PROJECT: INSTITUTIONAL SUPPORT FOR THE INTEGRATED PUBLIC FINANCIAL MANAGEMENT REFORM PROJECT (IPFMRP)

Transcription

1 AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND PROJECT: INSTITUTIONAL SUPPORT FOR THE INTEGRATED PUBLIC FINANCIAL MANAGEMENT REFORM PROJECT (IPFMRP) COUNTRY: LIBERIA PROJECT APPRAISAL REPORT Date: June 2012 Team Leader: Kalayu Gebre-selassie, Principal Governance Expert, OSGE.1 Appraisal Team Team Members: Jonathan Nyamukapa, Regional Financial Management Coordinator, ORPF.2/GHFO Mosetsanagape Mabe-Koofhethile, Principal Procurement Specialist, ORPF.1/LRFO Brenda Aluoch, Principal Legal Counsel, GECL.1 Sarah Holloway, Consultant Sector Manager: Jean-Luc Bernasconi, OSGE.1 Sector Director: Isaac Lobe Ndoumbe, OSGE Regional Director: Franck Perrault, ORWB Resident Representative: Margaret Kilo, LRFO Peer Reviewers Eshetu Legesse, Chief Financial Management Specialist (ORPF.2); Basil Jones, Principal Institutional Development Specialist (OSFU); Adam Amoumoun, Principal Governance Officer (OSGE.2); Achraf Tarsim, Senior Macro Economist (OSGE.1); Wiseman Vwala-Zikhole, Principal Disbursement Officer, (FFCO.3); Alain Pierre Mbonampeka, Country Program Officer (LRFO); Ismaila Ceesay, Lead PFM Specialist and Cluster Leader (World Bank); and Tammy Palmer, Economic Governance Officer (USAID)

2 Table of Contents Currency Equivalents... ii Fiscal Year... ii Acronyms and Abbreviations... ii Loan Information...iii Project Summary... iv Results Based Logical Framework... v Project Timeframe... vii I STRATEGIC THRUST & RATIONALE Project linkages with country strategy and objectives Rationale for Bank s involvement Donors coordination... 4 II PROJECT DESCRIPTION Project design and components Technical solution retained and other alternatives explored Project type Project cost and financing arrangements Project s target area and population Participatory process for project identification, design and implementation Bank Group experience, lessons reflected in project design Key performance indicators III PROJECT FEASIBILITY Economic and financial performance Environmental and Social impacts IV IMPLEMENTATION Implementation arrangements Monitoring Governance Sustainability Risk management Knowledge building V LEGAL INSTRUMENTS AND AUTHORITY Legal instrument Conditions associated with Bank s intervention Compliance with Bank Policies VI RECOMMENDATION Appendix I. Comparative Socio-Economic Indicators Appendix II. Summary of ADB Portfolio in Liberia Appendix III. Map of Liberia Appendix IV. Summary of Public Expenditure and Financial Accountability (PEFA) 2012 Appendix V. Analytic Work and Underpinnings

3 LIST OF TABLES Table 1 Donor coordination in Liberia Table 2.1 Project components Table 2.2 Comparison of funding modalities Table 2.3a Project cost estimates by component and subcomponent Table 2.3b Sources of financing Table 2.3c Project cost by category of expenditure by component and subcomponent Table 2.3d Expenditure schedule by year Table 2.4 Lessons learned from previous operation and other analytical reports Table 3 Implementation schedule i

4 Currency Equivalents As of 16th April 2012 UA 1 = Liberian Dollars UA 1 = US Dollars Fiscal Year 1 st July 30 th June ADF AfDB ASYCUDA CAG CoA CPAR CPPR EGCSP FSF GAC GOL HRMIS IFMIS IMF IPFMRP IPSAS ISP JAS LBO MDAs MDTF MOF MOU MFF MTEF NSAs PCR PEFA PEMFAR PFM PFMU PIU PRS RCU SIDA SIGTAS SOE TA UA USAID WB Acronyms and Abbreviations African Development Fund African Development Bank Automated System for Customs Data Comptroller and Accountant General Chart of Accounts Country Procurement Assessment Review Country Portfolio Performance Review Economic Governance and Competitiveness Support Program Fragile State Facility General Auditing Commission Government of Liberia Human Resources Management Information System Integrated Financial Management Information System International Monetary Fund Integrated Public Financial Management Reform Project International Public Sector Accounting Standards Institutional Support Project Joint Assistance Strategy Legislative Budget Office Ministries, Departments and Agencies Multi-Donor Trust Fund Ministry of Finance Memorandum of Understanding Macro Fiscal Framework Medium Term Expenditure Framework Non State Actors Project Completion Report Public Expenditure and Financial Accountability Public Expenditure Management and Financial Accountability Review Public Financial Management Public Financial Management Unit Project Implementation Unit Poverty Reduction Strategy Reform Coordination Unit Swedish International Development Agency Standard Integrated Tax Administration System State Owned Enterprise Technical Assistance Unit of Account United States Agency for International Development World Bank ii

5 Client s information BORROWER: EXECUTING AGENCY: Loan Information Government of Liberia Ministry of Finance Financing plan Source Amount (UA) Instrument FSF 3 million Grant IDA 3.2 million Credit MDTF 12.4 million Grant Government Nil In kind TOTAL COST 18.6 million Grant and Credit Timeframe - Main Milestones (expected) Preparation February 2012 Concept Note approval March 2012 Appraisal April 2012 Project approval July 2012 Effectiveness August 2012 Mid-term Review June 2014 Completion June 2016 Last Disbursement December 2016 iii

6 Paragraph Project Overview Needs Assessment Bank s Added Value Knowledge Management Project Summary Topics covered Project name: Integrated Public Financial Management Reform Project (IPFMRP) Expected Outputs: Government public financial management (PFM) capacity strengthened; capacity of accountability and integrity institutions strengthened; the quality and effectiveness of internal and external audit strengthened; and revenue mobilization and administration capacity improved. Implementation timeframe: Project cost: UA 3.0 million (this represents the AfDB share of total program costs) Project direct beneficiaries: The IPFMRP will strengthen the capacity of key institutions involved in PFM including the Ministry of Finance (MOF), the General Auditing Commission (GAC), Ministries and Agencies, State-Owned Enterprises (SOE), the Legislature/Legislative Budget Office (LBO), and non-state actors (NSAs). Innovation and best practice: This project represents an innovative approach for the Bank by proposing a pooled funding arrangement to support a comprehensive government program for PFM reform. This is an important step for the Bank in embracing its commitment to agreements such as the Paris Declaration and to the principles of effective engagement in fragile states. A comprehensive Public Financial Management Reform Strategy anchored in the country s Poverty Reduction Strategy (PRS) was formally approved by the Government, through the PFM Steering Committee in December The strategy seeks to widen and strengthen the foundations for PFM through concrete improvements in selected systems, in a manner that would enable Liberia to gradually develop its own institutional, organizational, and human resource capacities in the medium term. The government, in partnership with development partners, has implemented a wide range of PFM reforms covering aspects of policy, legislation, institutional arrangements and PFM systems. However, recent assessments including the 2012 PEFA identified a range of weaknesses. It is essential that the Bank continues to support and consolidate the gains that have been attained in PFM. The proposed operation will build on the previous Bank supported reform and capacity building efforts and complement other development partners projects. The Bank added value derives from a number of factors: (i) experience gained in implementing one Institutional Support Project (ISP) and two policy-based operations whose lessons have been fed into the design of this project; (ii) the Bank s experience in public sector governance in fragile states will serve as a guide for implementation of this program; and (iii) the Bank s field presence will contribute to improved policy dialogue on the ongoing PFM reforms and portfolio management. The Bank also has the capacity to strengthen its interventions in Liberia through a blend of aid instruments: budget support, technical assistance and capacity building, economic and sector work, and leveraging resources from regional operations and initiatives (e.g. the WAMZ payment system development project). The proposed operation will contribute to knowledge building in the area of PFM in fragile states. Knowledge will be acquired through skills and knowledge transfer from long and short term advisors and training providers to local counterparts and institutions, supplemented by regional courses and study visits, development of technical manuals and on the job support. The Bank will capture and disseminate knowledge and experience through sharing the findings of regular supervision missions, progress reports, PEFA report and the Project Completion Report. Lessons learned and experience gained will therefore be available to inform future operations. iv

7 OUTPUTS OUTCOME IMPACT VII. Results Based Logical Framework Country and Program Name: Liberia: Institutional Support Project for Integrated Public Financial Management Reform Project Purpose of the program: Improved budget coverage, fiscal policy management, financial control, and oversight of government finances RESULTS CHAIN Indicator (including CSI) PERFORMANCE INDICATORS Baseline Target MEANS OF VERIFICATI ON RISKS/MITIGATION MEASURES Impact: Improved PFM performance leading to effective and efficient use of public resources as a basis for macroeconomic stability and improved delivery of public services Outcome: Improved fiscal discipline, and efficiency and effectiveness of public expenditure Output 1: Enhanced Budget Planning, and Credibility Output 2: Improved Budget Execution, Accounting and Reporting Output 3: Improved Revenue administration capacity a. Percentage of government budget spent on priority sectors 1 b. Corruption perception index c. CPIA rating Aggregate expenditure and revenue outurns compared with original approved budget Effectiveness in collection of tax Effectivess of payroll control and internal audit Quality and timeliness of in-year budget reports and annual financial statements Effectiveness of external and legislative scrutiny of external audit report Transition to medium term and policy based budgeting a. IFMIS fully operational b. GOL producing fully IPSAS compliant financial statements (FS) a. Coverage of ASYCUDA++ b. Revenue Authority fully established a. Pro-poor spending 60% (2010) b. CPI score 3.2 (2011) c. CPIA score 3.72 (2011) Baseline 2012 PI-1, & PI-3 score D PI-15 score D+ PI-18, & PI-21 score D+ PI-24, & PI-25 score D/D+ PI-27 & PI-28 score D/D+ Single year, line item budgets a. IFMIS rolled out at MOF b. No IPSAS compliant FS a. 1 port has ASYCUDA++ b. Draft Revenue Authority bill a. Pro-poor spending upheld at 65% by 2016 b. 3.7 (2016) c. 4.0 (2016) Target 2016 All the selected PEFA scores improved to B/B+ MTEF based budget prepared for 2014 a. IFMIS rolled out to all MDAs by 2015 b. IPSAS compliant Financial statements prepared within 3 months of year end by 2016 b. ASYCUDA ++ operational in all ports by 2015 b. Liberia Revenue Authority established by 2013 PEFA report Transparency International report CPIA- AfDB MOF report MOF reports PFM progress reports & Supervision Mission reports PFM progress reports & Supervision mission reports Risk # 1: Macroeconomic risk: Liberia s vulnerability to macroeconomic shocks due to its dependence on imported food and fuel as well as on primary exports and foreign direct investment. Mitigation measures: Continued implementation of fiscal and monetary policy supported by IMF program, AfDB budget support operations and policy dialogue will help to monitor and mitigate risks. Risk # 2: Implementation capacity constraints: Weak institutional and human resources capacity could cause delays or hamper implementation Mitigation measures: This proposed support is based on a recent and realistic assessment of implementation capacity in general and a clearly sequenced PFM Reform Strategy. The program will provide additional project management capacity. Risk #3 Fiduciary Risks: Government has made notable progress in PFM, but there are still weaknesses in the fiduciary control environment. Mitigation measures: Government has put in place a PFM Act, and a PFM Reform Strategy that present a broadly credible program for improvement, supported by technical assistance from the Bank and other donors. Implementation of the Bank s operation, fiduciary assessments and audit requirements will 1 The priority sectors for support are health, education, governance and private sector development/economic growth v

8 KEY ACTIVITIES Output 4: Improved budget transparency and accountability Output 5: Improved project management and PFM capacity building ACTIVITIES a. Number of operational internal audit units and committees b. Scope of External audit coverage across GOL c. Legislative Budget Office effectively supporting oversight Number of staff with recognized PFM qualification. a. 1 Internal Audit Unit in the MOF b. Not all MDAs audited and 2 years of audit backlog c. 3 months delays in budget approval 30 qualified PFM graduates a. Internal audit Units & Committees established in 50% of Ministries and Agencies by b. Full external audit reports published, and no audit backlog by 2015 c. Budget approved by July qualified staff (of which 22 female) in procurement, financial management and audit by % of women professionals in PFM benefitted from the training and capacity building activities Technical assistance in all technical areas outlined above Short term training and professional development programs for PFM staff Establishment of partnership and service delivery arrangements with local training providers and regional institutions Purchase of IT equipment & production of technical, guidance and training manuals Renovation of essential buildings and facilities PFM progress reports, Audit Reports and Supervision mission reports PFM progress reports and Supervision mission report INPUTS provide specific safeguards. Risk 4: Corruption: Many aspects of political and governance arrangements undermine good governance. Weak internal controls and limited procurement and PFM capacity increase the risk of conflict of interest, bribery, and patronage. Mitigation measures: include: on-going efforts to strengthen the Liberia Anticorruption Commission, the Public Procurement and Concessions Commission, the deployment of 16 competent auditors to high spending entities, and the enacting of the 2009 PFM Act and the 2010 Freedom of Information Act. Risks in PFM are mitigated by internal controls in IT-based PFM systems, the strengthening of the internal and external audit functions, and undertaking procurement compliance audit. ADF/FSF : UA 3 million Other donors: UA million (WB, SIDA and USAID) Implementation support supervision missions Note: This logframe is based on the overall IPFMRP. The AfBD project outlined in this document will co-finance the project. vi

9 Project Timeframe YEARS 2012/ / / /16 Action by Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ACTVITIES Project life cycle Grant approval Effectiveness Launching workshop Joint supervision and monitoring Mid-term review Disbursement of funds Submission of annual audit reports AfDB Project completion report All Components General Procurement Notice published Procurement of goods, and technical assistances Provision of training Submission of progress reports PEFA Updates AfDB GOL AfDB & GOL AfDB AfDB AfDB GOL AfDB GOL GOL GOL GOL GOL GOL vii

10 REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARDS OF DIRECTORS ON A PROPOSED GRANT TO LIBERIA FOR AN INSTITUTIONAL SUPPORT FOR THE INTEGRATED PUBLIC FINANCIAL MANAGEMENT REFORM PROJECT Management submits the following Report and Recommendation on a proposed grant for UA 3.0 million from the Fragile State Facility for ADF-12 to finance the Institutional Support for the Integrated Public Financial Management Reform Project (IPFMRP). I STRATEGIC THRUST & RATIONALE 1.1. Project linkages with country strategy and objectives The proposed operation is firmly anchored in the objective and structure of the country s second Poverty Reduction Strategy (PRS, ), known as Agenda for Transformation through Action, in particular Pillar IV - Governance and Public Institutions, which recognizes the fact that sound public financial management is crucial to achieve the overarching goal and long-term national vision, Liberia RISING The strategy will guide development activities in Liberia and focuses on key investments in infrastructure, people and institutions. The rationale for the proposed operation is also aligned to the government led Public Financial Management Reform Strategy and Action Plan ( ). The Strategy provides a comprehensive framework on which to base further development assistance to ensure that the interventions are coordinated, and aligned with Government of Liberia s (GOL) priorities The proposed operation is consistent with the Joint Assistance Strategy (JAS) (extended to December 2012) priorities, and contributes towards: Pillar I Rebuilding core state functions and institutions and Outcome 1 improving efficiency of budget preparation and execution and enhanced revenue administration. It is also consistent with the Bank s Medium Term Strategy and its Governance Strategic Direction and Action Plan (GAP, ) which promotes support to building capable and responsive states by strengthening transparency and accountability in the management of public resources. The project is in line with the ADF-12 operational priorities and the Strategy for Enhanced Engagement in Fragile States, all of which emphasise promoting good financial and economic governance through the deepening of PFM reform and capacity building. It also proposes an innovative approach to engagement in a fragile state by supporting a pooled funding arrangement within a comprehensive, government led reform program, in line with the Bank s commitment to the Paris Declaration Rationale for Bank s involvement Developing and sustaining human capital remains a great challenge. The prolonged conflict had a devastating effect on the human capital of Liberia, with many of the most qualified and experienced persons leaving the country. It is evident that the key institutions of government are critically short of the necessary skilled and qualified professionals to give the basis for strong and effective government. A human resource training needs analysis funded by the Bank 2 under the first Institutional Support Project (ISP) has identified critical skill gaps in public finance. Much has been done to support human capacity building efforts under previous reform projects, but this is a medium term undertaking, and sustained support for this work is still required. A capacity building implementation framework is developed to support directly Liberia s PFM reform and capacity buiding strategy. The program plans to contribute towards developing organizational and human capacity in Liberia. 2 Training Need Assessment and Staff Training Plan prepared by FJP Development and Management Consultants (2011) 1

11 1.2.2 Notwithstanding the difficulties mentioned above, the government, in partnership with multilateral and bilateral development partners, has implemented a wide range of PFM reforms covering aspects of policy, legislation, and institutional arrangements and systems. There have been improvements in the quality of Liberia s fiscal institutions and the GOL has made steady progress in PFM reforms over the past few years, (including adoption of a PFM Act, launch of an Integrated Financial Management Information System (IFMIS) in MOF, signficant organisational restructuring in MOF, adoption of an internal audit strategy and achievement of HIPC completion point), showing that the government is firmly committed to governance reform over the medium to long term. These reforms have sought to restore working conditions of PFM systems and to initiate their modernization to enable Government to better implement its poverty reduction and development strategies. The proposed operation will enable the Bank to remain engaged, and consolidate PFM reform in Liberia The project will build on the achievement of the Bank s first ISP 3, and consolidate the Bank s support to Liberia s PFM Reform Strategy and Action Plan. Since the launch of the first ISP, commendable progress has been registered in a number of areas, including: (i) Country PFM systems have been significantly strengthened; (ii) project management processes are improving, and (iii) there are plans to use theifmis for all government expenditure regardless of source of funds. However, there is no doubt that many challenges remain, primarily in continuing the process of capacity development and strengthening PFM on a sustainable basis. The Project Completion Report (PCR) of the first ISP noted that in order to sustain reform and build on the gains from the previous projects, Bank support to PFM reform needs to continue its support in line with Good Practice 4 in supporting PFM. The program will provide support in the same technical areas of PFM reform as the previous operation in order to provide continuity in the reform process and consolidate earlier gains The proposed operation also complements the ongoing policy-based operation, the Economic Governance and Competitiveness Support Program (EGCSP, ) 5. The EGCSP supports institutional reform in the areas of customs administration, business enabling environment, financial transparency and accountability, and extractive industry governance. The proposed operation complements the EGCSP through building the capacity of key institutions including Internal Audit, General Audit Commission (GAC), Legislative Budget Office (LBO) and Non-State Actors (NSAs) to enhance external oversight and accountability which is critical for the delivery of the reform program under the EGCSP. 3 Institutional Support Project for Governance, Economic Management, and Poverty Reduction Approved by the Board of Directors on 27 th October 2006, Ref. ADF/BD/WP/2006/97 4 Includes support to: (i) a country-led PFM reform strategy and action plan; (ii) a more coordinated approach; and (iii) a shared information pool with a framework for measuring results. 5 Approved by the Board of Directors on 21 st June 2011, Ref: ADF/BD/WP/2011/59. 2

12 1.2.5 The proposed operation has been guided by various analytical and diagnostic reports as well as consultations during the project preparation and appraisal missions. The analytical underpinning for the design of the operation is provided by the 2008 Public Expenditure Management and Financial Accountability Review (PEMFAR), the draft 2012 Public Expenditure and Financial Accountability Asssessment (PEFA), the annual PFM reform progress reports, the IMF technical assessment report, the USAID PFM assessment report, OPEV Evaluation Report (Joint PFM Evaluation and Bank s Assistance to Fragile States), OECD Report on International Engagement in Fragile States (2011), the JAS mid-term Review and Country Portfolio Assessment (2010), and the PCR for ISP I. The main conclusions and recommendations are summarised in Technical Annex B1. 3

13 1.2.6 Recent PFM performance assessments and analytical reports identified a range of weaknesses in Liberia s PFM systems, which are the basis to design and prioritise interventions under this project. The key challenges are summarized in Box. The IPFMRP has been designed to ensure that all of the key challenges are addressed through the various project components The operation will help intensify and sustain reform efforts in Liberia. To realize the gains that have occurred and to address the weakness and challenges in PFM, the Liberian authorities, along with development partners have adopted a comprehensive PFM Reform Strategy. The strategy seeks to widen and strengthen the foundation of public financial management through concrete improvements in selected systems, in a manner that would enable Liberia to gradually develop its own institutional, organizational, and human resource capacities in the medium term. The proposed operation will contribute to effective implementation of the strategy and addresses the identified weaknesses in the PFM systems Donors coordination Donor support to Liberia is coordinated by the Ministry of Finance. A significant number of development partners currently provide assistance to Liberia. Aid flows to Liberia are channelled through four modalities: Budget Support, Pooled Funding, Liberia Reconstruction Trust Fund, and Project Support. GOL is committed to improving the effectiveness of aid, by moving from project financing to coordinated donor financing through a much clearer institutional arrangement for aid coordination and integration of donor funds into the GOL budget. In this regard a draft aid policy was developed in September 2011 with the aim of improving effectiveness of aid and providing guidance on mobilisation of high quality aid, and mechanisms for dialogue, and mutual accountability There is now a strong basis for improved donor coordination for PFM reform. Support from development partners to PFM reform process has, until recently, been provided through bilateral initiatives which resulted in problems with coordination, funding gaps and overlapping of donor support for certain reform activities. The recent joint evaluation of PFM reform in Africa (OPEV 2011), identified the urgent need to move to more harmonized and coordinated donor support to PFM reform. The evaluation of Fragile State Facility (OPEV, 2012) also recommends investing in existing donor coordination and promote more concerted, harmonised and coordinated international efforts. GOL has developed the framework for this to happen through the Reform Coordination Unit (RCU). The adoption of the PFM Reform Strategy, and the associated IPFMRP as well as the PFM Operational Manual have markedly improved the framework for donor coordination in Liberia The Ministry of Finance requested donors to harmonize and align their support to IPFMRP. Two key donors (USAID and SIDA) have entered into a World Bank Trust Fund arrangement to support IPFMRP, and the AfDB is expected to co-finance the program through a pooled funding arrangement. The contributions of the various partners are shown in Table 2.2b. A partnership and cooperation agreement is being developed to better coordinate support to the IPFMRP. Complementarity between the development partners will be achieved through the PFM Working Group, and common implementation arrangements. This project proposes an innovative approach for the Bank by using a pooled funding arrangement, whereby individual donor funds are not specifically ring-fenced to support any particular project component. This is an important step for the Bank in embracing its commitment to the Paris Declaration and the principles of effective engagement in fragile states. 4

14 II PROJECT DESCRIPTION 2.1. Project design and components Project objectives: The overarching goal of the project is Improved budget coverage, fiscal policy management, financial control, and oversight of government finances in Liberia. Through strengthened institutional capacity for the delivery of effective PFM and oversight, the government will be able to expand and deepen the scope of reforms to reduce corruption, improve service delivery, and thereby reduce poverty Project Components: The project supports has five components which are mutually reinforcing: (i) enhancing budget planning and credibility, (ii) strengthening budget execution, accounting and reporting; (iii) strengthening revenue administration; (iv) enhancing transparency and accountability; and (v) project management and capacity building. The major activities under each component are summarized in Table 2.1 below. Components Component 1: Enhancing Budget Planning, and Credibility Component 2: Strengthening Budget Execution, Accounting and Reporting Component 3: Strengthening Revenue Administration Component 4: Enhancing Transparency and Accountability Component 5: Project Management and capacity building Table 2.1 : Project components Component description Training in macroeconomic modeling, financial programming and revenue forecasting Technical support to the medium-term expenditure framework (MTEF) Support for strengthening planning and budget preparation processes Technical support in establishing a fiscal monitoring framework for SOEs Provision of computers, and accessories and vehicles. Technical support to continue strengthening the PFM legal framework Technical support for the roll-out of the Free Balance-based budget preparation, execution, and fiscal reporting modules of the IFMIS Support to build capacity in implementing guidelines for producing IPSAS Cash Standard financial statements Design of the budgeting, accounting, and reporting tools within IFMIS Training the staff of the Public Financial Management Unit (PFMU) in the CAG Accounting Services Unit on the implementation of project accounting, and establishing County Treasuries Training on customs administration Technical Assistance (TA) for implementation of Single Integrated Tax Administration System (SIGTAS) roll-out and training Establishment of a Revenue Authority Procurement of hardware and related software TA support, training and provision of essential equipment to strengthen the Public Procurement and Concessions Commission TA support for establishing the Internal Audit Governance Board and Secretariat, and internal audit operational tools and manuals Training of internal auditors across MDAs Short-term training and certification for GAC staff/external auditors Provision of logistical support to facilitate the work of the LBO and the legislative committees Training and seminars on budget analysis for LBO Provision of grants to NSAs to build their capacity in the analysis and monitoring of budget preparation, approval, and execution In-service and specialized training programs in PFM, and procurement Hiring an international procurement specialist to build procurement capacity Design of a career path for PFM staff and associated training Support to monitor, evaluate, and review progress on all components The IPFMRP is based directly on the stated objectives and priorities of GOL as expressed in the medium term PFM Reform Strategy. The approach has been designed to cover all the main elements of the PFM framework, in some cases, to complete on-going reforms (e.g. the full implementation and roll out of the IFMIS) and in other cases to build capacity in critical functions, such as internal and external audit. The main activities of the program are focused on 5

15 building stronger PFM systems and capacity building and transfer of knowledge through (i) technical assistance to train staff in their respective areas with key counterpart staff identified; (ii) on the job training; (iii) local, regional and limited overseas training focused on a few key areas which are essential for the development of high level technical qualifications and strong analytical skills; (iv) provision of essential equipment and facilities and (v) professional development programs in the PFM Training School The project directly addresses the identified weaknesses in the PFM systems in a coordinated and properly phased approach. The project design includes specific activities to address the problems and challenges identified in the PEMFAR and PEFA reports. Further consideration of the specific weaknesses being addressed and the challenges in each of the project components is summarised in Technical Annex B Technical solution retained and other alternatives explored During AfDB project preparation and appraisal, several options were explored regarding the areas of intervention, the number of institutions/beneficiaries to support, and the modality of the capacity building to be provided. In terms of the project implementation approach and types of support to be provided, taking into account the lessons learned and recommendations from various analytical reports as well as the PCR for ISP I, it was agreed that in order to realize the gains that have occurred from the previous Bank projects, Bank intervention would need to continue to focus on institutional capacity building with a greater focus on: (a) ensuring sustainability and improved coordination with other development partners, and (b) strengthening the supply and demand side of governance. This will require strengthening the PFM institutions (e.g. key departments in the MOF), and accountability institutions such as external audit, the Legislature, and support to the civil society and social accountability initiative In terms of the funding modality, previous ISP support has been provided through standalone, bi-lateral operations in specific areas of the PFM reform agenda. However, it is clear that operating in this way, the Bank and other development partners were creating excessive and distracting burdens on GOL as a direct unintended consequence of increasing levels of donor assistance. The Project Implementation Unit (PIU) used for the first ISP had only three projects at the time the ISP was launched but by the end of the project, the Unit was providing administrative and financial management support to 53 projects with a combined value of over US$ 500 million. Due to donor requirements, all these projects were being provided with financial management and procurement support outside government systems. In an environment where capacity is weak, this was a huge distraction to the efforts of the small numbers of staff with financial management expertise from the essential function of good PFM. In view of this, the proposed operation has adopted a common implementation arrangement including use of the existing Reform Coordination Unit in the MOF as opposed to a parallel PIU to minimise transaction costs and improve development effectiveness To attempt to minimise the burden of having a large number of individual projects, GOL developed the comprehensive PFM Reform Strategy and requested donors to provide support on a harmonised basis into a single reform project. The World Bank, USAID, SIDA, and AfDB have led the way in the development of a multi-donor support program to the IPFMRP, on which this proposed operation is based. Two key donors (USAID and SIDA) have already entered into a World Bank Trust Fund arrangement to support IPFMRP. Consistent with the Bank s commitment to provide a coordinated and harmonised donor support to PFM reform, the proposed operation will co-finance the IPFMRP through a pooled funding arrangement. The relative advantages and disadvantages of different funding modalities are summarised in Table 2.2 below. 6

16 Table 2.2 Comparison of funding modalities MODALITY ADVANTAGES DISADVANTAGES Option 1 High degree of control and Will create significant administrative Stand alone Grant accountability for funds provided burdens for the GOL funds direct to GOL May lead to weakened coordination and via a Special Account synergy within the overall reform Option 2 Pooled funding arrangement aligned with Trust Fund Will use tried and tested disbursement, supervision, financial management and procurement processes Totally in line with current good donor practice Substantially reduced administrative burden on GOL Will provide greater assurance to GOL that key parts of the PFM reform program will be funded Supports effective coordination of the reform program and common approaches to implementation Would still provide a high level of control over the use of project funds program Not in line with current good practice in donor harmonization and maximizing aid effectiveness in fragile states Somewhat reduced level of direct control over targeting and accountability for use of funds although AfDB would be a key player in the joint donor group The proposed operation adopts a comprehensive approach to capacity building that would enhance the state building agenda through promoting the use of of country systems and strengthening state and non-state actors. The project promotes the use of country systems, in particular migration of donor funded projects into the GOL budget, and a single reform agenda with clear performance targets to mitigate the risk that external assistance can do harm. As one of the largest donors in Liberia and a signatory to the Paris Declaration, it is recommended that AfDB enter into this pooled funding arrangement. Such an arrangement will provide GOL with the assurance that it has the funds to pursue what is a comprehensive and challenging PFM reform agenda (thereby maximising the benefit of the AfDB investment). It will also enable GOL to allocate funds in line with their own needs and priorities, rather than being driven by development partner priorities. This approach, whilst innovative for the Bank is consistent with the Banks endorsement of the Paris Declaration, the recommendations of recent OPEV evaluations and OECD report on aid effectiveness in fragile states. A Memorandum of Understanding (MOU) is being developed to coordinate support to PFM reform in Liberia (Technical Annex C2) Project type This is an innovative institutional support project in terms of effectively implementing the Bank s commitment to development effectiveness. Innovation comes from the proposed funding modality, which will provide funds through a pooled funding arrangement. This approach has not been used by the Bank before, so we have drawn on the extensive experience of our co-financiers in ensuring that project design, governance and reporting arrangements will provide sufficient safeguards to support effective use of the Bank s financial contribution. This type of operation was selected in order to provide a coordinated support to country-led PFM reform and capacity building program and consolidate gains from earlier Bank support. The proposed operation is entirely complementary to, and based upon support being provided by other donors in pursuit of the objectives set out in the GOL medium term PFM Reform Strategy It will deliver improved capacity and institutional development through a range of interventions including the provision of specialist technical assistance, basic and specialised training in PFM and procurement, support to development of new working systems and procedures, use of Information Technology (IT) to strengthen public financial governance, and twining arrangements with and experience 7

17 sharing visits to peer institutions in the region. A capacity building implementation framework has been developed to guide and coordinate all interventions under this project Project cost and financing arrangements The total cost of the whole IPFMRP (including taxes and duties) is estimated at UA million. A price contingency of 5% and physical contingencies of 3% have been factored into the project cost. Details of the full project cost are presented in the Technical Annex B The Bank will finance 16.1% or UA 3 million of the project cost using the Fragile State Facility, and the remaining 84% or UA million will be financed by the World Bank, USAID, and SIDA. The Government will not be required to provide any financial contribution but will be responsible for the provision of office accommodation and associated utilities. Annex C1 provides justification of request for waiver of counterpart contribution and finance taxes and duties associated with the project implementation in line with the Bank s Policy on Eligible Expenditures The estimated project cost by component and subcomponents, source of finance, category and schedule of expenditures are summarised in Tables 2.3a, b, c, and d below. Table 2.3a: Project cost estimates by component and subcomponent Component (US$ 000) (UA 000) 1. Enhancing Budget Planning, Coverage and Credibility 1.1 Macro-Fiscal Framework Fiscal Reporting and Fiscal Policy Review Enhanced Budget Frameworks 1, Subtotal Component 1 1,838 1, Strengthening Budget Execution, Accounting and Reporting 2.1 Revision of PFM Legal Framework IFMIS Roll Out to MDAs 8,220 5, Strengthening Financial Standards, Accounting and Reporting Treasury/Cash, Debt and Aid Management Establishment of County Treasuries Donor Project FM Integration into Country Systems Subtotal Component 2 10,258 6, Strengthening Revenue Administration 3.1 Capacity Building of Customs Operations Tax Automation (SIGTAS) 4,218 2, Establishment of Revenue Authority Subtotal Component 3 5,378 3, Enhancing Transparency and Accountability 4.1 Public Procurement Internal Audit 1,555 1, External Audit 3,235 2, Legislative Oversight Civil Society and Social Accountability Subtotal Component 4 6,233 4, Project Management and capacity building 5.1 Program Coordination Institutional and Capacity Building 3,165 2, Monitoring and Evaluation and Change Management Project Fiduciary/Audit Subtotal Component 5 4,844 3,159 TOTAL PROGRAM COSTS 28,550 18,620 Note: Exchange Rates 1UA= USD 8

18 Table 2.3b: Sources of financing Sources of Financing Total (US$ 000) Total (UA 000) Percentage ADF Grant 4, % World Bank 5, % SIDA 15, % USAID 3, % Total 28, % Table 2.2c: Project cost by category of expenditure Category of Expenditure Total (US$ 000) Total (UA 000) Percentage % A. Works 1, % B. Goods 8, % C. Services 12, % D. Operating cost 5, % TOTAL PROGRAM COSTS 28,550 18, % *All figures includes price and physical contingencies Table 2.3d: Project Expenditure Schedule Components UA 000 US$ 000 Total 2012/ / / /16 Total 2012/ / / /16 US$ Enhancing Budget Planning, Coverage and Credibility 1.1 Macro-Fiscal Framework Fiscal Reporting and Fiscal Policy Review Enhanced Budget Frameworks Subtotal Component Strengthening Budget Execution, Accounting and Reporting 2.1 Revision of PFM Legal Framework IFMIS Roll Out to MDA Strengthening Financial Standards, Accounting and Reporting 2.4 Treasury/Cash, Debt and Aid Management Establishment of County Treasuries Donor Project FM Integration into Country Systems Subtotal Component Strengthening Revenue Administration 3.1 Customs Operations Tax Automation Revenue Authority Subtotal Component Enhancing Transparency and Accountability 4.1 Public Procurement Internal Audit External Audit Legislative Oversight Civil Society and Social Accountability Subtotal Component Project Management 5.1 Program Coordination Institutional Capacity Building Monitoring & Evaluation and Change Management Project Fiduciary/ Audit Subtotal Component Total Program Cost *All figures includes price and physical contingencies 9

19 2.5. Project s target area and population The beneficiaries will include: the, Comptroller and Accountant General s Department, Revenue Departments, Budget Department, PFM Reform Coordination Unit, Aid Management Unit, Debt Management Unit, and Macro-Fiscal Unit, the General Auditing Commission, Internal Audit Secretariat, the Ways and Means Committee, the Legislative Budget Office and the Public Accounts Committee, State Owned Enterprises, and the Public Procurement and Concessions Commission. Minstries and Agencies, Non-state Actors and CSOs will also be key stakeholders and beneficiaries of the reforms supported under the program Participatory process for project identification, design and implementation The preparation and appraisal missions held discussions with high level officials and potential beneficiaries. Discussions were also held with other key development partners to ensure consistency and coordination with other development initiatives. The proposed operation is based on the Government s medium term PFM Reform Strategy and action plan which was prepared through a broad participatory process, which involved consultation with a range of actors including Ministries and Agencies, civil society organizations, parliamentary committees and development partners. To contribute to better donor coordination, the Bank s missions were timed to coincide with the World Bank appraisal mission in November 2011, and PEFA mission in April During implementation, the institutional mechanisms and project activities (such as the work with non-state actors and the support for the Legislature) provide opportunities to share progress and lessons with a wider audience and seek feedback on results. The GOL has demonstrated their high level of support for this project through their commitment to coordinate and implement a multi-donor support program to the IPFMRP Bank group experience, lessons reflected in project design The performance of the Bank Group portfolio in Liberia is broadly satisfactory. Currently there are ten (10) on-going operations in the Bank Group portfolio in Liberia (including the multinational WAMZ project) with a total approved amount of UA million 6. The average project size is UA 11.2 million, the average age is two years and three months with a cumulative average disbursement rate of 29%. The delay between approval and effectiveness of first disbursement is 11 months and 10 days. In May 2012, the country s portfolio performance showed an overall rating of 2.53%, Implementation Progress rating of 2.61 and Development Objective rating of The establishment of the Liberia Field Office continues to enhance dialogue and improve the quality of portfolio management and donor coordination The Bank s support under the previous ISP was generally regarded as effective. The Bank has approved one ISP in the area of governance. This project The Institutional Support Project for Economic Management and Good Governance (ISP I) was in response to the urgent need to rebuild key institutions of governance after the end of the civil war. Despite significant delays in project implementation, project overall performance was strong. Evidence from thepcr shows the project made tangible contributions to increasing capacity and developing sustainable foundations for further strengthening of PFM systems and performance. It has helped to address critical skill gaps and improve the performance of PFM functions in macroeconomic and fiscal analysis, revenue administration, and timely budget preparation and execution. A summary of the major achievements and lessons learned from the previous operation is attached in Technical Annex B1. 6 Infrastructure (mainly Water and Sanitation) accounts for 25%, Multi-sector (32%), Social Sector (19%), Agriculture (15%), multinational (5%), and Private Sector (4%). 10

20 2.7.3 The design of this proposed project has benefitted from the experience and lessons from the previous operation, review of numerous analytical reports 7, and discussions with the development partners. The lessons learned are summarized in Table 2.3 below. It also takes into account lessons learned from Bank experience in similar PFM and ISP projects in other countries. Analysis of Bank experience is outlined in Technical Annex B1 and serves to add strength to the messages summarised below. Table 2.4: Lessons learned from previous operation and other analytical reports Lessons learned Actions taken to integrate lessons into the project Low levels of in-country capacity had a negative This project will be directly based on the GOL) PFM impact on implementation, and serious attention reform strategy and action plan which includes detailed should be given to the design and staffing of the work plans taking account of both technical and human structures established to coordinate and manage resource requirements and limitations. New arrangements PFM reforms have recently been established including a central Reform Coordination Unit staffed with high level technical expertise. Project design also provides funding for a The importance of strong coordination arrangements for PFM reform: Fragmented donor interventions and project management requirements have placed a huge burden on extremely scarce GOL resources and diverted very limited PFM expertise to servicing donor requirements as opposed to leading the reform agenda. It is widely acknowledged that future support to GOL should be provided in a way that harmonizes and coordinates all interventions and allows GOL to focus PFM resources on reforms and internal needs, rather than meeting donor requirements. Scope of Bank supervision and measuring results - the focus of supervision is compliance with procurement, disbursement timetables and Bank conditions. There is a limited focus on the measurement of results. The current piecemeal approach to capacity development and separate donor funding and reporting arrangements creates unacceptable administrative burdens on limited PFM capacity in fragile states (OECD, 2011) The joint evaluation of African PFM reforms identified what factors institutional and contextual contribute to successful PFM reform and how donors can best support PFM reform given the influence of contextual factors on the process of change. One of the key messages is that donors should align support as closely as possible to the Government programme and avoid pursuing independent initiatives. Externally financed support to PFM reform was most efficient and effective, when it directly financed, or supported through technical assistance, and interventions identified explicitly within the Government PFM reform program. procurement expert. This ISP will contribute to a multi-donor support program to the PFM Reform Strategy and action plan. There is broad consensus on reform priorities as well as mechanisms to improve donor coordination. A detailed Operational Manual and cooperation framework has been developed to improve coherence and coordination among donors and between the PFM donor group and GOL. This will greatly reduce the reporting and project management burden on government. The Liberia Field Office will enhance further country dialogue and donor coordination. The RCU will be providing regular progress reports against the indicators and targets. A common result measurement framework and implementation support supervision mission has been developed to reduce the administrative burden on GOL and make reporting against performance and results much more comprehensive and streamlined. This proposed operation will provide joint funding to a multi-donor, integrated and coordinated PFM reform program in which every attempt has been made to minimise the burden of multiple reporting and monitoring arrangements and reduces the risk of uncoordinated interventions.. This program is directly aligned with the GOL PRS and the integrated PFM Reform Strategy. It is designed around the needs and priorities identified by GOL through an extensive, review, consultation and planning exercise. As one of the largest donors in Liberia and a signatory to the Paris Declaration, the proposed operation will be delivered through a pooled funding arrangement. 7 This includes: (a) the AfDB Portfolio Performance Review, March 2011, (b) the ISP I project completion report, November 2011, (c) joint evaluation of PFM reform, 2011, and (d) the OECD report on International Engagement in Fragile States,

21 Evaluation of the Bank s Assistance to Fragiles States recommended that the Bank should practice and promote more concerted, harmonised and coordinated international efforts. It should also invest more effort in existing donor coordination framework (OPEV, 2012) PFM reform programmes should attend to the basics, build on existing systems, sequence the approach, and aim for simplicity: Pre-packaged reform programmes should be avoided as interventions need to be adapted to existing capacities, however weak they may be. The proposed operation has adopted a coordinated approach to support a country-led PFM reform agenda.. The Bank has made efforts to promote a coordinated and harmonised implementation and management arrangement building on the existing partnership framework with development partners in Liberia. The operation builds on reform efforts that have been achieved so far and on ongoing interventions in a sequenced and phased manner, consistent with the newly designed PFM Reform Strategy document, to avoid reform overload. 8 This is necessary particularly in the light of low capacity within the civil service Key performance indicators The key performance indicators are set out in the Results based logframe. The achievement of the program s overall development objectives will be measured by the following key outcome indicators, based around the PEFA assessment framework: (i) Budget, credibility, coverage and policy-based budgeting: Improved aggregate expenditure outturn compared with approved budget (PEFA PI- 1) Extent of Unreported Government Operations (PEFA PI-7) Multi-year perspective in fiscal planning, expenditure policy and budgeting (PEFA PI-12) (ii) Predictability and control in budget execution: Effectiveness in collection of tax payment (PEFA PI-15) Effectiveness of payroll controls (PEFA PI-18) Competition, value for money and control in procurement (PEFA PI-19) Effectiveness of non-salary controls (PEFA PI-20) Effectiveness of internal audit (PEFA pi-21) (iii) Accounting, recording and reporting: Quality and timeliness of annual financial statements (PEFA PI-25). (iv) External audit and legislative scrutiny: Scope, nature, and follow-up of external audit (PEFA PI-26) Extent of legislative scrutiny of annual audit reports (PEFA PI-28) Progress will be measured on a regular basis through a variety of means including: regular Bank supervision missions, submission of Quarterly Progress Reports, review of specific outputs such as audit reports, and Minutes of meetings from thercu, which will also be an important vehicle for donor coordination across the whole PFM Reform Strategy. Objectively verifiable evidence of progress against meeting the higher level targets will be obtained from IMF Mission Reports, and governance indicators Collection and analysis of information to monitor performance will be the responsibility of the RCU. The RCU is responsible for ensuring that information is collected to assess all targets and indicators against the logframe and for preparing the comprehensive program performance reports. 8 The strategy has been developed by the MoF in close collaboration with the IMF and the WB, taking into account the specific circumstances of Liberia and its fragility. 12

22 The RCU will provide inputs to this process where targets are directly linked to the broader PFM reform strategy which they are responsible for monitoring. III PROJECT FEASIBILITY 3.1. Economic and financial performance The economic and financial benefits from the project should be significant. Identifying and quantifying the direct and indirect economic and financial benefits of capacity building interventions is not straightforward. It is difficult to carry out rigorous cost-benefit and financial analysis. While the costs are quantifiable (see section 2.4), the benefits are indirect, and ultimately seen in improved public financial governance, service delivery and better performance of the public financial management institutions. The economic justification of the proposed operation is its contribution to a better functioning government through improved PFM and capacity to implement the national development strategy. The benefits of the program will follow from improved budget credibility, strengthened budget execution, better internal controls, enhanced oversight, and increased transparency in the management of public resources. The project will also support the development of human resource capacity, thereby ensuring that the benefits will be sustained over time Environmental and social impacts Environment and climate change. The project will not have a negative impact on the environment. The proposed project is environmentally classified as Category 3 by ORQR Gender. The proposed operation will support government efforts and plans to enhance gender budgeting and gender mainstreaming into development programs. Specifically, the IPFMRP program will support training in gender budgeting, which Government has initiated to facilitate a gender analysis in the formulation of government budgets and allocation of resources. The GOL is committed to gender mainstreaming by promoting adherence to the United Nations Security Council Resolution 1325 (2000) on rebuilding institutions in post-conflict societies 9. The program will also support implementation of the 2009 National Gender Policy and the Civil Service Reform Strategy by developing gender budgeting capacity skills and promoting training and mentoring of female employees. The IPFMRP will ensure that the training program provided will be made available to all middle to senior level women in beneficiary institutions. It will promote gender balance in its activities and ensure women s participation in training sessions reaches 90% of eligible female employees (i.e. 90% of women professionals in PFM) Social. The aim of the project is to enhance government capacity to implement reforms and manage public resources efficiently and effectively. This will strengthen and leverage the impact of the national budget on delivery of services, and poverty reduction through increasing efficiency and effectiveness of resource allocation and budget execution in line with the national economic growth and poverty reduction strategy. A sound PFM system matters to help ensure that budget planning are compatible with macroeconomic stability, and that there is a firm basis for high quality services to be provided to the public. 9 In this resolution, the Security Council urges Member States to ensure increased representation of women at all decision-making levels in national, regional, and international institutions and mechanisms for the prevention, management, and resolution of conflict. 13

23 3.2.4 Impact on Private Sector Development. The project will contribute positively to private sector development. Improved macro economic policy and financial governance will improve the confidence of the private sector in the future of the Liberian economy. IV IMPLEMENTATION 4.1. Implementation arrangements Executing Agency: The Ministry of Finance (MOF) is the executing agency for the program. The MOF is due to merge with the Ministry of Planning and Economic Affairs probably before end of 2012, but the existing MOF structures that will support this program will be retained unchanged, so there will be no impact on IPFMRP implementation. The proposed operation will use the existing structure and project management units within the MOF. Day to day program implementation and supervision of activities will be vested in the Reform Coordination Unit (RCU). A PFM Steering Committee, chaired by the Minister of Finance will be responsible for strategic oversight and policy guidance. Coordination with development partners will take place through a joint PFM Working Group which will meet quarterly to review plans, and implementation progress. A common monitoring and evaluation framework and operational plan have been developed to guide implementation and coordination of the reform efforts. The RCU has a Coordinator, Resident IMF Adviser, Capacity Building Officer, Financial Management Specialist, and Monitoring and Evaluation Specialist. This core team will be supported by additional staff (including a Procurement Specialist) recruited specifically for this operation. Technical Annex B3 provides details of the implementation arrangements Financial Management: Responsibility for Financial Management will be vested in the existing Project Financial Management Unit (PFMU) in the MOF. The PFMU already handles the financial management for most donor financing in the country, including some on-going Bank financed projects. It is manned by qualified and experienced accounting professionals, who are familiar with the unit s current accounting software (Sun Accounting), as well as experienced in producing financial reports with the form and content expected by development partners. During the life of the proposed program, the PFMU is expected to be transformed into a constituent part of the CAG s Accounting Services Unit, migrating from Sun Accounting to the IFMIS (Free-balance) software The GAC will be responsible for project management of the the sub component for External Audit, in line with GAC s objective to maintain and further enhance its institutional independence from the Executive. The GAC has an established accounting department in which accounting for the proposed operation will be mainstreamed. The Commission s accounting is currently manual, with regular reports generated in Excel. The existing manual system is based on established procedures and has sufficient controls to provide reasonable assurance on the accuracy and timeliness of reports generated therefrom. The GAC has a stand-alone finance department headed by a Chief Financial Officer that currently successfully manages the GAC s own budget The assessment of both the PFMU and the GAC concluded that there is sufficient financial management (FM) capacity to ensure: (a) that project funds are used only for the intended purposes in an efficient and economical way; (b) the preparation of accurate, reliable and timely periodic and annual financial reports; (c) that any assets purchased using project funds are adequately safeguarded. The residual FM risk is rated as moderate Regarding the use of country systems, the project is expected to migrate to the IFMIS during the course of implementation; the PFMU is expected to be incorporated into the CAG s department, while the bulk of the project audit will be conducted by the Auditor General. In 14

24 championing the use of a common financial management arrangement and the existing PFMU for financial management, and piloting the use of the GAC for audit, efforts have been made to align the Bank s requirements for the proposed operation with those of the co-financing partners. Technical Annex B4 provides details of the financial management, and the fiduciary risk analysis Disbursement: Disbursement will make use of the Special Account modality, with a segregated USD pooled account to be opened in the Central Bank of Liberia for use by the cofinancing partners. The partners will contribute to the pool in the agreed proportions of their contributions. The Special Account will disburse only towards meeting eligible expenditures (as defined in the appraisal report). The request for disbursement and subsequent replenishment will be in accordance with the project appraisal report, the applicable Memorandum of Understanding with the co-financier, and as will be specified in the Disbursement Letter. Replenishments will be based on interim unaudited financial reports covering the preceding quarter(s), a forecast of project expenditure for the following six months, and the Aide Memoire following the joint supervision and evaluation missions ( JSEM ) to be held every six months. Exemption will be sought for the Bank to pay taxes, in line with the practices of the co-financing partners. Technical Annex B4 and C.2 provide details of the financial management and joint financing arrangements Audit: External audit and oversight of all government financing is the responsibility of the General Auditing Commission of Liberia. The proposed operation will pilot the use of the GAC to audit project funds, although a private professional firm of auditors will still be required to audit the GAC component of the project. The private audit firm will be hired on Terms of Reference approved by the co-financing partners, using selection procedures agreed in the MOU. Both audit reports, supported by the relevant management letters, will be required to be submitted to the Bank and the other co-financing partners annually within six months of the end of the year audited. The details of the audit arrangements are set out in Technical Annex B Procurement: The RCU will have overall responsibility to carry out the procurement management functions including preparing procurement plans, contract administration and the procurement monitoring process. In line with the Paris Declaration, Accra Agenda for Action, and Bussan High Level Forum on Development Effectiveness, the proposed operation will adopt a common implementation and procurement arrangement with the IDA as the implementing partner for a Multi Donor Trust Fund (MDTF). The procurement arrangement is proposed to be carried out using the WB Procurement Guidelines. 10 To that end, IDA will serve as primary focal point regarding procurement matters, in consultation with the Bank. The modalities followed in using the WB Procurement Guidelines in lieu of the Bank s are described in Technical Annex B5. In addition, a Memorandum of Understanding (Technical Annex C2) provides details of the joint implementation arrangement and Bank s fiduciary oversight responsibility Parallel financing would require the use of two sets of rules (AfDB and World Bank) and would create significant administrative burden for Government and undermine the limited resources and capacity in Liberia. Instead, joint financing would facilitate the implementation of the project from the Borrower s perspective, and enable the Bank to shift its support to the project to carrying out regular and targeted capacity building activities. Further, the use of the WB Procurement Guidelines is acceptable based on the following reasons; (i) Bank and WB have harmonized their procurement policies, procedures and standard bidding documents; (ii) The WB s operational framework for dealing with complaints is reliable and similar to that of the Bank; (iii) The Bank and IDA are both signatories of the Cross-Debarment Agreement aimed at ensuring, beyond the mutual recognition of sanctions, the application by each participating institutions of core principles 10 Section 1.17 (b) of the Bank s Rules and Procedures for Procurement of Goods and Works (May 2000 Edition) provide that: where the Bank finances on a Joint basis with financiers, other than the Borrower, the Bank will require as a condition for its financing that these Rules apply, unless the Board of Directors authorizes a waiver. 15

25 in its internal mechanism for addressing and sanctioning violations of its anti-corruption policies. In line with the Bank s Rules and Procedures (section 1.17 (b)), Management seeks from the Board of Directors a waiver to use the WB procurement procedures, in lieu of the Bank s Rules and Procedures for the procurement of all activities and eligible expenditures under the components described in the this report Monitoring MOF will be responsible for the overall monitoring and evaluation activities in collaboration with the project component managers and/or beneficiary institutions. The Bank will undertake bi-annual supervision missions as part of the common implementation framework and joint donor supervision and evaluation missions. Government will submit quarterly progress reports on the implementation of the program. The reports will review progress made in light of the Results-Based Logical Framework and include a clear presentation of activities undertaken during the period under review. The reports will also analyze the extent to which the activities undertaken have contributed to the realization of the anticipated outputs and outcomes. The Bank will also prepare a Project Completion Report within three months of the final disbursement to draw lessons for future interventions. Table 3. Project implementation schedule Timeframe Milestone Monitoring process July 2012 Board Approval Board Resolution August 2012 Effectiveness Bank September 2012 Project start-up Bank/GOL September 2012 December 2015 Procurement of goods & services GOL Quarter 1 and 3 of each fiscal year Joint supervision mission Bank and GoL June 2014 Mid-term Review Bank June 2016 Project Completion Report Bank 4.3. Governance Robust governance arrangements have been put in place to manage the implementation, monitoring, review and audit of this project, as outlined in sections 4.1 and 4.2, above. The main risks to project governance arise in procurement decisions, use of project assets and selection of persons to attend training and capacity building events. Risks will be mitigated through the preparation of a detailed procurement plan, robust processes for contractors and participant selection and application of the agreed procurement rules and procedures. Procurement plans will be prepared by the RCU on the basis of agreed program plans. Financial management of procurement related expenditure will be carried out by the PFMU. Further training will be provided to RCU and PFMU staff to ensure that they are fully aware of all requirements and regulations. Compliance with these controls will be reviewed during supervision missions. An independent audit will be undertaken every year. The establishment of a permanent AfDB field presence in Liberia will also provide a stronger foundation for review of project governanace and performance Sustainability Sustainability has been an important consideration during appraisal and will be ensured through a number of factors included in project design. However, achieving an appropriate balance between delivering tangible project outcomes and establishing sustainable capacity in a low capacity post-conflict environment like Liberia is nevertheless challenging. The PCR for the previous ISP identified some very positive examples of sustainable impacts from that operation. These have included a commitment to ensure that staff trained by the project were incentivised to 16

26 remain in their roles and clear evidence that GOL were continuing with capacity building and training programs developed under ISP I. Measures to ensure sustainability are summarised below: Ensuring that GOL counterparts and component managers are identified and assigned; Putting in place a performance management frameworks for the project to measure progress and results across all components; Focusing on the production of high quality outputs forming the regular program of work of the beneficiary organisations such as the MTEF, and internal and external audit reports, and LBO scrutiny reports. The project will ensure that production of these reports will be institutionalised into the regular practices of the GOL; Developing tailor made manuals, working practices and tools for capacity building program and continued use after the end of the project; Developing basic financial management capacity through the FM Training School, which envisages training graduates for the core financial management functions.it is envisaged that graduates from the training school will be deployed to support the implementation of the program at the all levels. It is also expected that the training program would ensure that PFM resource strength remains in place within the civil service after program implementation by ensuring that the FM Training School has institutionalised capacity to continue to deliver the traning courses; On systems maintenance and ICT support for PFM improvement in the country, the program will put in place a coherent maintenance and support organizational set up. The capacity building initiatives provide for knowledge transfer between a selected group of consultants and civil servants to enable retention of skills as consultants move out. To allow for sustainable maintenance and upkeep of the systems, the program will deploy a functional support team of FreeBalance and Crystal Reporting experts to ensure that in-house capacity is developed; The GOL s commitment to PFM reforms is affirmed, among other actions taken, by its financing of the customs automation (ASYCUDA) through the government budget consistent with the agreement reached under the AfDB s budget support operation Risk management Macroeconomic risk: The recent global financial crisis has highlighted Liberia s vulnerability to macroeconomic shocks due to its dependence on fuel as well as on primary exports. The probability of this risk arising is medium, and the impact would be medium. Mitigation measures include continued implementation of fiscal and monetary policy supported by an IMF program, continued implementation of budget support operations as well as policy dialogue through the Field Office which will help to monitor and mitigate the macro-economic risks. The program will also directly contribute to building macroeconomic management capacity in GOL to support sustained improvements to economic management Implementation capacity constraints: Weak institutional and human resources capacity could cause delays or hamper implementation. The probability of this risk arising is medium and the impact would be high. Mitigation measures are the fact that this proposed support is based on a recent assessment of implementation capacity and a clearly sequenced PFM Reform Strategy. The program will provide additional project management capacity Fiduciary risks: Government has made notable progress in improving PFM, but there are still weaknesses in the fiduciary control environment. The weaknesses are especially evident in the area of corruption due to weak prosecution capacity and sanctions regime. The probability of this risk arising is medium and the impact would be high. Mitigation measures include the PFM Act, and GOL PFM Reform Strategy which presents a credible program for improvement, supported by technical assistance from the Bank and other donors. The Government s commitment to, and 17

27 ownership of, reforms is high. The project will also directly contribute to building capacity for improved fiduciary control through support to improved financial management information systems and internal audit Corruption risks:. Weak internal controls and limited procurement and financial management capacity increase the risk of conflict of interest, bribery, and patronage. This may lead to the misuse or misappropriation of project funds or assets. The probability of this risk arising is medium and the impact would be high. Mitigation measures at the GOL level include (a) ongoing efforts to strengthen the Liberia Anti-corruption Commission (LACC) including the revision a bill that empower LACC to prosecute corruption cases, (b) the deployment of sixteen competent auditors to high spending entities, and (c) implementation of the 2009 PFM Act and the 2010 Freedom of Information Act. At the project level, corruption risks will partly mitigated through; (a) the successful establishment of internal controls embedded in IT-based financial management systems, (b) support to the legislature, and external audit to improve their scrunity of PFM, (c) support to civil society organisations to improve accountability to the public, and (d) robust financial management, publication of procurement plans and contract awards, and post procurement review Knowledge building Knowledge will be acquired through skills transfer from technical assistance, as well as through formal and informal training on the job, locally and regionally. In addition to the specific technical areas in beneficiary institutions, the capacity building implementation framework has identified needs across the beneficiaries for improved understanding of PFM in general. The ongoing PFM training program will continue and will significantly increase the numbers of people with recognized PFM, audit and procurement qualifications Knowledge will also be built through direct hands on support from program advisors to enable beneficiaries to undertake their day to day work. The project will also help to develop guidance manuals, automated financial management systems and various reporting tools and models, such as the MTFF and macro economic models, internal audit manuals and IFMIS reporting tools. It will support knowledge and diagnostic work through training on PEFA selfassessment and monitor the quality of public financial governance in Liberia Specific arrangements to ensure that knowledge is transferred will include; (a) assigning counterpart staff to work with external consultants, (b) evaluating all technical assistance based on performance on knowledge transfer and building local capacity, and (c) putting in place an exit strategy to sustain capacity building efforts in Liberia. 18

28 5.1 Legal instrument V LEGAL INSTRUMENTS AND AUTHORITY The Protocol of Agreement between the Republic of Liberia and the African Development Bank for an amount of ADF Grant of UA 3 million from Fragile State Facility. 5.2 Conditions associated with Bank s intervention Conditions Precedent to Entry into Force: The Protocol of Agreement shall enter into force on the date of signature by the Government of the Republic of Liberia and the African Development Bank Conditions Precedent to First Disbursement: The first disbursement of the grant shall be conditional upon: (a) the entry into force of the Protocol of Agreement; and (b) evidence of having opened a special account in the Central Bank of Liberia for the deposit of the proceeds of the grant; and (c) signing of a Memorandum of Understanding between the Government of the Republic of Liberia and the World Bank, and the African Development Bank, by no later than three (3) months after the date of entry into force Compliance with Bank policies In view of the need to adopt a joint financing modality and harmonised implementation arrangements, it is recommended that the Board of Directors approves a waiver for (a) the program to apply the World Bank Rules and Procedures for procurement of all eligible expenditure as specificed in the Appraisal Report; and (b) 100% financing of the total program cost in line with the Bank Group's Policy on Eligible Expenditures (Technical Annex C1). The project complies with all other applicable Bank policies. VI RECOMMENDATION 6.1 Management recommends that the Boards of Directors approves the proposed grant of UA 3.0 million to the Government of the Republic of Liberia from the Fragile State Facility for the purposes and subject to the conditions stipulated in this report. Acceptance of this recommendation would represent adoption of an innovative, pooled funding arrangement in line with the Bank s commitment to the Paris Declaration principles 19

29 Appendix I. Comparative Socio-Economic Indicators Liberia - Development Indicators Liberia Social Indicators Africa Developing countries * Area ( '000 Km²) ,323 80,976 Total Population (millions) , ,732.2 Population growth (annual %) Life expectancy at birth, total (years) Mortality rate, infant (per 1,000 live births) Physicians per 100,000 People Births attended by skilled health staff (% of total) Immunization, measles (% of children ages months) School enrollment, primary (% gross) Ratio of girls to boys in primary education (%) Literacy rate, adult total (% of people ages 15 and above) Access to Safe Water (% of Population) Access to Sanitation (% of Population) Human Develop. (HDI) Rank (Over 187 Countries) 182 n.a n.a Human Poverty Index (% of Population) Liberia Economy GNI per capita, Atlas method (current US$) GDP (current Million US$) ,300 1,409 GDP growth (annual %) Per capita GDP growth (annual %) Gross Domestic Investment (% of GDP) Inflation (annual %) Budget surplus/deficit (% of GDP) Trade, External Debt & Financial Flows Export Growth, volume (%) Import Growth, volume (%) Terms of Trade (% change from previous year) Trade Balance ( mn US$) Trade balance (% of GDP) Current Account ( mn US$) Current Account (% of GDP) Debt Service (% of Exports) External Debt (% of GDP) Net Total Inflows ( mn US$) ,663.2 Net Total Official Development Assistance (mn US$) Foreign Direct Investment Inflows (mn US$) External reserves (in month of imports) Private Sector Development & Infrastructure Time required to start a business (days) 20 6 Investor Protection Index (0-10) Main Telephone Lines (per 1000 people) Mobile Cellular Subscribers (per 1000 people) Internet users (000) Roads, paved (% of total roads) 6.2 Railways, goods transported (million ton-km) Source: ADB Statistics Department, based on various national and international sources * Most recent year Last Update: Oct I

30 Project name Social sector Appendix II. Summary of Bank Portfolio in Liberia as at 31 st May 2012 approval date Signature Date effectiveness closing date Net approved amount (UAm) amount disbursed (UAm) Labor-based Public Works Project ,240,000 10,101,649 66% Labor-based Public Works Project (suppl) , % disb. (%) Water Supply/ Sanitation sector Urban Water & Sanitation Project ,630,000 71,427 0,3% Water Sector Reform Study* ,446, ,916 62% Multisector Economic Governance and competitiveness ,000,000 14,000,000 47% Support to various Ministries and Public Agencies for Capacity Building - FSF Pillar III Private Sector Liberia Bank for Development & Investment* * * * 3,868,366 1,295,778 34% _ ,227, % Equity in Access Bank* n/a 775, , % Agriculture Agriculture Sector Rehabilitation Project ,500,000 2,007,924 16% Smallholder Agricultural Productivity and Commercialization Multinational WAMZ-Payment System Development Project (The Gambia, Guinea, Sierra-Leone and Liberia) ,000, % ,000, % TOTAL (only national) 101,257,147 31,205, % TOTAL (including multinational) 106,257,147 31,205, % *Amount approved in USD or Euros. Rate used are those at approval date. II

31 Appendix III. Map of Liberia III

32 Appendix IV. Summary of the draft PEFA 2012 Assessment in comparison with PEFA 2007 Indicator Description PFM OUTTURNS: Credibility of the Budget SCORE 2007 SCORE 2012 (Draft) CHANGE PI-1 PI-2 PI-3 PI-4 Aggregate expenditure outturn compared with original approved budget B D DOWN Composition of expenditure outturn compared D D+ UP with original approved budget Aggregate revenue outturn compared with A D DOWN original approved budget Stock and monitoring of expenditure payment D+ B UP arrears KEY CROSS CUTTING ISSUES: Comprehensiveness and Transparency PI-5 Classification of the budget C C NO CHANGE PI-6 Comprehensiveness of information included in C B UP budget documentation PI-7 Extent of unreported government operations D+ D+ NO CHANGE PI-8 Transparency of inter-governmental fiscal NO NO NO CHANGE relations SCORE SCORE PI-9 Oversight of aggregate fiscal risk from other D D NO CHANGE public sector entities PI-10 Public access to key fiscal information C C NO CHANGE BUDGET CYCLE C (i) Policy Based Budgeting PI-11 Orderliness and participation in the annual budget process PI-12 Multi-year perspective in fiscal planning, expenditure policy, and budgeting C (ii) Predictability and Control in Budget Execution B B NO CHANGE D+ C UP PI-13 Transparency of taxpayer obligations and C B UP liabilities PI-14 Effectiveness of measures for taxpayer C C+ UP registration and tax assessment PI-15 Effectiveness in collection of tax payments D+ D+ NO CHANGE PI-16 Predictability in the availability of funds for C+ C DOWN commitment of expenditures PI-17 Recording and management of cash balances, C+ B UP debt, and guarantees PI-18 Effectiveness of payroll controls D+ D+ NO CHANGE PI-19 Competition, value for money, and controls in D+ C UP procurement PI-20 Effectiveness of internal controls for non-salary C+ C+ NO CHANGE expenditure PI-21 Effectiveness of internal audit D+ D+ NO CHANGE C (iii) Accounting, Recording, and Reporting PI-22 Timeliness and regularity of accounts reconciliation D C UP IV

33 Indicator Description SCORE 2007 SCORE 2012 (Draft) CHANGE PI-23 Availability of information on resources D D NO CHANGE received by service delivery units PI-24 Quality and timeliness of in-year budget reports C D+ DOWN PI-25 Quality and timeliness of annual financial D D NO CHANGE statements C (iv) External Scrutiny and Audit PI-26 Scope, nature, and follow up of external audit D D+ UP PI-27 Legislative scrutiny of the annual budget law C+ C+ NO CHANGE PI-28 Legislative scrutiny of external audit reports No Score D N/A DONOR PRACTICES D-1 Predictability of direct budget support No Score D N/A D-2 Financial information provided by donors for D D+ UP budgeting and reporting on project and program aid D-3 Proportion of aid that is managed by use of national procedures D D NO CHANGE V

34 Appendix V. Analytic work and underpinnings Analytical themes Analytical work Institution Strategy Joint Assistance Strategy Macroeconomic Framework - Medium Term PFM Reform Strategy - PRSP II- Agenda for Transformation - Country Strategy mid-term review, and Portfolio Performance Review (May 2011) - OECD 2011 Report on International Engagement in Fragile States Republic of Liberia , December, Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding - Seventh Review under the Enhanced Credit Facility, December Debt Management Strategy Progress Report - Budget Framework Paper, 2010/ / Economist Intelliogence Unit, Country Report Liberia, December Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document and Multilateral Debt Relief Initiative (MDRI), June AfDB & World Bank - GOL/MOF - GOLR - GOL - OECD - GOL/IMF - IMF - GOL - GOL - EIU - World Bank/IMF Public Financial Management - Public Expenditure and Financial Accountability (PEFA) assessment (2012) - ISP I Project Completion Report, Training Need Assessment and Staff Training Plan, USAID PFM Assessment Report, OPEV Joint PFM Evalution Report, OPEV Bank s Assistance to Fragile States - PFM reform implementation reports, 2011 & Public Expenditure Management and Financial Accountability Assessment (PEMFAR, 2009) - PFM Capacity Building Implementation Framework, May PFM Reform Operational Manual, PFM Reform M&E Framework, Corruption Perceptions Index - GOR/WB/AfDB/ EC - AfDB - GOL/AfDB - USAID - AfDB - AfDB - GOL - GOL/IMFWB/Af DB - GOL - GOL - GOL - Transparency International VI

35