s financial situation after reaching the HIPCI completion point and benefiting from debt relief; and (iv) better control of public expenditure at the provincial level Risk Management Arrangements were made to tackle the risk of poor governance (fraud, corruption) especially in the procurement process, financial management and disbursement conditions. The risk of reversibility of Government s commitment to reforms and political instability will be mitigated respectively by: (i) sustaining and continuing the programme supported by the IMF s Extended Credit Facility (ECF); and (ii) consolidating national reconciliation. Table 4.2 Risks and Mitigative Measures Identified Risks Risk Rating Mitigative Measures Reversibility of Government s commitment to reforms Weak The country s commitment to continue and deepen structural reforms and the determination of TFPs to continue supporting the country in carrying out reforms (especially under the IMF stabilization programme) will cushion the impact of potential exogenous shocks. Security and political instability Late implementation of project activities Weak Average The resolve of all political forces in the country to continue working to consolidate social peace. The commitment of the international community and the country s partners to support the peace-building and national reconciliation process. In this regard, the United Nations Organization (UNO) Security Council decided in July 2011 to extend the mandate of UN peacekeepers in order to secure the elections. PAM-FP will be directly implemented by the Ministry of Finance, with a motivated teams acquainted with Bank procedures. Procurements will be grouped in lots. Annual procurement plans and monitoring arrangements will be designed. The executing agency will be governed by performance obligations. 4.6 Knowledge Building The type of knowledge expected to emerge from implementing this project includes good practices in budget alignment and public finance management at the provincial level in fragile States. These practices will be disseminated within Government departments through documents produced, procedures manuals and training sessions to be organized as part of the project. The knowledge will be acquired through the following means: progress reports prepared by the executing agency, project supervision, mid-term and completion reports and the Department s working and discussion papers. This knowledge and lessons learned will be disseminated through seminars and OPEV reports. 18

29 V. LEGAL FRAMEWORK 5.1 Legal Instrument The financing instrument proposed is a UA 10 million grant to the Democratic Republic of Congo. 5.2 Conditions Associated with Bank Intervention A. Condition for Grant Effectiveness Effectiveness of the Grant Agreement shall comply with the provisions of Section of the General Conditions Applicable to Protocol Agreements on Grants awarded by the African Development Fund. B. Conditions Precedent to First Disbursement Apart from effectiveness of the grant agreement, the ADF will only proceed with the first disbursement if the Donee fulfils the following conditions to ADF s satisfaction: Provide evidence of setting up the central PIU and designating its members and focal points in each Directorate involved in the project to serve as interlocutor at the PIU (par ); Provide evidence of setting up the project steering committee (PSC) and designating its members (par ); Provide evidence of setting up three PIUs at the provincial level: Bas-Congo, Maniema and Orientale Provinces (par ); Provide evidence of opening the special account in a commercial bank into which the ADF grant resources will be lodged (par ) Compliance with Bank Policies This project complies with applicable Bank policies, especially those regarding project financial management, procurements, disbursement and eligibility of expenditure to Bank financing. No waiver is recommended. VI. RECOMMENDATION Management hereby recommends that the Board of Directors approve the proposed ADF grant of UA 10 million to the Democratic Republic of Congo for the purpose and under the conditions stated in this report. 19

30 Annex I Country s Comparative Socio-economic Indicators Congo (DRC) COMPARATIVE SOCIO-ECONOMIC INDICATORS Year Develo- Develo- Congo Africa ping ped (DRC) Countrie Countrie Basic Indicators Area ( '000 Km²) Total Population (millions) , ,732 1,123 Urban Population (% of Total) Population Density (per Km²) GNI per Capita (US $) Labor Force Participation - Total (%) Labor Force Participation - Female (%) Gender -Related Dev elopment Index Value Human Develop. Index (Rank among 187 countries) n.a n.a n.a Popul. Liv ing Below $ 1 a Day (% of Population) Demographic Indicators Population Growth Rate - Total (%) Population Growth Rate - Urban (%) Population < 15 y ears (%) Population >= 65 y ears (%) Dependency Ratio (%) Sex Ratio (per 100 female) Female Population y ears (% of total population) Life Ex pectancy at Birth - Total (y ears) Life Ex pectancy at Birth - Female (y ears) Crude Birth Rate (per 1,000) Crude Death Rate (per 1,000) Infant Mortality Rate (per 1,000) Child Mortality Rate (per 1,000) Total Fertility Rate (per woman) Maternal Mortality Rate (per 100,000) Women Using Contraception (%) GNI per capita US $ Cong o (DRC) Africa Population Growth Rate (%) Congo (DRC) Africa Health & Nutrition Indicators Phy sicians (per 100,000 people) Nurses (per 100,000 people)* Births attended by Trained Health Personnel (%) Access to Safe Water (% of Population) Access to Health Serv ices (% of Population) Access to Sanitation (% of Population) Percent. of Adults (aged 15-49) Liv ing w ith HIV/AIDS Incidence of Tuberculosis (per 100,000) Child Immunization Against Tuberculosis (%) Child Immunization Against Measles (%) Underw eight Children (% of children under 5 y ears) Daily Calorie Supply per Capita Public Ex penditure on Health (as % of GDP) Education Indicators Gross Enrolment Ratio (%) Primary School - Total Primary School - Female Secondary School - Total Secondary School - Female Primary School Female Teaching Staff (% of Total) Adult literacy Rate - Total (%) Adult literacy Rate - Male (%) Adult literacy Rate - Female (%) Percentage of GDP Spent on Education Environmental Indicators Land Use (Arable Land as % of Total Land Area) Annual Rate of Deforestation (%) Annual Rate of Reforestation (%) Per Capita CO2 Emissions (metric tons) Life Expectancy at Birth (years) Infant Mortality Rate ( Per 1000 ) Cong o (DRC) 2008 Cong o (DRC) Africa Africa Sources : ADB Statistics Department Databases; World Bank: World Development Indicators; last update : UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports. Note : n.a. : Not Applicable ; : Data Not Available. October 2011

31 Annex II Project/Sector Table of ADB Portfolio in the Democratic Republic of Congo as on 4/10/10 Amount (in USD Million) Percentage Key Dates Commitment Disbursed Disbursed Approval Signature Closing Agricultural Sector Rehabilitation Support Project in Bas Congo and Bandundu Provinces /05/04 25/5/04 31/03/12 7 (PARSAR) Agricultural Sector Rehabilitation Support Project in Katanga and the East and West Kasaï /12/05 2/2/06 31/01/ Provinces (PRESAR) Agricultural Sector Study (ESA) /06/06 11/10/06 30/06/11 5 Agriculture Rehabilitation of the Nsele-Lufimi and Kwango- Kenge roads /12/05 29/12/05 31/12/11 6 Air Security Project (PPSA) /09/10 2/11/10 31/12/ Project to Rehabilitate and Strengthen the INGA Hydro-electricity Power Plants and the Kinshasa /12/07 10/4/08 31/12/ Network (PMEDE) Rural and Peri-urban Electrification Project (PEPUR) /12/10 10/03/11 31/12/ Drinking Water Supply and Sanitation Project in Semi-urban Areas (PEASU) /6/27 9/8/07 31/12/12 4 Infrastructures Support to Health Development Master Plan in Orientale Province (PAPDDS) /03/04 25/05/04 31/03/12 7 Socio-economic Re-integration Support (PARSEC) /07/07 9/8/07 30/06/11 4 Social Revitalization/Modernization of Human Resources (PRM-RH) /01/11 4/05/11 31/12/ Multi-sector 20-0 Total Age (year)

32 Map of Project Area Annex III

33 Summary Table of Donor Interventions Annex IV Donors Projects/Activities Status Objective Implemeta -tion Period UNDP UNCDF DFID Support to Decentralisation and Local Development Programme to Support Local Decentralisation (PADDL) Census of workers without EPSP in DRC Programme to Support Decentralisation and Local Development (PADDL) Programme to Support Decentralisation and Local Development (PADDL) Promotion of Ethical Values and Corruption Control Projects to Build Capacity and Governance (PRCG) On-going On-going On-going On-going On-going On-going On-going Support to set up a decentralisation strategy Local participatory planning; public finance management; capacity building of provincial assemblies Promotion of ethics and good conduct Local participatory planning; public finance management; capacity building of provincial assemblies Local participatory planning; public finance management; capacity building of provincial assemblies Promotion of ethical values; Strengthening of the accounting chain Regional economic planning; Results-based public finance management Automatic payroll and staffing management Project Amount 2010 USD USD USD USD USD World Bank Support to Identification of Civil Servants, ESPC Workers and Cartography Support to FP Management (with EU, USAID and Sweden) Project to Support Rejuvenation in the Civil Service (PARFOP) Future Control of 2/3 of the staff Appraisal ongoing Future Future Support to public finance management in Maniema and the two Kasai Payment of retirement entitlements Validation of the sector organic framework Establishment of the Pension Fund Performance-based reward system Appraisal ongoing Appraisal ongoing Belgian Cooperation Tschopo PAIDECO On-going Rehabilitation of public buildings PAIDECO BBK On-going Rehabilitation of public buildings Project to Support DRC s On-going Institution building in 5 Legislative System Provincial provincial assemblies Assemblies Component Training of deputies and EUR EUR

34 South Africa Sud European Union staff Training of deputies and staff Census Completed Technical support; strengthening of census workers Administrative Governance On-going Support to institution building in 3 provinces Rehabilitation and equipment of administrative buildings Building the capacity of magistrates, criminal police Economic Governance On-going Improve public finance management Prepare the PSRFP and PAP Institution building; External and internal control EUR EUR IMFI Financing of Government s Economic and Financial Programme On-going Vote and application of the finance law Computerised payroll management (PTS) KFW Peace Consolidation Fund Administrative and social infrastructure in five provinces CIDA France USAID Francophonie Italy Support to the National Decentralisation Forum Support to Public Finance Management Support to the Decentralisation Strategy Support to the Establishment of the Decentralisation Legal Framework Decentralisation Support Project (Tuscany Region) Completed Completed On-going Completed On-going Consultation to define a strategy for implementing the decentralisation Set up computerised payroll (PTI) Strengthen public finance management capacity Train outreach workers for the CSMOD sensitisation and social communication Production of compendium of legal texts on the decentralisation Build the capacity of deputies and provincial ministers of North Kivu and Orientale provinces as well as the administrative staff of the Ministry of Decentralisation USD CAD EUR USD August

35 OUTCOME OF NEGOTIATIONS Negotiations between the Congolese delegation and the African Development Bank relating to the proposed operation to finance the Public Finance Modernization Support Project took place in November 4, 2011 by videoconference in the Temporary Relocation Agency in Tunis and the Office of the Resident Mission of the Bank CDFO in Kinshasa. These negotiations have been concluded to the satisfaction of the Congolese authorities and the Bank. All documents necessary for the presentation of the project to the Board (final drafts of the Memorandum of Grant Agreement, the Disbursement Letter and Minutes of the negotiations) have been reviewed and approved by both parties.

36 CORRIGENDUM The table below replaces Annex II of the Appraisal Report. AfDB Portfolio in the Democratic Republic of Congo as of 31/03/2012 Project Title Approval Date Effectiveness Date Closing Date Approved amount (mill. UA) Amount disbursed (mill. UA) % disb. National Operations Projet de mobilisation des ressources de l administration publique (PMR-RH) Multi-sector 21-jan mai dec ,00 1,65 8,25 Water and Sanitation Programme d AEPA en milieu rural (PEASU) 06-juin avril juil ,00 26,86 38,37 Projet d appui au PDDS en province orientale (PAPDDS) Projet d appui à la réinsertion socio-économique (PARSEC) Projet d appui à la réhabilitation du secteur agricole (PARSAR) Projet de réhabilitation du secteur agricole et rural dans 3 provinces (PRESAR) Projet d appui au développement des infrastructures rurales (PADIR) 17-mars Social 16-mars dec ,00 12,96 51,84 24-juil août juin ,00 4,18 27,87 Agriculture 19-mai fev mars ,00 24,74 98,96 12-dec fec jan ,00 29,78 85,09 10-nev jan dec ,46 0,00 0,00 Transport Projet de réhabilitation de la route Nsele-Lufi 19-dec dec dec ,45 43,76 83,44 Projet prioritaire de sécurité aérienne 27-sept nov dec ,60 11,05 12,47 Projet de réhabilitation hydroélectrique (PMEDE) Energy 18-dec avril dec ,70 4,48 12,55 Projet d électrification péri-urbaine rural (PEPR) 15-dec mars dec ,69 0,00 0,00 TOTAL 485,51 159,94 33,23 Private Sector Operations Appui à ADVANS BANK 04-fev avril mai ,61 0,48 78,69 Multinationales Operations Agriculture Programme d aménagement du Lac Tanganyika 17-nov nov dec ,79 2,24 32,99 Energy Interconnexions réseaux électriques NELSAP 27-nov mai dec ,62 0,00 0,00 Etudes INGA et interconnexions associées 30-avril août dec ,15 4,96 54,21 TOTAL 43,56 7,20 16,53