butDocument of The World Bank Report No: ICR00003004 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-H2410) ON A GRANT IN THE AMOUNT OF SDR 9.8 MILLION (USD 14 MILLION EQUIVALENT) TO THE KINGDOM OF CAMBODIA FOR A PUBLIC FINANCIAL MANAGEMENT AND ACCOUNTABILITY PROJECT May 13, 2014 Poverty Reduction and Economic Management Unit Cambodia Country Department East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 29, 2014) Currency Unit = Cambodian Riel (CR) USD 1 = CR 4,015 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank ASYCUDA Automated System of Custom Data AusAID Australian Agency for International Development CAP Consolidated Action Plan CAR Council of Administrative Reform CAS Country Assistance Strategy COA Chart of Account COFOG Classification of the Functions of the Government CPIA Country Policy and Institutional Assessment DFID British Department for International development DIC Department for Investment Cooperation DPs Development Partners DMFAS Debt Management and Financial Analysis System EAP External Advisory Panel EC European Commission EITI Extractive Industries Transparency Initiative FM Financial Management FMIS Financial Management Information System FMWG FMIS Project Management Working Group GDNT General Department of the National Treasury GDP Gross Domestic Product GFS Government Financial Statistics IBRD International Bank for Reconstruction and Development IDA International Development Association ICM Implementation Completion Memorandum ICR Implementation Completion Report IFAPER Integrated Fiduciary Assessment and Public Expenditure Review IMF International Monetary Fund INT Integrity Vice Presidency IPA International Procurement Agent IPSAS International Public Sector Accounting Standards ISRs Implementation Status and Results Report JICA Japan International Cooperation Agency MBPI Merit Based Pay Initiative MEF Ministry of Economy and Finance MDTF Multi-Donor Trust Fund MDGs Millennium Development Goals MTEF Medium Term Expenditure Framework NAA National Audit Agency NSDP National Strategic Development Plan PAD Project Appraisal Document PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFMAP Public Financial Management and Accountability Project PFMMP Public Financial Management Modernization Project PFMRP Public Financial Management Reform Program PMF Priority Mission Group POC Priority Operating Costs PRSO Poverty Reduction Support Operation RCS Reform Committee Secretariat RGC Royal Government of Cambodia SCS Steering Committee Secretariat SIDA Swedish International Development Agency SWAp Sector Wide Approach TOFE Table of State Financial Operations (in French) TTL Task Team Leader TOR Terms of Reference TSA Treasury Single Account TWG Technical Working Group UNDP United Nations Development Program Vice President: Axel van Trotsenburg Country Director: Ulrich Zachau Sector Director: Sudhir Shetty Sector Manager: Mathew A. Verghis Project Team Leader: Leah April ICR Team Leader: Tuan Minh Le CAMBODIA Public Financial Management and Accountability Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 8 3. Assessment of Outcomes .......................................................................................... 12 4. Assessment of Risk to Development Outcome......................................................... 19 5. Assessment of Bank and Borrower Performance ..................................................... 20 6. Lessons Learned ....................................................................................................... 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 26 Annex 1. Project Costs and Financing .......................................................................... 28 Annex 2. Outputs by Component ................................................................................. 29 Annex 3. Economic and Financial Analysis ................................................................. 33 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 35 Annex 5. Beneficiary Survey Results ........................................................................... 37 Annex 6. Stakeholder Workshop Report and Results................................................... 38 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 39 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 41 Annex 9. List of Supporting Documents ...................................................................... 42 MAP A. Basic Information Cambodia Public Country: Cambodia Project Name: Financial Management and Accountability Project ID: P087945 L/C/TF Number(s): IDA-H2410,TF-545471 ICR Date: 11/15/2013 ICR Type: Core ICR KINGDOM OF Lending Instrument: SIL Borrower: CAMBODIA Original Total USD 14.00M Disbursed Amount: USD 15.05M2 Commitment: Revised Amount: USD 13.96M Environmental Category: C Implementing Agencies: Ministry of Economy and Finance, National Audit Authority Cofinanciers and Other External Partners: AusAID, DFID, EC, SIDA B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 02/04/2005 Effectiveness: 06/29/2007 06/29/2007 07/20/2011 Appraisal: 04/10/2006 Restructuring(s): 11/07/2011 11/01/2012 Approval: 06/27/2006 Mid-term Review: 10/19/2009 10/19/2009 Closing: 01/15/2012 11/15/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory 1 Implementation Completion Memorandum (ICM) was made separately for this TF. 2 The original amount came from the exchange rate (SDR=USD) at the time of negotiation, where the actual disbursement is the actual USD equivalence at the time of release of funds (replenishments/direct payments/reimbursements). MDTF (RETF TF No. 54547) amount was USD 9.46M. C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Satisfactory Government: Satisfactory Moderately Implementing Moderately Quality of Supervision: Satisfactory Agency/Agencies: Satisfactory Overall Bank Moderately Overall Borrower Moderately Performance: Satisfactory Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 100 100 Theme Code (as % of total Bank financing) Administrative and civil service reform 20 20 Law reform 20 20 Public expenditure, financial management and 40 40 procurement Tax policy and administration 20 20 E. Bank Staff Positions At ICR At Approval Vice President: Axel van Trotsenburg Jeffrey S. Gutman Country Director: Ulrich Zachau Ian C. Porter Sector Manager: Mathew A. Verghis Barbara Nunberg Project Team Leader: Leah April Robert R. Taliercio ICR Team Leader: Tuan Minh Le ICR Primary Authors: Tuan Minh Le/Miki Matsuura F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) To strengthen public financial management by strengthening the: (1) mobilization of public resources, (2) management of public resources, (3) management of human resources, and (4) external audit. Revised Project Development Objectives (as approved by original approving authority) N.A. (a) PDO Indicator(s) Original Target Formally Actual Value Achieved Values (from Indicator Baseline Value Revised Target at Completion or Target approval Values Years documents) Achieved Total revenues in GDP Strengthened reached 14.9% in 2013 of mobilization of public which Tax 11.7% and resources as Growth in Revenue non-Tax 1.8%. The lower measured by increases 2005 Revenue over period to % percentage of non-tax in tax and non-tax as % GDP 10.3% GDP 11.9% of revenue to GDP reflects revenues as a of which Tax 7.6% which Tax %GDP the growing size of GDP. percentage of GDP and and Non Tax 2.2% 9.2% and Non Tax However, overall, the accountable 2.6%GDP revenue generation stewardship of oil exceeds the target by 3% revenue of GDP. Oil revenue not applicable [no revenue generated from oil].) Achieved 2001-2003Average Targets for outturn of quarterly outturn non-salary expenditure for non-salary achieved. The outturn of Strengthened expenditures as The end of each non-salary expenditure management of public percentage of Quarter [Q1:15%; reached 104.8% by the resources as budget [Q1:7%; Q2:40%; Q3: 70% end of 2013. No specific measured by more Q2:18%; Q3: 45% and Q4:90%]. data on reduction of price credible budget and Q4:70%]. differential obtained formulation and Reduction in price through surveys. But the implementation and Weighted average differential to 15% elimination of payment reduced fiduciary risk of public of market price. arrears contributes to the procurement price reduction of risks thereby differential greater creating incentive for than 20%. suppliers to reduce price for goods procured by the government. Partially achieved There were some progress at the agency level, i.e. the MEF in which the HR Management system is in place and functional and the MBPI scheme had been successfully piloted Strengthened and later replaced by management of donor funded POC, which human resources as ended in mid-2012.The Low productivity, measured by the MEF continues to fund high levels of Pay levels increased POC designed number of ministries the POC scheme for absence, weak to between for MEF and with civil servants certain civil servants retention of skilled USD150-600 per line ministries, motivated by an engaging in reform staff due to month for 510 skill POC effective incentive program ranging from inadequate staff in MEF, using implementation, levels and managed by USD180 to 600 per month incentives (salaries Merit based Pay review and meritocratic procedures depending on position and less than USD50 System evaluation (improved productivity, type of work. Pay level per month). performance and across government conditions of service ministries slightly for skilled personnel) improved comparing to the baseline of less than USD50 but continues to be low at roughly USD100 per month for the lowest level of civil servants due to slow progress in compensation reform. Not rated. The component was not implemented under this project as designed but some improvements made by the Government need Audit coverage of at to be recognized: Audit Strengthened external least 50% of reports were submitted audits as measured by Low level of audit government regularly to the National the extent of audit coverage of public expenditures. Assembly and contributed coverage in line with entities and to relatively speedy international standards operations. No Government annual adoption of the budget and number of audit published audit financial statements settlement law within 12- reports submitted to the reports to date. audit report 18 months. Although the National Assembly published. NAA did not use its allocation under the project to strengthen capacity, the improvement in the accounting system, which enables speedier closing of the government’s accounts, contributes to this. The NAA’s audit covers government’s fund, which is approximately 66% of the total government budget. However, transparency remains an issue. The publication of audit reports has been slow. The last published audit report was for 2008 (b) Intermediate Outcome Indicator(s) Original Target Formally Actual Value Achieved Values (from Indicator Baseline Value Revised Target at Completion or Target approval Values Years documents) Policy agenda MEF produces GFS Achieved Fragmented and implemented through Classified, partial budget implementation of comprehensive A three year rolling process for MTBF and unitary budget N.A. MTEF developed; example between MTEF/Program oriented toward program budgeting recurrent and Budgeting in Line achieving implemented in 10 capital Ministries programme results ministries. Achieved Budget Strategic Plan (BSP) integrating the government’s and donor’s fund developed in all line ministries. The BSP provides a framework for The accountability program oriented and MEF provides line for and proportion Programme Oriented accountable output ministries with a of budgets to be and Accountable /activities based budget by framework for allocated to Output/Activity linking input to budgeting that N.A. service unit Based Budgets policy/priorities and strengthens links activities not implemented across missions of the ministries, between resource inputs identified in all Ministries and to the overall result. and outputs/results budget In addition, program based budgeting has been implemented in 10 line ministries. Full program budgeting is planned for stage 3 of the platform approach. The PFM reform program is currently under stage 2. Partially Achieved Budget credibility Weak legal improved and contributed More reliable and framework for to the elimination of comprehensive Budget supply of some Legal framework for Restructuring/ arrears and better budget Monitoring and forms of data to supply of data to refocusing management and Accounting data MEF. Accounting MEF established. under PFMRP disbursement; Issues in reported. MEF's & LM data (Non Tax FMIS implemented leading to FMIS implementation of FMIS management can use Rev/DP Projects) across Central treasury centric arose but key functional data for better decision suffers from same Ministries. module prerequisites for the FMIS making. lack of are in place; and the completeness. Treasury centric module is under implementation. Achieved Substantial The inconsistency inconsistencies between the final TOFE Improved between final Inconsistencies and the interim report at accountability and TOFE for the between final TOFE the end of the final year internal control systems year; and interim and interim report at remains in some years at result in strengthened report produced at N.A. slightly more than 5%. compliance and end of financial end of financial year reduced to no more The inconsistency is transparency in the year. Average mainly due to the external mobilization and use of delay in producing than 5% (of value). financing portion of the public resources. in-year TOFE budget which is not under 2001-2003 was 3- the control of the 4 weeks. Government. Achieved The 2013 data suggest that internal audit departments have been established in 26 ministries (23 functional) and 9 public enterprises. Low levels of Required trainings regulatory 10 internal audit provided. Each internal Strengthen the compliance (less units established. audit department has regulatory framework produced a Strategic than 25 Each internal audit Refers to for internal audit and Audit Plan. Audit reports Institutions) and unit produced at PFMRP CAP2 build internal audit have been produced by capacity. capacity relating least 6 reports to the the functional audit to internal responsible minister. departments; however, the auditing. quality of the reports varies in different ministries’ internal audit departments. To address this, the MEF introduced internal audit standard and template to all internal audit departments at line ministries. The MEF is playing a leading role. Its internal audit department produces audit reports on approximately 90-100 entities under its supervision per year. Partially achieved MEF 'Merit Based CAR and MEF provide Performance Payroll management and Fragmented and adequate policy options Indicator' Pilot resource are synchronized undisciplined POC to strengthen positive complete. MBPI and better coordinated. remuneration restructuring and negative incentives Strategy expanded to However, incentive system for civil servants. structure continues to be support other sectors weak due to the delay in compensation reform. G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/29/2007 Satisfactory Satisfactory 0.00 2 03/22/2008 Satisfactory Satisfactory 0.98 3 08/07/2008 Satisfactory Satisfactory 1.28 4 10/14/2009 Satisfactory Satisfactory 4.01 Moderately 5 02/26/2010 Moderately Satisfactory 4.94 Unsatisfactory 6 11/22/2010 Moderately Satisfactory Moderately Satisfactory 6.00 7 11/11/2011 Moderately Satisfactory Satisfactory 8.31 8 11/13/2012 Moderately Satisfactory Satisfactory 12.74 9 07/29/2013 Satisfactory Satisfactory 15.00 H. Restructuring (if any) IDA H241-KH:  July 20, 2011: IPA additional allocation and changes in financing percentage  November 07, 2011: Closing date (extended from January 15, 2012 to January 15, 2013)  November 1, 2012: Closing date (extended from January 15, 2013 until November 15, 2013). US $ Millions 10 12 14 16 0 2 4 6 8 2007 S1 2007 S2 2008 S1 I. Disbursement Profile 2008 S2 2009 S1 Original(USD) 2009 S2 2010 S1 2010 S2 2011 S1 Revised(USD) 2011 S2 2012 S1 2012 S2 2013 S1 2013 S2 Actual(USD) 2014 S1 2014 S2 Total 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country and Sector Background. Cambodia remained a post-conflict country at the time of project preparation. Many important public sector institutions were destroyed during the Khmer Rouge period and politico-military violence continued until 1997. The conflict has resulted in weak governance and perceived high levels of corruption. Poor governance was considered the primary constraint on development in general and on the World Bank Group’s program in particular. The Bank’s Country Assistance Strategy (CAS) 2005-2008 aimed to remove the governance constraints in order to attain the Cambodia MDGs. One of the core objectives of pillar 1 of the CAS (Objective 3) is to improve the Royal Government of Cambodia (RGC)’s public financial management (PFM), a critical foundation for better pro-poor service delivery and reducing corruption. The CAS recognized weak governance as the primary obstacle to poverty reduction and aid effectiveness in Cambodia. The joint RGC- Bank focus on governance provided the primary filter that led to the selection of PFM as an area of Bank support. Despite profound development challenges, Cambodia made significant strides in graduating from an isolated, low-growth, state-managed, and subsistence-oriented economy to a market-based economy that was open to international flows of capital, goods and labor. Since 1993 election, Cambodia has achieved substantial progress in economic reconstruction. Economic growth averaged 7 percent a year from 1994 to 2004 driven largely by construction and tourism, and since the late 1990s, the very rapid emergence of a garment sector. Economic growth drove significant poverty reduction from 47 percent of population lived below the national poverty line in 1996 to 35 percent in 2006. PFMRP Background. Economic growth and poverty reduction however were undermined by serious institutional weaknesses. The Cambodia’s public sector had low capacity, resources, and accountability in delivering services to citizens. The bureaucracy remained often inefficient and ineffective in meeting the needs of its population, especially the poor. In order to implement its development agenda, the Government recognized the need to make progress on fiscal, fiduciary, and institutional challenges. To overcome the serious institutional weaknesses, the Government started reforms in public expenditure policy and public finances recognizing the necessity to improve the functioning of the core public management system. The Government embarked on a comprehensive multi-staged Public Financial Management Reform Program (PFMRP) in 2004 with a focus on the budget credibility, accountability mechanisms, and enhanced oversight functions. PFMAP: Rationale and Financing. This Public Financial Management and Accountability Project (PFMAP) was designed to support the Government’s broader 1 PFMRP program. Its aim was to tackle the serious weakness of the public financial management system in order to improve the accountability in the collection and use of public monies and to enhance the quality of public services delivery. The project also intended to remove development constraints and to foster good governance more broadly. It was complemented by a Poverty Reduction Support Operation (PRSO), a development policy lending instrument, which provided the Government with additional incentives to undertake difficult policy reforms. The Bank’s support was fully coordinated with that of other government agencies, development partners (DPs) and stakeholders by introducing a sector-wide approach around DP’s support in PFM program. This project was co-financed with Australian Agency for International Development (AusAID), British Department for International development (DFID), European Commission (EC), and Swedish International Development Cooperation Agency (SIDA) through Multi-Donor Trust Fund (MDTF) administered by the Bank. The DFID left the MDTF when it closed its Cambodia country program in October, 2011. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The PDO set in the PAD was: “To strengthen public financial management by strengthening: (1) the mobilization of public resources, (2) the management of public resources, (3) the management of human resources, and (4) external audit capacity.” The PDO was reiterated in the project description under Schedule 1 of the Financing Agreement between the Kingdom of Cambodia and the International Development Association dated February 13, 2007 “to strengthen the mobilization and management of the Recipient’s public resources, its human resources, and its audit capacity in order to improve service delivery and reduce corruption.” For the assessment, the ICR team used the set of PDO indicators and intermediate outcome indicators outlined in the Results Framework and Monitoring (Annex 3 of the PAD) because of two reasons: First, the set of results framework and monitoring was taken from the PFMRP and the task team indicated that target values would be subject to assessment near the end of each platform. Second, the set of PDO indicators was updated during project implementation and monitoring and reflected in the ISRs (Table 1). It mapped specifically baseline values to respective PDO indicators and added the formally revised target values. Further, the task team used these indicators to track the progress of PFM reforms and project implementation. Table 1: PDO Indicators, Baselines and Target Values as presented in the ISRs 2 Indicator Name Baseline End-of Project Target Values Strengthened mobilization of public resources as measured by increases Growth in Revenue over period to % 2005 Revenue as % GDP 10.3% of in tax and non-tax revenues as a GDP 11.9% of which Tax %GDP which Tax 7.6% and Non Tax 2.2% percentage of GDP and accountable 9.2% and Non Tax 2.6%GDP stewardship of oil revenue 2001-2003Average quarterly outturn for Strengthened management of public non-salary expenditures as percentage of The end of each Quarter [Q1:15%; resources as measured by more budget [Q1:7%; Q2:18%; Q3: 45% and Q2:40%; Q3: 70% and Q4:90%]. credible budget formulation and Q4:70%]. implementation and reduced fiduciary Reduction in price differential to 15% risk Weighted average of public procurement of market price. price differential greater than 20%. Strengthened management of human resources as measured by the number of ministries with civil Low productivity, high levels of Pay levels increased to between servants motivated by an effective absence, weak retention of skilled staff USD150-600 per month for 510 skill incentive levels and managed by due to inadequate incentives (salaries staff in MEF, using Merit based Pay meritocratic procedures (improved less than USD50 per month). System productivity, performance and conditions of service for skilled personnel) Strengthened external audits as Audit coverage of at least 50% of measured by the extent of audit Low level of audit coverage of public government expenditures. coverage in line with international entities and operations. No published standards and number of audit reports audit reports to date. Government annual financial submitted to the National Assembly statements audit report published. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The project PDO was not formally revised throughout the project implementation. However, substantive changes to the project components and sub-components as well as timeline were made by way of Restructuring Papers as required under the Bank procedures (see sub-sections 1.6 and 1.7). 1.4 Main Beneficiaries The project supported the Royal Government of Cambodia (RGC)’s PFMRP. The main beneficiaries of the project were the RGC, particularly central financial ministry, sectors, and sub-national government agencies responsible for public financial management, including planning, budgeting, budget execution, auditing, civil service management, and oversight and accountability functions. The main government agencies as intended direct beneficiaries of this PFMAP included the Ministry of Economy and Finance (MEF), the National Audit Authority (NAA), the National Assembly, the Ministry of Planning, and line ministries and provinces subject to pilots within the framework of the project. Ultimate beneficiaries in turn were the citizens of the Kingdom of Cambodia through the improved PFM and enhanced quality of public service delivery. 1.5 Original Components (as approved) 3 The project had six components as follows. Component 1: Revenue Management (USD3.1 million) Sub-component 1.1: Modernization of Revenue Administration (USD0.7 million) This subcomponent was designed to provide technical support to the Tax Department including advising functional reorganization, strategic planning and capacity development, strengthening of core tax administration functions, and improvement in accountability arrangements. The support was planned to be extended to non-tax revenue policy and administration in selected areas. Sub-component 1.2: Oil Revenue Management (USD2.4 million) This subcomponent was envisaged to provide technical support in developing policy and strengthen institutional arrangements for transparent oil and gas revenue management, including improving MEF operations in sequestration and smoothing of revenue flows to the budget with a focus on the Extractive Industries Transparency Initiative (EITI) principles and engagement. It also planned to provide support to oil fund and taxation policy, negotiations with oil companies including from a legal perspective, and revenue management, as well as technical aspects of oil and gas extraction. Component 2: Budget Formulation (USD1.4 million) This component was to provide technical support to strengthen the Recipient’s capacity to formulate and integrate its budget, including: (a) improving budget coverage by capturing currently off-budget revenues and expenditures; (b) strengthening the control over expenditures, especially the formulation of wage and capital budgets; (c) developing a medium term macroeconomic-fiscal framework, including revenue forecasting capacity; (d) strengthening debt forecasting, financing analysis, and payment management; (e) redesigning the budget and accounts classification system; (f) piloting a program-based budget structure; (g) redesigning the budget formulation process and calendar; (h) budget policy formulation; (i) development of an integrated budget formulation information system; and (j) expenditure tracking techniques. Component 3: Budget Execution (USD10.6 million) Sub-component 3.1: Financial Management Information System (USD8.4 million) Specific activities proposed in this subcomponent include: (a) technical guidance on quality assessment of Financial Management Information System (FMIS) framework and procedures; (b) technical advice on appropriate policy, system design, and content, taking into account capacity and technology constraints and including a program of phased roll- out; (c) IT system software and hardware, including testing and quality assurance; (d) building sustainable capacity in the MEF to operate the FMIS and use the reports that it 4 will generate; and (e) training and capacity development in line agencies as appropriate to allow use of system generated information. The coverage of the FMIS was designed to include the central MEF, National Treasury, six provincial treasuries, and three pilot line ministries. Sub-component 3.2: Procurement (USD0.9 million) This subcomponent was envisaged to provide technical support on the development of improved arrangements for processing of procurement actions, in order to improve transparency, economy, and efficiency, streamline spending processes, and enable greater fiscal deconcentration. Specific measures include: (a) further developing the legal and regulatory framework, including a new procurement law; (b) development and dissemination of harmonized procurement procedures and documents; (c) further devolving procurement to line ministries and provinces consistent with their capacity while ensuring that adequate processes are in place, including effective oversight; (d) carrying out a capacity building program for the MEF, procuring entities, and contractors; and (e) developing an information and performance monitoring system in public procurement. Sub-component 3.3: Treasury Systems and Procedures (USD1.3 million) Specific activities in this subcomponent include: (a) streamlining budget execution processes; (b) increasing payments to and from Government through the banking system in terms of tax collections and Government payments to civil servants and contractors; (c) designing and implementing measures to improve budget discipline by limiting accumulation of payment arrears. Component 4: Capacity Development (USD5.9 million) Sub-component 4.1: Internal Audit (USD0.2 million) This subcomponent was aimed to provide technical support in strengthening the Recipient’s capacity to carry out internal audits including establishing arrangements for managing internal audit standards and reviews. Sub-component 4.2: Performance and Organizational Management (USD0.5 million) Technical support to strengthen the MEF’s overall capacity, including: (a) assessing and reorganizing the MEF’s institutional structure; and (b) strengthening Reform Committee Secretariat (RCS)’s capacity to implement the project, including the development and implementation of a communications strategy. The RCS was renamed to Steering Committee Secretariat (SCS). Sub-component 4.3: Program Management (USD1.8 million) 5 Technical support to the RCS in managing the PFMRP, including the cost of the Chief Technical Advisor, office management, and annual retreats and workshops. Sub-component 4.4: Training (USD3.3 million) Specific activities included training, workshops, and study tours to support the PFMRP and based on the agreed PFMRP Capacity Development Strategy under preparation by the MEF. This subcomponent includes financing for training of a core group of staff in the MEF and NAA to accelerate implementation of the PFMRP. Component 5: Merit Based Pay Initiative (MBPI) (USD7.8 million) This component was designed to assist the Government to carry out piloting a civil service reform in the context of the PFMRP. The MBPI aimed to institutionalize an accelerated pay enhancement program based on a number of key features including the Government to pay an increasing share of the cost over time, selection of participants based on merit according to agreed criteria, and establishing a mechanism to remove non- performers according to agreed criteria. Component 6: Building the Oversight Capacity of Cambodia’s National Audit Authority (USD1.5 million) Sub-component 6.1: Developing an Effective Organization (USD1.1m) This subcomponent was envisaged to provide technical support to the National Audit Authority (NAA) with appropriate and relevant knowledge and exposure to enhance their ability to develop the NAA institution to effectively meet its audit mandate. To support NAA in developing its institutional arrangements for publishing and making audit reports widely available to the public in conjunction with enhanced budget information of the Government, this sub-component was to provide technical assistance (USD0.6m), training (USD0.15m), and operational expenditures (USD0.15m). Resourcing requirements was also to cover the computerization of the audit function, involving purchases of systems and hardware. Software was to be provided through bilateral cooperation (Danida), while hardware was to be provided through this activity (USD0.2m). Sub-component 6.2: Enhancement and Development of Auditing Methodologies, Standards, and Capacity (USD0.4m) This sub-component was envisaged to provide the NAA with technical assistance and training to continue the development of public sector auditing standards in conjunction with the National Accounting Council of Cambodia and appropriate audit methodologies. It was envisaged to provide technical assistance (USD0.2m) to develop a set of audit methodologies for internal use by the management and staff of the audit office, together with assistance to provide easy access to the audit methodologies and the support to development of managerial and staff capacity (USD0.1m), and to develop audit personnel 6 to provide effective audits in a wide range of ministries, agencies, entities, as well as to work effectively with parliament including covering the cost of field work, publications, and printing (USD0.1m). 1.6 Revised Components The project underwent restructuring three times relating to extension of closing date and revision of components and sub-components. Component 5, Merit Based Pay Initiative (MBPI) was formally revised to the Priority Operating Costs (POC). According to the Restructuring Paper dated June 6, 2011, it was the Royal Government of Cambodia (RGC)’s decision to cancel the MBPI and Priority Mission Group (PMG), and all other salary supplement and incentive schemes with effect from January 1, 2010 regardless of the sources of financing. It was replaced with the establishment of the Priority Operating Costs (POC), which was also terminated in 2012. Reallocation of IDA grant was made and hence there were changes to the results monitoring. 1.7 Other significant changes Two significant changes were also made during project implementation: Subcomponent 3.1: Financial Management Information System (FMIS) Though this subcomponent was not formally revised, the scope of the support to FMIS was large at the design stage and became substantially larger at the time of implementation. The procurement began in 2005, though increased cost during the first stage competitive bidding process resulted in the failure of the first tender. Failure of the first bidding led to the program extensions but concluded with failed procurement in January 2012. Accumulated undisbursed funds were reallocated to finance procurement services provided by International Procurement Agent (IPA). The INT investigation in 2006 highlighted the importance of managing the fiduciary risks and required all the Bank projects to use IPA. While the ICR cannot speak to whether or not corruption was reduced in the Bank financed projects as a result of the IPA, the IPA was a set-back to the development of a national procurement system because it simply carried out procurement on behalf of the government without building procurement capacity. Some lessons could be drawn from the IPA experience (Section 6). Sub-component 3.2: Procurement The scope and implementation arrangements of this subcomponent were modified due to external factors unforeseen at the time of PFMAP design. The INT investigation and the management decision to engage an IPA in reducing fiduciary risks for all Bank-supported projects in Cambodia affected the implementation of this subcomponent. A decision was made that the IPA would carry out all procurement under the project, except for the following activities, which would be undertaken by the implementing agencies (IAs): (i) Procurement of Supply and Instillation Financial Management Information System 7 (FMIS) (Two stage bidding); (ii) Selection of Individual Consultants and hiring of NGOs; (iii) Direct Contracting (for Goods and Works) and Single Source Selection (Consulting Services); (iv) Procurement of Goods estimated to cost less than USD50,000; and (v) Procurement of Works estimated to cost less than USD100,000. The use of IPA was not compatible with the broader objective of strengthening a national procurement system and institutional capacity. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The task team recognized the complexity and challenges of the operation to be implemented in the context of a post conflict country where weak public sector governance prevailed and even basic institutions were to be rebuilt after the Khmer Rouge period. As such the PFMAP was prepared with sound background analysis, comprehensive assessment of the Government commitment to reforms, lessons learned in PFM operations elsewhere, and risks as well as possible risk mitigation measures. Some key highlights are noted below and further analyzed in relevant sections 3-5. PFMAP was structured to be fully consistent with the Government’s PFMRP. In turn the PFMRP had been developed coming out of the Bank's Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER) and designed in such a way that could ensure maximum ownership by the Government and understanding by key donors. The PFMRP was very detailed, providing a broad vision, a sequenced strategy, and great detail on which departments were to do what by when. The entire PFMRP was built on four sequenced reform stages (or platforms), each of which would be expected to take two and half years to complete (Table 2). The PFMRP was attached with a Consolidated Action Plan (CAP) for each of the four platforms. The PFMRP also provided plans for capacity building and reorganization of the MEF. This PFMRP was prepared over the course of a year and launched by the Prime Minister. The project (PFMAP) then took this as the starting point, and thus rested on a solid foundation. On the other hand, because the project was directly linked to the PRMRP, its design was, to certain extent, constrained by the very large scope and timeline of PFMRP. The MEF wanted the project (PFMAP) to fully support all of the PFMRP, which was designed as an overambitious 10-year program. Such an overambitious timeline was supported by other donors, while on the Government side, the MEF felt the program was realistic enough - and sufficiently rigorous - to motivate action and impress some sense of urgency on the MEF departments. At the time of project preparation, the Bank task team conducted an extensive risk analysis. The task team candidly identified the critical risks and risk mitigation measures. All the risks and their trends were classified into six groupings: ownership and commitment, capacity building, performance management, MBPI, donor coordination and the FMIS. In particular, the team recognized the high costs and complexity in 8 implementation (both technical and political) and prepared a separate assessment on the basis of the Bank and IMF tools (more details to be discussed in 3.1). There were complexities in the co-financing arrangements. The project was designed to support the RGC’s PFMRP with the IDA financing (USD 14 million equivalent) and a multi-donor trust fund (MDTF) co-financed by AusAID, DFID, the EC, and Sida (total USD17.55 million). The PAD outlined the areas of support provided by the MDTF, though the actual financing was co-mingled in supporting the Government’s PFM programs. It was estimated that the project and the MDTF would cover about eighty percent of the total cost of phases I and II of the PFMRP. DFID withdrew their support in Cambodia in October 2011 and the Bank refunded DFID it proportionate share of unused funds. DFI’s withdrawal from the Trust Fund did not affect the quality of implementation. Table 2: Platform Approach in PFMRP The budget is made credible as an instrument of strategic and operational management by ensuring that it delivers resources reliably and predictably to Platform 1 managers in line ministries (this provides the basis for accountability by improving budget execution) Initial improvements are made in internal control and thereby hold resource Platform 2 manager accountable (this enables a focus on what is done with resources by providing better data, effective discipline, and greater internal transparency) Improvements are made in linking policy priorities and service delivery targets Platform 3 to budget planning and implementation (this enables greater accountability for performance) Accountability and review processes for both finance and performance are Platform 4 integrated (this would enable greater external transparency and provide a solid basis for deconcenration) 2.2 Implementation Multiple challenges unfolded during project implementation that led to a series of adaptive restructuring. First, the 2008 national elections attributed to the slowdown in the implementation of PFMRP in general and PFMAP in particular. A half year before and after elections the Government had to shift their attention to the preparation for elections, the formation of a new government and assuring political stability in the post-election period. The 2013 national elections also saw a similar pattern. Second, the global financial crisis diverted the Government’s strategic priorities from long-haul PFM reforms to containing the plunge of the economy. Third, the INT investigation of misprocurement in other Bank-financed projects exerted pressure on the project to finance IPA, which was beyond the risk calculation of the task team at design stage. 9 Fourth, slow market response leading to delayed procurement of key resident advisors, and the trust funded staff turnover significantly affected the pace of project implementation. In addition, change of the Bank TTLs over the course of project implementation particularly affected the approach to management of the FMIS and quality of supervision (more to be discussed in 3.1 and 5.1). The independent assessment, External Advisory Panel (EAP) report 2010 by PDP Australia Pty Ltd, served as a Review for the project. The report noted progress made against a number of established targets in revenue mobilization, budgeting, debt management, commitments and payments system, cash management, arrears management, strengthening of TSA, internal auditing, program budgeting pilot. The panel highlighted the initial success in implementation of the MBPI and suggested action after the MBPI was abruptly cancelled: “The MBPI was to have been expanded during 2009 to cover line ministries, bringing the total number of staff covered to 760 (250 for line ministries and 510 for the MEF) from the current 245 which were initially provided to only the MEF staff. In the view of EAP, the MBPI scheme is appearing to be having a significant positive impact on the success of PFM reform and supports its expansion to line ministries as critical for the success of the de-concentration of PFM to line ministries (LMs). However, EAP learned in late October that expansion to line ministries has not happened during 2009 and that the MBPI scheme is to be suspended for 2010, as part of a set of expenditure saving measures in response to the impact of the global financial crisis on revenues. Given the importance of MBPI to PFMRP, the EAP considers that the Government should put in place as soon as possible a sound alternative to MBPI.” (Page 14) The Panel assessed the slippage in FMIS procurement and highlighted major challenges in Stage 2 PFMRP implementation: “The challenges confronting the Government under Stage 2 are in many ways more formidable than under Stage 1, posing institutional constraints as well as vested interest and capacity challenges. Implementation of FMIS and D&D is technically, managerially and politically demanding as institutional and business process change will be part of the process and strong coordination is required between the two.” (Page 17) 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E Design: The PDO indicators and targets as established in the PAD were completely compatible to the Government’s approach and inputs from donors into PFM reforms. They were taken directly from the PFMRP document and target values were allowed to be adjusted during implementation. Such approach ensured the M&E framework was grounded on reality evolving in the reform process. 10 M&E Implementation: According to the PAD, the project was subject to supervision missions that monitored progress through Implementation Status Reports (ISRs) and this Implementation Completion and Results Report (ICR). The task team during 2007-2010 corrected necessary data for the ISRs regularly against baselines and end targets but only at the minimum level. Due to the change of TTL, the quality of ISRs improved during 2010-2013, and the task team collected detailed data, updated the current progress precisely against baseline and end target, and provided background context and issues needed to ask for management attention. In addition, regular external reviews of the project and the overall PFMRP progress were conducted. M&E Utilization: Data provided at the time of ISRs and other PFM missions, the EAP reports, and the Government annual and quarterly progress reports were used to assess progress on various areas of PFM reforms and to update ISRs. ISRs monitored and evaluated the achievement of PDOs and other PFM missions, the EAP reports and government progress reports monitored achievement of the Government reform progress in detail, which essentially became M&E of the project implementation. 2.4 Safeguard and Fiduciary Compliance The Financial Management (FM) Specialist and Procurement Specialist were fully involved in the project and monitored fiduciary and procurement issues. Fiduciary compliance of PFMAP has consistently been Satisfactory for the following reasons: 1) The Country Financial Accountability Assessment (CFAA) 2003 concluded that the legislative and regulatory framework governing public financial sector in Cambodia were generally acceptable, except for the control functions. The CFAA assigned a high-level of risk concerning the reliability of public expenditure management. The project inherent risk from the country environment was assessed “high” due to the weak financial control environment and systems of the public sector. The mitigated measures were put in place with a good FM arrangement, strong internal controls, and motivated staff at the Steering Committee Secretariat (SCS)/MEF. The FM risk rating for this project was considered as Moderate. 2) The PFMAP maintained adequate FM staff, sound FM systems, policy and procedures. The SCS/MEF regularly submitted the quarterly interim unaudited financial reports to the Bank. The MEF appointed external auditors for the project, and the audit reports were submitted to the Bank on time. 3) The FM assessment for the SCS/MEF met the Bank’s requirement for the FM arrangements and found acceptable to the Bank OP/BP 10.02. It also met other FM requirements such as developing and implementing a project-specific FM Manual, and the Interim Unaudited Financial Reports (IFRs). 4) The SCS/MEF had a FM team with adequate numbers of staff in combination of Government staff and national consultants. This FM team was responsible for managing of the project’s financial transactions, facilitating of timely release and disbursement of funds, reviewing of claims for payments, and preparing and submitting Statement of Expenditures and Withdrawal Applications to the Bank; and submitting quarterly IFR Reports to the Bank on time. 11 5) Almost all supervision missions including the Bank’s FM supervision were conducted by the Bank FM specialists. The findings and recommendations were fully implemented by the SCS/FM team. The Bank mission provided FM performance rating to the project’s FM implementation at satisfactory. 6) All audit reports were submitted to the Bank on time. The annual financial statements and the IFRs were disclosed publicly and they are available at the MEF’s website. 7) IDA grant of $14 million equivalent was fully disbursed from the Bank since September 2013. As of March 5, 2014, the cumulative expenditure was $15 million, which is 107% over the total grant financing. The spend rate of the project was high due to favorable gains from fluctuation of SDR versus the Dollar currency. 2.5 Post-completion Operation/Next Phase To sustain the PDO achieved under PFMAP and overall progress made to date in the broader PFMRP, the Bank completed the preparation of a successor project, the Public Financial Management Modernization Project (PFMMP), which became effective on November 15, 2013. The PFMMP will be financed by the MDTF with USD12 million. The PFMMP was built on the successes and lessons learned of PFMAP and focuses on improving financial accountability and the effective management of public finance (Platform 2 of the PFM Reform Program). The PDO for PFMMP is more focused and aims to enhance public financial management by strengthening: (a) revenue mobilization and (b) budget execution processes through the implementation of the FMIS. Progress will be measured by the contribution made to the overall PFMRP’s KPIs and targets set forth under Platform 2. This PFMMP project uses the existing institutional arrangements set up by the PFMAP. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives: Satisfactory The Project Development Objective (PDO) of the project was fully relevant to the Government policy and the Bank’s strategies at the time of design and implementation and remained the cornerstone of the follow up PFMMP. The project PDO remained highly relevant to the evolving Government’s development strategies reflecting its commitments to successful implementation of the PFM reforms despite some short-term interruption in momentum just before and after 2008 national election. The project was intimately linked with the Government’s comprehensive, well-sequenced PFMRP. The PFMRP Stage 1 was developed in December 2004 with the objective to improve budget credibility. It continued with Stage 2 in December 2008 to achieve better financial accountability by improving internal control and holding managers accountable. 12 The National Strategic Development Plan (NSDP) 2009-2013 3 ’s key priorities and actions are fully aligned with the “Rectangular Strategy.” The NSDP place the importance on RGC’s continued governance reforms for the enhanced effectiveness in implementation of policy and delivery and management of public goods, especially a better public services delivery in order to respond to the aspirations of the people. The “Rectangular Strategy (RS) - Phase I” was launched in July 2004 with a focus on the central issues of building good governance. The “Rectangular Strategy (RS) - Phase III” (strategy at the time of ICR) continues to raise good governance at the core of achieving social justice and equitable socio-economic development. The project’s focus on good governance through enhancement of PFM encompasses the overarching objectives of the Bank’s corporate strategies. The Bank’s CAS 2005-2008 was formulated to implement the RGC’s “Rectangular Strategy” and focused on improving governance and combating corruption as country’s central development challenges. The CAS’s Pillar 1 is set as “removing the governance constraints to attaining the Cambodia MDGs.” One of the core objectives of this pillar (Objective 3) was to improve the Government’s public financial management, considered as a foundation for reducing corruption and providing better pro-poor service delivery. The CAS was extended after 2008 and Cambodia has not developed a new CAS at the time of ICR. Relevance of Design: Satisfactory The project design was highly relevant to the CAS 2005-2008, extended CAS 2005-2008, and the current Bank country and sectoral assistance strategies. The PDO and components at entry were fully compatible with the Government’s strong commitments and drive for the on-going PFMRP. It followed the following principles:  The operation was directly linked to and supported the Government’s PFMRP.  The preparation of PFMRP in turn was based on the collaboratively-produced IFAPER (2003) with involvement of both MEF senior leadership and technical department level staff and DPs.  The project was designed to fund the PFMRP according to a sector wide approach (SWAp) in order to ensure maximum ownership and effective donor coordination.  The operation was intended to support the first harmonization objective of the Paris Declaration on Aid Effectiveness - the use of common arrangements or procedures in terms of the percentage of aid provided through program-based approaches - endorsed by the Bank. As mentioned in section 2.1, the PFMRP follows an innovative approach to sequence the reforms in four stages of platforms. Given the progress of the PFMRP, the Government is continuing to use sequential approach (platforms) laid out from the outset. This confirms 3 The Government developed National Strategic Development Plan 2013-2018 but the English version was not available at hand at the time of ICR. 13 the robustness of the sequencing activities in accordance with the reform stages and institutional capacity. Building a project based on the Government’s existing program (i.e., PRMRP) rather than a stand-alone project was also a good practice. In addition, it is worth noting the innovative approach to the design of the MBPI. The MBPI was considered as critical underpinning of the entire PFMRP. Experience indicates that wholesale approach to civil service reforms tend to fail as it is prohibitively costly, technically complicated, and highly politically charged. As analyzed in Nunberg and Taliercio (2012), donors are also responsible when it has focused increasing resources on raising civil service capacity through fragmented projectized aid infrastructure, but ‘sabotaged’ longer term capacity development. The MBPI was designed with the aim to change such fundamental flaws – thus based on incremental introduction of merit-based incentives in one ministry, the success of which then would be replicated to others. It was prepared with Government in the driver’s seat, supported by donors in piloting in departments of the MEF. The MBPI was also to anchor in official government pay policy. The management of the MBPI was to be based on the MBPI Manual developed by the MEF and agreed by Council of Administrative Reform (CAR) and DPs, and was to be supervised by the Reform Committee’s Incentives and Recruitment Subcommittee. In addition, it was envisaged to support the MEF to conduct complementary work on: human resource management reform, including setting up an establishment register; phasing out salary supplements; functional analysis leading to a strategy for organizational change; fiscal sustainability analysis; and use of the payroll for the MBPI. These activities were to be carried out in coordination with the overall civil service reform program, which at the time of this ICR remained in the strategic focus of the Government. While the PFMAP rested on a solid foundation, with the benefits of hindsight, the project design became overly ambitious at the time of implementation due to unforeseen Cambodia’s political situation and external circumstances (Section 2.2). The project was designed to support the “whole-of-government” and to strengthen all aspects of PFM system in PFMRP, including revenue management, budget formation, budget execution, capacity development, human resource management, and national audit capacity. The issue was less about the scope itself but rather the timeline. While the government’s PFMRP was designed for a 10 year period, it could take as long as 20 years considering the scope of reforms and other external complexities. The delay in the implementation of Stage 2 of the PFMRP was due in large part to this ‘whole-of-government’ approach. To prepare the PFMAP, the task team conducted thorough assessment of risks while fully recognizing the high risk-high return nature of the operation. Recognizing the ambitious scope and technical complexity in FMIS (Sub-component 3.1), the team particularly undertook a dedicated comprehensive risk review on the basis of two major IT- investment documents, the World Bank’s “Six Pillars for Successful FMIS Reform” and the IMF’s “Five Preconditions for Development of an FMIS.” These assessments concluded that (i) the proposed FMIS was appropriate; but (ii) weak areas (low ownership at mid-management and user levels; and uncertainty in the extent of delegation 14 of responsibility and accountability to suppliers in implementation of FMIS) would need to be closely monitored during supervision. Some further light also should be shed on the design of the FMIS particularly on sequencing of the FMIS preparation. The FMIS was not a part of Platform 1, but rather a part of Platform 2. The plan was to undertake preparatory work during Platform 1 (i.e., not before project launch) for the implementation of the FMIS sometime during Platform 2. The preparatory work undertaken during project preparation was sufficient for the FMIS implementation in Platform 2. There were various workshops conducted by the team at the MEF to discuss IT system, accounting, and change management issues. These workshops were intended to build the understanding of Government officials as to the key concepts and changes that they would have to address. The team that provided technical assistance had been involved with many other Bank FMIS projects and well understood the issues needed to be addressed. However, the turnover of a TTL in late 2007 led to a change in approach that ultimately resulted in the need for revision of both conceptual and bidding documents. The dynamics in approach and lessons learned from the FMIS are presented in more detail in section 6 and became the foundation for the MEF’s second FMIS procurement. Relevance of Implementation: Satisfactory Implementation of the project was highly relevant with the Government’s on-going PFM reforms and the Bank’s CAS. At the time of the ICR, the Government was completing the PFMRP Platform 2 and planned to enter into Platform 3. The overall progress, particularly in revenue management, budget formation, and treasury modernization has been significant as tracked in the project’s and PFMRP’s intermediate outcomes. Many of these successes could not be achieved without this project. Although the components and subcomponents of the MBPI, National Audit Authority, FMIS, and procurement could not be implemented in full due to the unforeseen change in political momentum and evolving external circumstances, such reform initiatives indeed served as impetus to drive Government’s own reform efforts. For example, during our ICR mission, the MEF management reaffirmed its strong commitment to continuing with the implementation of FMIS and broader civil service reforms. Over the past couple of years, the TTL and the task team had proactively engaged with the Government and DPs to restructure certain project components and timeline which contributed to the achievement of PDO in difficult environment. 3.2 Achievement of Project Development Objectives Rating: Moderately Satisfactory Overall, the project had supported impressive progress to date in the on-going PFMRP. Though some important reform activities (e.g., FMIS) did not meet the timeline envisioned at the outset of the PFMRP, successes in PFM reforms - particularly in expansion of fiscal space (both domestic revenue mobilization and public expenditures) and enhancement of efficiency, efficacy, and fiduciary in public resource management - within just five years, were notable: revenue increased by almost five percentage points 15 of GDP; commitment control and cash management improved with complete turnaround from uncontrollable level of arrears to its elimination and from mostly cash to a mostly non-cash treasury system; the Treasury Single Account (TSA) was introduced; commercial banks used for both collections and payments; and early stage of MTEF introduced with new revenue forecasting and enhanced credibility of budgeting. Such progress attained within relatively short period of time provided the impetus for further reforms in the country still suffering from the worst destructive Khmer Rouge revolution and would indeed become an envy of any other countries at similar income level running full-scaled PFM reforms. To track project performance, the ICR team used the set of outcome indicators in ISRs (Annex 2) evolved over time of the project implementation. It is also worth noting that there were no outcome indicators mapped specifically to project Components, neither in the PAD nor in ISRs. To assess the extent to which the project PDO was achieved, it is necessary to deconstruct the PDO into four components. PDO (1): To strengthen the mobilization of public resources. PDO 1 was achieved in terms of actual revenue collection at project completion compared with the original target value. Revenue collection was enhanced due to improved revenue administration and broadened base. The use of banking system for tax payments was promoted. Circulars on measures to collect revenue information were developed. Self-assessed regime on property tax, tax auditing, and collection of tax arrears was initiated. In addition, non-tax revenue and property taxes and associated decrees were introduced and the medium-term revenue mobilization strategy 2013-2018 was developed. These reform activities, collectively, contributed to the better mobilization of public resources. One PDO indicator outlined in the PAD, accountable stewardship of oil revenue, was dropped from the first ISRs. During conceptualization of the project, the MEF and the Petroleum Authority had a plausible assumption that oil revenues would flow during implementation. On the contrary, oil extraction turned out to be very small, not commercially viable, and thus the Government decided not to factor oil revenues into the revised Revenue Mobilization Strategy. In addition, the Government was not strongly committed to EITI. The EITI dialogue was handled through the first PRSO but did not materialize due to both political sensitivity and broader relationship problems between the Bank and the Government. PDO (2): To strengthen the management of public resources. PDO 2 was achieved and the ICR assessment was fully in line with the review by the latest EAP (2012). A key achievement related to treasury modernization is the development of the Uniform Account code Structure (Chart of Accounts, CoA), comprised of six segments. The administrative, economic and functional classifications segments of the CoA are in line with GFS/COFOG. The CoA is fully compliant with International Public Sector Accounting Standards (IPSAS) cash basis requirements and a 16 road map has been developed by the General Department of the National Treasury (GDNT) to fully comply with accounting and reporting requirements of the Standard. This CoA forms the backbone of the FMIS system and lays the foundation for much greater transparency in budgeting, accounting, and reporting. Elimination of arrears and reduced fiduciary risks provided opportunity for the Government to extend the use of commercial banks for FM transactions. It should be emphasized that PDO 2 focused more on credible budget formulation and not on the FMIS per se. As described, budget credibility, transparency and accountability were mostly achieved under platform 1 (the elimination of payment arrears is one such highlight). The FMIS was to be implemented under platform 2. While the FMIS implementation did not proceed under the PFMAP due to the failed procurement, the project did contribute to the development of many functional prerequisites (including budget classification, Treasury Single Account (TSA), uniform account structure, chart of account based on IPSA etc.) that lay the foundation for the FMIS successor project. The Government, the MEF in particular, remained committed to ensuring organizational and technical readiness for the implementation of FMIS (being redesigned to become treasury centric FMIS under the technical support of the forthcoming PFMMP). The re-launch in implementation of FMIS moved steadily and within the time line agreed between the Bank and the MEF. As of the time of this ICR, stage 2 of the two-stage-competitive bidding process was completed and contract was awarded. PDO (3): To strengthen the management of human resources. PDO 3 was partially achieved. Initially the MBPI was a success as confirmed in the two External Advisory Panel Reports (2007, 2010). The panels’ reports also recommend for its expansion and the program gained traction among top leadership. The Government decided to roll out to the Ministries of Interior, Health, and Land Management as well as the Council for Administrative Reform (CAR) in April 2009. However the expansion as it turned out was premature (Numberg and Taliercio, 2012), and the Government cited the need to avoid internal conflict in the public administration among civil servants including military personnel at the height of Cambodian - Thai border disputes. The cancellation of the MBPI was abrupt and surprised even the MEF. The MEF introduced the new scheme the Priority Operating Costs (POC) in 2010. The POC, a fully donor funded pay mechanism, retained MBPI’s approach to basic performance management. Due to the unsustainable salary supplementation, the Government framed the POC as a short-term mechanism until a substantial medium-term pay reform could be in place. Ultimately, the POC was terminated in June 2012. The abrupt cancelation of the MBPI and the long delay in getting a successor arrangement (POC) created disincentives for the MEF staff and undermined implementation given the extremely low salaries (and opportunities for moonlighting; e.g., many MEF staff reportedly went back to teaching in EFI for high hourly rates after the MBPI cancelled). Despite the cancelation of the initiative, the Government very much recognizes the importance of merit-based pay and incentive mechanisms and some key reforms introduced under the MBPI were retained and now form a part of the revived civil service 17 reform agenda. It has recently regained momentum continues and the Government has incorporated the reform in the PFMRP. PDO (4): To strengthen external audit capacity. PDO 4 was not rated. After the legal agreement was signed, the National Audit Authority (NAA) decided to drop this component and withdrew from engaging with the Bank. The withdrawal seemed to be affected by the INT investigation in 2006 and this decision was made at the senior level of NAA. The task team decided not to implement the component but to reallocate the funds to other areas. It should also be noted, as seen in Annex 2, the reform effort by the Government continued, albeit slowly, outside the scope of PFMAP: (i) Audit reports were submitted regularly to the National Assembly and contributed to relatively speedy adoption of the budget settlement law within 12-18 months; (ii) For the first time, the National Assembly published a user friendly "Citizens' Budget;" and (iii) the MDTF component was used to help the National Assembly understand and ultimately approve the customs law (prepared by the IMF TA with the MEF). 3.3 Efficiency Rating: Moderately Unsatisfactory The ex-post financial and economic analysis on the basis of core assumptions revised to reflect enhancement in revenue collection and reduced leakage in the use of public resources suggest that the project as a whole remain both financially and economically beneficial. The project paid for itself by eliminating the supplier arrears problem. That is, even if there were no other benefits (see Annex 2 for the outlines of the project achievements in revenue collection, cash management, and enhancement in treasury function), this project had a positive NPV on the basis of the arrears alone (See Annex 3 for more detailed discussion of cost-benefit analysis). However the breakdown of original budget and actual expenditures by component indicates that the project did not achieve the most value for money. Financing of the IPA was a case in point. The IPA is a new activity that arose as part of the restructuring package in response to the Bank’s fiduciary review and the INT investigation. Neither the task team nor the MEF desired the addition of the IPA since it goes against the overall objective of the Project to build country systems. While it fit somewhat into the PDO specifically targeted at improving public resource management, it was costly and deemed unsustainable in enhancing the quality of procurement and country processes. The component cost amounted to approximately USD6.7 million or 44 percent of the total IDA allocation. The IPA was in fact short-lived at the end of the project was cancelled as the Government viewed it as non-vital for its long-term capacity building and it lacked genuine ownership of the MEF. The team planned to apply for additional financing to refinance the IPA as well as to fund planned important capacity building activities that had been put on hold due to budget shortfalls (related to the IPA). Additional financing could not be sought, however, due to the management decision to freeze all additional financing across Cambodia portfolio. 18 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The overall outcome was rated as Moderately Satisfactory. The rating was made on the basis of individual rating of relevance of objectives (Satisfactory), relevance of design (Satisfactory), relevance of implementation (Satisfactory), achievement of PDO (Moderately Satisfactory), and Efficiency (Moderately Unsatisfactory). 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The project was designed to specifically aim at enhancing the efficiency and effectiveness of PFM. It could provide indirect positive impact on poverty reduction, gender equity, and social development through improvements achieved in prioritization of public service programs and service delivery to the citizens. (b) Institutional Change/Strengthening The impact of the project on long-term capacity and institutional development are expected to be substantial. Capacity was built particularly in the MEF (the main executor of the project) and in the ministries directly involved in PFM reforms. Various MEF departments including Economic and Finance Policy Department, General Department of Taxation, Non-tax Revenue Department, Custom and Excise Department, Budget Department, General Department of National Treasury, Internal Audit Department, Personnel Department, Public Procurement Department, IT Department and PFM Reform Committees and technical working groups including the Economic and Finance Committee, the PFM Steering Committee, the MEF Reform Committee, Reform Secretariat, Reform Working Group in line ministries, and several PFM sub technical working groups benefited from policy and technical advice, training, study visits, hardware and software acquisition during project implementation. It is worth emphasizing that the MEF structure was substantially simplified with the number of general directorship reduced from 23 to 12 along with the PFM reforms and based on the advice received by the project. (c) Other Unintended Outcomes and Impacts (positive or negative) N.A. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N.A. 4. Assessment of Risk to Development Outcome Rating: Moderate 19 Despite considerable strain in the relationship between the government and Bank, the project has been sustained despite considerable strains in the Bank relationship. Ownership by the Government was relatively high. However risks remain and there are two areas of concern, which attributes to the assessment rating of Moderate. First, there was some resistance in implementation as reflected in the dropped component of NAA. The NAA senior leadership withdrew from engaging constructively with the Bank and the component was dropped. Second, public sector governance and the external environment tend to create more uncertainty and thus impact the project outcomes. The task team could not envision the fiduciary and the INT investigation of other Bank- financed projects. The Bank declared misprocurement in June 2006 and the Government’s objections to the investigation process led to a period where dialogue with the Government was severely constrained. While the PFMAP had to finance the cost of IPA, all IDA additional financing for Cambodia portfolio was suspended thus the project was not allowed to obtain compensatory funding for implementation. In addition, major external factors to the project such as the rising tensions at the Thai-Cambodia border in 2010 that created a concern of possible resentment between the low paid armed personnel stationed at the border and the civil servants benefiting from the MBPI scheme could not be foreseen either by the Government or by the Bank. This resulted in the abrupt cancelation of the MBPI in the middle of successful implementation. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The overall quality of Bank performance in ensuring quality at entry was Satisfactory. The project PDO was highly relevant to the Government and the Bank’s development priorities. The project’s outcome indicators, baselines, and targets were taken from the PFMRP document. Flexibility was also envisioned at the design stage - targets were established for two years and supposed to be adjusted to realism during project implementation. Driven by the demand of the MEF senior management and with consensus by the entire donor community, the project team went beyond the PFMRP in three specific areas: oil revenue management, external audit, and the roll out of the MBPI. This ambitious approach was to use the Project as a leverage to push into broader public sector management reform and to strengthen the MEF’s hand in pushing the reform agenda across government agencies. Section 2.1. presents a more detailed account of project preparation and design. The innovative approach to pay reform, framed in the MBPI, deserved some further discussion (Nunberg and Taliercio 2012, and Taliercio 2009). One of the most significant weaknesses in the enabling environment was the patronage-based civil service, in which chronically low pay led to low performance, low attendance, and high corruption (the civil service in the post-conflict period was used as a mechanism to integrate previously 20 warring parties and to cement allegiance to the nascent CPP). The project realized that it would not succeed without addressing this constraint, yet did not wish to address it by means of traditional salary supplements, which actually erode capacity over the medium term. Rather, the project took a highly innovative approach of developing an asymmetric civil service reform pilot in the MEF. All reviews of the MBPI (two External Advisory Panel reports and one specific external review of the MBPI) pointed to its positive impact in motivating the MEF staff. The MBPI component also had important positive externalities to other sectors: the MBPI was eventually expanded to eight additional ministries and agencies before it was abruptly cancelled. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Moderately Satisfactory The quality of supervision was Moderately Satisfactory. The Bank’s full team included the TTL, technical experts, FM and procurement specialists, and consultants. They consistently engaged with the counterparts closely on regular basis, particularly with the MEF, the Reform Committee (RC) and the Steering Committee Secretariat (SCS). The team conducted regular supervision missions every six months to take stock of progress being made and recorded it in the ISRs and a midterm review to provide an assessment of progress, prospect of achieving the program target, and key issues that need further action by the client. The task team responded appropriately and timely to the management decision to finance IPA from this project and delays in the implementation of activities by issuing restructuring papers and made changes to financing percentage and closing dates. It is worth highlighting the task team’s proactive and innovative approach to improving the quality of project management. Such approach consisted the Bank support to (i) build institutions and capacity to manage the overall PFMRP and the project, particularly the Reform Committee and the SCS; and (ii) create a new forum for effective donor coordination. The approach was both productive and sustainable and thus deserved more detailed discussion (as described below). The role of the RC and the SCS. At the start, the MEF did not have any form of internal coordination mechanisms, regular meetings of reform management team, coordinating secretariat, regular monitoring/reporting on reform progress, and retreats. All of that changed radically and management capacity in the MEF was built up under the project. It is worth highlighting that the task team from the outset did not set up a typical PMU but rather focused on helping the MEF to build up the SCS. The SCS until the time of this ICR remained in charge of donor support coordination. While this approach caused some delays as SCS' capacity was initially very low, it was sustainable and currently the institution is being seen as a training ground for promotions. Equally importantly, the SCS prepared very detailed quarterly progress reports against the CAP, which were shared with the donor community and reviewed jointly in the technical working group regularly. 21 Development Partners Committee (DPC). The project was starting just after the previous arrangement, Technical Cooperation Assistance Program (TCAP), had failed. TCAP (supported by the IMF, ADB, UNDP, DFID and the Netherlands) took a long time, spent a lot of money, and failed to deliver results. In this context, donors were allergic to any more coordinated approaches and wished to go their own ways, there loomed an imminent risk of further fragmentation in DPs support of the PFMRP. At the time, the problem of uncoordinated donor support and sometimes contradictory advice persisted. Setting up the DPC was a challenge, though it was necessary to create a new effective form of donor coordination centered in DPC, which is still in operation today. As the project became a cornerstone of the SWAp, the task team led the donor coordination through DPC and established harmonized approach through developing Partnership Principles, joint missions, pooled funding mechanism, and technical working groups. The team led the monthly DPC and shared with them timely information on project and the Government’s PFM reform implementation progress and issues. Within this DPC framework, another important innovation was the use of periodic External Advisory Panels (EAP), contracted according to the quality and cost-based selection method jointly by a Bank-donor selection panel. The EAP reports over the project implementation provided useful guidance and a quasi-independent view of where the program was heading. The quality of ISRs during June 2007- February 2010 could be rated as sub-standard as they did not capture sufficient information of achievement and on-going challenge for management attention. For example, in 2009, the Bank management held a series of active discussions with the MEF management and the manager of Steering Committee Secretariat to try to address the slow progress and sought independent advice from the External Advisory Panel. However these facts were not fully captured in the ISRs. Since 2010, the quality of ISRs had improved with the new incoming TTL. The team paid closer attention to the on-going challenges and more proactively communicated with the Government counterparts to detect new challenges affecting the pace of project implementation. In addition to standard project supervision properly filed in the ISRs, the team conducted several joint PFM missions with the other development partners to discuss with the Government on the PFM reform progress and the results were all recorded in the Aide Memoire. Other supervision mechanism includes independent EAPs, and recommendations provided by the EAPs were well communicated with the Government. Quality of FM reporting including audit reports to the Bank was high and timely and rated as satisfactory. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory The overall Bank performance was rated Moderately Satisfactory on the basis of the rating of Bank performance in ensuring quality at entry (Satisfactory) and quality of supervision (Moderately Satisfactory). 22 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory Government ownership, particularly at the MEF senior management was high. The MEF senior management were highly committed to the PFM reforms and showed strong leadership in carrying out activities. The Government prioritized reforms and developed the sequenced PFMRP with support by DPs. Commitment was strong in improving revenue management, budget formation, treasury systems and internal control, and thus significant achievements were made in these critical PFM areas. The MEF strongly supported civil service pay reform and was surprised by the Prime Minister’s decision to cancel the MBPI. The EAP report 2010 also highlighted that: “Government ownership, exercised through the Steering Committee for PFMRP remains strong, and has contributed to the progress made.” However institutional commitments were not consistent in different parts of the Government. In particular, the component of National Audit was dropped due to the decision made at the top. The head of National Audit Authority (NAA) decided to withdraw from the Bank’s assistance soon after legal agreement was signed. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory The performance of implementing agency is rated as Moderately Satisfactory . The PFM Reform Committee and Secretariat as well as various MEF departments in charge of revenue, budget, treasury, IT, and internal audit performed well. The NAA, however, failed to show continued commitment to implementing their oversight capacity development component. The implementing agencies could have improved the timeliness and quality of M&E reports. Initially the Steering Committee Secretariat SCS (formally RCS) produced progress reports regularly and submitted to the Bank in a timely manner. As the project went on, the Secretariat reduced the frequency of these reports, from monthly to quarterly, and the reports were prepared with fewer details. The task team received the last progress report in 2012. The reorganization of the MEF after the 2013 election, appointment of new personnel, and reconstitution of the Secretariat contributed to the relaxed M&E performance from the Government side. The Government did not produce an ICR for this particular project. Instead, the Government shared with the task team the Progress Report on PFMRP as a whole, making it difficult to judge the Government’s perspective on the project-specific impact on the achievement of the PDO. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 23 The overall Borrower performance was rated Moderately Satisfactory on the basis of the rating of the Government performance (Moderately Satisfactory) and performance of implementing agency (Moderately Satisfactory). 6. Lessons Learned Narrowing the project scope and managing expectation of both Government and DPs in the face of mounting uncertainty in a post conflict country. The project was well prepared with a strategic link to the overall PFMRP and remained consistent with the country’s and the Bank’s development priorities. The original project PDO and components completely resonated with the Government’s and DPs’ incentives and commitments. The MEF leadership’s aspiration to motivate and exert some sense of urgency on functional departments and sectors drove the setting of ambitious scope and timeline for the project. The broad scope intended to engage a wide spectrum of government stakeholders and implementing agencies within a short period of time - even driven by the Government demand, fully supported by the DPs community, and underpinned by the PFMRP - turned out to be challenging for implementation. Given a series of political, public sector governance issues, border crisis, natural disasters, and the global crisis - all emerged during project implementation, beyond the scope of critical risks identified at the inception - the project had to undergo multiple adaptive restructuring in order to attain the PDO. As the team was actually working in an extremely difficult environment of a post conflict country enduring the worst turbulence, the question - with the benefits of hindsight - is whether the project could have been simplified for the proposed five-year completion. In the context of Cambodia, this would lead to a challenge for the task team to manage both Government’s and DPs’ expectations, even from the stage of PFMRP design. FMIS implementation. While the team did a thorough job of evaluating the risks, drawing on major analytical tools and lessons learned from similar FMIS implementations worldwide, the first FMIS procurement faced a number of design, procurement and capacity constraints that ultimately led to a failed bidding process. The FMIS was envisioned as the backbone of the reform that would provide the tool for controlling aggregate spending and deficits, prioritizing expenditure across policies, programs and projects; decentralizing the accounting system and achieving greater transparency by as early as 2010. The MEF created the IT Department to implement what was essentially viewed as an IT project. Hence, the FMIS was an IT led project with nascent understanding of the need to build the ownership of system users. None of the functional departments within the MEF – Treasury, Budget, Tax were engaged in the design, let alone line ministries which also were planned to be connected to the system. At the time of the issuance of the bid there was some ambiguity regarding requirements (functionality, sequencing, numbers of users). Eventually there was a reasonable quantification but the contract process became problematic and more costly with over 24 ambitious scope adopting a “big bang” decentralized accounting system while maintaining a centralized payment system. This redefinition of the scope was the result of a difference of approach by the Bank TTL at the time (which speaks to the turnover of Bank PFM TTLs and staff on the project) as well as a miscalculation on the difficulty and the depth of resistance to business process streamlining and reorganization within the MEF and line ministries, in particular the decentralization of financial control and management to line ministries and program/budget managers. In hindsight the project design was too ambitious and too quick to move toward decentralization of the accounting system without first making sure that the existing (centralized) system was modernized with full commitment controls and capacity to decentralization. Also, important prerequisites including the finalization of the Uniform Account Code Structure including the CoA and change management to promote an initial understanding of the FMIS were not in place. Training to facilitate a successful implementation was fragmented and not well sequenced. The first procurement was hampered by a series of events contributing to the eventual derailment of the project. As previously mentioned, the fiduciary review, the INT investigation, and the subsequent establishment of the IPA in 2006 contributed to delays in the procurement process. Eventually a joint decision was made between the MEF and the Bank to exclude procurements currently underway which exempted the FMIS procurement from being procured by the IPA and the process proceeded. When the additional funds needed to finance the system did not materialize in 2010/2011, the contract award became further complicated leaving the MEF to award the contract in several parts to coincide with available funding. This had to be negotiated with the selected contractor and when agreement could not be reached the contract award collapsed. In addition, the ability for the IT Department to undertake this complex 2- stage procurement process on its own was overestimated. These challenges and lessons learned informed the MEF’s second FMIS procurement. The General Department of National Treasury (GDNT) has increasingly taken a leadership role in the process. The scope of the system was scaled back to simplify system implementation; accelerate the development and go-live of the treasury centric system; reduce risks in the introduction of budget execution, cash management and fiscal reporting functionalities; and build a strong foundation for adding other modules. All key functional departments were engaged in the revised concept and design stage and participated in the procurement, evaluation and award processes. The MBPI. The MBPI, the agency based civil service pay reform, was an innovative approach It was successfully piloted at the MEF but failed to be expanded beyond the Ministry as anticipated. This asymmetric approach to public administration reform was not successful in the Cambodian context for two reasons. First it caused resentment among those not directly benefiting from the scheme that eventually left it to its abrupt cancellation by the Prime Minister. The MBPI provided an important lesson on parity (and the sensitivity around parity issues) that arose between civil servants benefiting from the MBPI and military personnel who at the time were involved in a border conflict with Thailand and faced sporadic military clashes. Second, the MPBI was risky and designed 25 to be disruptive – disruptive enough to force some real change (which it did). However it turned out to be too destabilizing. The asymmetric approach is risky – even careful attention to political economy and during preparation cannot fully mitigate these risks. The political dynamics that led to the cancellation are still unclear and worth further study to draw on additional lessons to be learned from such an approach. Nevertheless, the MBPI represents an approach that is incremental and political economically relevant to Cambodia. Some key reforms and practices introduced under the MBPI were retained and now form part of the revived civil service reform agenda that recently has regained momentum. The IPA. The IPA was not anticipated at the time of project design, and emerged from the decision to manage the fiduciary risks highlighted by the INT investigation. However, it was a set-back to the development of a national procurement system because it was a procurement mechanism that bypassed the national system. Its focus was to simply carry out procurements on behalf of the government. The IPA represents a missed opportunity to build procurement capacity within the government and strengthen and transform the existing government procurement system. Adaptive adjustments to project’s scope and timeline based on proactive engagement and effective communication of the task team with the Government counterparts. The experience in implementation of the PFMAP reconfirms the lessons learned elsewhere in the world that PFM reforms, inherently, are technically and politically complex, long-term, and non-linear. Modifications to the scope and timeline of PFM reforms should be regarded as an integral part of project implementation and monitoring in public investment management (Rajaram et al., 2010). In the case of PFMAP, at the design, no one could reasonably have predicted the INT investigation and the need to institute the IPA to support procurement of Bank – financed projects (yet alone fully finance it under the project). Neither the Bank/DPs nor the MEF management expected the Government’s abrupt decision to cancel the MBPI while the initial benefits were being realized. A series of project restructuring adapted to emerging risks and challenges in such context were critical to attaining the PDO. What we could learn from the experience of the task team is that for effective restructuring, it would be essential that (i) the task team maintain timely and effective communication with the Government and the donor community to collectively detect and find the best approach to deal with evolving risks and changing realism; and (ii) the Bank proactively conduct, in parallel, programmatic TAs to support the project implementation. A case in point - as highlighted by the MEF management during the ICR mission - such critical proactive Bank supervision indeed contributed to the successful transformation of the Treasury and related reforms such as moving from three sets of COAs to a single COA based on internationally accepted international accounting standards. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 26 The government was invited to conduct their own ICR on the project. They instead chose to prepare their own evaluation of the PFMRP, given that the project does not cover the entire government’s reform program. The government’s review is provided as an attachment to the ICR in WB Docs and summary of the ICR team’s comments on the evaluation is provided below. The ICR team concurred with the Government’s assessment on the outcomes of the implementation of the PFMRP (February 2014). In this report, the Government reaffirmed its commitment to successful PFM reforms. The Government highlighted critical success in instituting budget credibility and introducing elements of program- based budgeting. The slowdown in implementation of PFMRP since 2008/2009 was acknowledged with candor and partly attributed to the negative impacts of major challenges unforeseen at the outset: the global economic and financial crisis; the Cambodian-Thai border crisis; and natural disasters (massive floods). In addition, the Government noted the evolving risks that need to be monitored and mitigated in order to ensure continued success and sustainability of the PFMRP: (i) Leadership-related risks (policy, principle or directing); (ii) Management-related risks (identification of activities, task assignments); (iii) Technical/lack of institutional capacity- related risks; and (iv) Coordination and cross-department information sharing. (b) Cofinanciers N/A. The task team prepared a dedicated ICM for the MDTF portion of the project. 27 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Actual/Latest4 Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) Total Baseline Cost 30.28 24.51 80.95 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project Costs 30.28 24.51 80.95 Front-end fee PPF 0.00 0.00 0.00 Front-end fee IBRD 0.00 0.00 0.00 Total Financing Required 14.00 15.05 107.50 (b) Financing5 Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) AUSTRALIA: Australian Agency for MDTF 2.25 1.6 71.11 International Development Counterpart Borrower 1.50 0.13 8.70 Fund UK: British Department for MDTF 8.40 5.5 65.48 International Development (DFID) EC: European Commission MDTF 3.90 4.01 102.82 IDA Grant Grant 14.00 15.05 107.50 SWEDEN: Swedish Intl. Dev. MDTF 3.00 2.86 95.33 Cooperation Agency (SIDA) 4 Note: The actual estimate contains IDA ($15.05) and MDTF ($9.46) 5 Note: AusAID: contribution paid $2.54 - $0.94 (refunded), equal to $1.6 actual disbursement DFID: contribution paid $7.61-$2.9 (refunded), equal to $5.5 actual disbursement SIDA: contribution paid $3 – $0.139 (refunded), equal to$2.86 actual disbursement EC and IDA portions have been overspent against the financing grants because of exchange rate gained 28 Annex 2. Outputs by Component (b) PDO Indicator(s) Original Target Formally Actual Value Achieved Values (from Indicator Baseline Value Revised Target at Completion or Target approval Values Years documents) Achieved Total revenues in GDP Strengthened reached 14.9% in 2013 of mobilization of public which Tax 11.7% and resources as Growth in Revenue non-Tax 1.8%. The lower measured by increases 2005 Revenue over period to % percentage of non-tax in tax and non-tax as % GDP 10.3% GDP 11.9% of revenue to GDP reflects revenues as a of which Tax 7.6% which Tax %GDP the growing size of GDP. percentage of GDP and and Non Tax 2.2% 9.2% and Non Tax However, overall, the accountable 2.6%GDP revenue generation stewardship of oil exceeds the target by 3% revenue of GDP. Oil revenue not applicable [no revenue generated from oil].) Achieved 2001-2003Average Targets for outturn of quarterly outturn non-salary expenditure for non-salary achieved. The outturn of Strengthened expenditures as The end of each non-salary expenditure management of public percentage of Quarter [Q1:15%; reached 104.8% by the resources as budget [Q1:7%; Q2:40%; Q3: 70% end of 2013. No specific measured by more Q2:18%; Q3: 45% and Q4:90%]. data on reduction of price credible budget and Q4:70%]. differential obtained formulation and Reduction in price through surveys. But the implementation and Weighted average differential to 15% elimination of payment reduced fiduciary risk of public of market price. arrears contributes to the procurement price reduction of risks and thus differential greater creating incentive for the than 20%. suppliers to reduce price for goods procured by the government. Strengthened Partially achieved management of human resources as There were some progress Low productivity, measured by the POC designed at the agency level, i.e. the high levels of Pay levels increased number of ministries for MEF and MEF in which the absence, weak to between with civil servants line ministries, HR Management system retention of skilled USD150-600 per motivated by an POC is in place and functional staff due to month for 510 skill effective incentive implementation, and the MBPI scheme had inadequate staff in MEF, using levels and managed by implementation been successfully piloted incentives (salaries Merit based Pay meritocratic procedures review and and later replaced by less than USD50 System (improved productivity, evaluation donor funded POC, which per month). performance and ended in mid-2012.The conditions of service MEF continues to fund for skilled personnel) the POC scheme for 29 certain civil servants engaging in reform program ranging from USD180 to 600 per month depending on position and type of work. Pay level across government ministries slightly improved comparing to the baseline of less than USD50 but continues to be low at roughly USD100 per month for the lowest level of civil servants due to slow progress in compensation reform. Not rated. The component was not implemented under this project as designed but some improvements made by the Government need to be recognized: Audit reports were submitted regularly to the National Assembly and contributed to relatively speedy adoption of the budget Audit coverage of at Strengthened external settlement law within 12- least 50% of audits as measured by Low level of audit 18 months. Although the government the extent of audit coverage of public NAA did not use its expenditures. coverage in line with entities and allocation under the international standards operations. No project to strengthen Government annual and number of audit published audit capacity, the improvement financial statements reports submitted to the reports to date. in accounting system, audit report National Assembly which enables speedier published. closing of the government’s account, contributes to this. The NAA’s audit covers government’s fund, which is approximately 66% of the total government budget. However, transparency remains an issue. The publication of audit reports has been slow. The last published audit report was for 2008 (b) Intermediate Outcome Indicator(s) 30 Original Target Formally Actual Value Achieved Values (from Indicator Baseline Value Revised Target at Completion or Target approval Values Years documents) Policy agenda MEF produces GFS Achieved Fragmented and implemented through Classified, partial budget implementation of comprehensive A three year rolling process for MTBF and unitary budget MTEF developed; example between MTEF/Program oriented toward program budgeting recurrent and Budgeting in Line achieving implemented in 10 capital Ministries programme results ministries. Achieved Budget Strategic Plan (BSP) integrating the government’s and donor’s fund developed in all line ministries. The BSP provides a framework for program oriented and The accountability MEF provides line accountable output for and proportion Programme Oriented ministries with a /activities based budget by of budgets to be and Accountable framework for linking input to allocated to Output/Activity budgeting that policy/priorities and service unit Based Budgets strengthens links missions of the ministries, activities not implemented across between resource inputs and to the overall result. identified in all Ministries and outputs/results In addition, program budget based budgeting has been implemented in 10 line ministries. Full program budgeting is planned for stage 3 of the platform approach. The PFM reform program is currently still under stage 2. Partially Achieved Budget credibility Weak legal improved and contributed More reliable and framework for to the elimination of comprehensive Budget supply of some Legal framework for arrears and better budget Monitoring and forms of data to supply of data to management and Accounting data MEF. Accounting MEF established. disbursement; Issues in reported. MEF's & LM data (Non Tax FMIS implemented implementation of FMIS management can use Rev/DP Projects) across Central arose but key functional data for better decision suffers from same Ministries. prerequisites for the FMIS making. lack of are in place; and the completeness. Treasury centric module is under implementation. 31 Achieved Substantial The inconsistency inconsistencies between the final TOFE Improved between final Inconsistencies and the interim report at accountability and TOFE for the between final TOFE the end of the final year internal control systems year; and interim and interim report at remains in some years at result in strengthened report produced at slightly more than 5%. compliance and end of financial end of financial year reduced to no more The inconsistency is transparency in the year. Average mainly due to the external mobilization and use of delay in producing than 5% (of value). financing portion of the public resources. in-year TOFE budget which is not under 2001-2003 was 3- the control of the 4 weeks. Government. Achieved The 2013 data suggest that internal audit departments have been established in 26 ministries (23 functional) and 9 public enterprises. Required trainings provided. Each internal audit already has Low levels of produced Strategic Audit regulatory 10 internal audit Plan. Audit reports have Strengthen the compliance (less units established. been produced by the regulatory framework functional audit than 25 Each internal audit for internal audit and departments; however, the build internal audit Institutions) and unit produced at quality of the reports capacity. capacity relating least 6 reports to the varies in different to internal responsible minister. ministries’ internal audit auditing. departments. To address this, the MEF introduced internal audit standard and template to all internal audit departments at line ministries. The MEF is playing a leading role. Its internal audit department produces audit reports on approximately 90-100 entities under its supervision per year. Partially achieved MEF 'Merit Based CAR and MEF provide Performance Payroll management and Fragmented and adequate policy options Indicator' Pilot resource are synchronized undisciplined POC to strengthen positive complete. MBPI and better coordinated. remuneration restructuring and negative incentives Strategy expanded to However, incentive system for civil servants. structure continues to be support other sectors weak due to the delay in compensation reform. 32 Annex 3. Economic and Financial Analysis The PDOs of the projects focus on enhancing the efficiency of the public sector through better PFM which in turn exert important and positive - both financial and economic- impact on private sector development, both in terms of economic and financial impacts. The ex-post review of the economic and financial analysis done at design stage confirms that the project is both economically and financially feasible. This is due to the largely achieved targets that fit into the underlying assumptions and parameters used at entry. The elimination of the supplier arrears problem, among others, contributed significantly to the national system strengthening. The project also successfully supported a complete turnaround from a mostly cash to a mostly non-cash system for payments to suppliers and civil servants, and collection of tax and customs revenues in 5 years. Other key achievements include better ability of budget holders to commit expenditure in line with budget and cash flow forecast; an increase of domestic revenue as a percentage of GDP; and an improved budgetary process with the smooth implementation of the budget formulation cycle. All of these have important fiscal and economic benefits to the country. Economic Analysis. As appropriately identified in the PAD, the main economic benefit is the cost savings resulting from lower supplier coping costs due to a reduction in payment times to suppliers. The Government’s opaque procedures leading to significant delays in payment to suppliers have improved at the end of the project. Most important was the strengthened commitment controls and areas management, and the result was that arrears reduced from around 18 percent of total public expenditures to zero percent. The outstanding clearance of arrears ultimately clears one of the major roadblock in cost containment the Government, particularly making the procurement more competitive and provide disincentives for suppliers to build into the contract price the cost of delayed payment (in terms of opportunity cost of capital), time costs in terms of efforts made in dealing with inefficient and non-transparent public sector processes and procedures, and some level of uncertainty over possible forfeiture of payment (a risk premium). The assumption used in the PAD of 10 percentage points of the average price difference between the costs of the government contracts and market prices attribute to real economic costs (or economic savings when such difference disappears) seems plausible. Combined with robust result of the cost benefit estimates of USD165 million economic NPV (at the discount rate of 10 percent) in the PAD, it is concluded in our ex-post analysis that the project is economically viable. Financial Analysis. The ex-post financial analysis takes into account the increase in tax revenue resulting from greater compliance due to enhanced tax administration and the reduction in the leakage of expenditure as the two major financial benefits. The data in the PFMRP Progress Report of 2012 indicate that (i) revenue outturn increasingly close to targeted level in approved budget (within +/- 5 percent of the forecast used in the budget, and (ii) progressive improvement in revenue yield compared to GDP was attained by 0.5 percent of GDP per annum. Also, the introduction of single treasury account and significant in cash management imply the level of leakage should be achieved at minimum 0.5 percent of total annual public expenditures. With these parameters on 33 progress in both revenue collection and expenditure management, the estimated NPV (real) at 10 percent discount rate is significant, at USD227 million. 34 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Ahsan Ali Lead Procurement Specialist EASR1 Procurement Ali Hashim Consultant AFTMW Procurement Anand Rajaram Practice Leader AFTPM Public Sector EASRP- Chinnakorn Chantra Procurement Specialist Procurement HIS Frederick Stapenhurst Consultant WBISG Public Sector James Seward Lead Financial Sector Specialist EASFP Financial Sector Jennifer K. Thomson Chief Financial Management Officer OPSOR FM Kannathee Danaisawat Financial Management Specialist EASFM Financial Sector L.S. Christine Wong Shui Operations Officer EASPW Operations Wan Senior Social Development Laila Al-Hamad MNSSU - Specialist M. Helen Sutch Consultant ECSPE - Maria Lourdes Pardo De La Senior Counsel LEGCF Legal Counsel Pena May Cabilas Olalia Senior Operations Officer LCSPS Operations Senior Private Sector Development Michael Engelschalk CICTI Private Sector Specialist Peter Reed Consultant EASPR - Robert Taliercio Lead Economist EASPR TTL Roch Levesque Senior Counsel LEGAM Legal Counsel Ronald Points Consultant MNSSU Public Sector Rosa E. Muleta Consultant CTRLA - Stephane Guimbert Adviser BPSSP Economist Supervision/ICR Anna Wielogorska Senior Procurement Specialist EASR1 Procurement Casey Barnett Consultant EASPT Public Sector Daryoush Kianpour Consultant MNSPS - Lead Financial Management Donald Herrings Mphande AFTMW Financial Sector Specialist Enrique Aldaz-Carroll Senior Economist EASPT Economist Latharo Lor Procurement Specialist EASR2 Procurement Senior Public Sector Mgmt. Leah April EASPT TTL Specialist Linna Ky Team Assistant EACSF Team Assistant Mathew Verghis Sector Manager EASP3 Sector Manager Public Sector Management Miki Matsuura EASPW ICR Author Specialist 35 Responsibility/ Names Title Unit Specialty Naomi Halewood ICT Policy Specialist TWICT ICT Senior Public Sector Management Peter Murphy EASPR TTL Specialist Seida Heng Financial Management Specialist EASTS FM Sodeth Ly Economist EASPT Economist Sokbunthoeun So Public Sector Specialist EASPT Public Sector Sophear Khiev Financial Management Analyst EASFM FM Sophorn Kith Program Assistant LEGJR Program Assistant Sreng Sok Procurement Specialist EASR2 Procurement Than Lwin Consultant EASPT - Tuan Minh Le Senior Economist AFTP1 ICR TTL Vannara Sok Operations Officer EASPT Operations (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY05 16.01 125.68 FY06 22.14 88.87 FY07 0.00 81.55 Total: 38.15 296.10 Supervision/ICR FY07 16.21 70.85 FY08 7.07 45.33 FY09 39.90 69.67 FY10 36.22 134.39 FY11 35.17 161.55 FY12 24.31 113.21 FY13 36.93 69.43 FY14 8.57 92.65 Total: 204.38 757.08 36 Annex 5. Beneficiary Survey Results (if any) N.A. 37 Annex 6. Stakeholder Workshop Report and Results (if any) N.A. 38 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 1) The Royal Government of the Kingdom of Cambodia is committed to a step-by-step reform of the public financial management towards the international standard, known as “a step-by-step reform from centralized input-oriented public financial management system to decentralized achievement-oriented or output-oriented public financial management system” through the implementation of comprehensive longstanding public financial management reform program and four platform or/and four-phase strategies including (1) Strengthened Budget Credibility, (2) Improved Financial Credibility, (3) Linking the Budget to Policy and (4) Improved Achievement Accountability. 2) The improved budget credibility which is the primary goal of Stage 1 was introduced at the end of 2004, fully implemented in 2005 and successfully ended with the introduction of Stage 2 at the end of 2008 which was fully implemented at the beginning of 2009. The budget credibility was truly enhanced and this was reflected by the improved effectiveness of budget implementation. As a result, it helped narrow the gaps of the income-expense implementation of the national budget against the approved budget law, making the income-expense flow smoother and more practical on monthly and quarterly basis and payment more punctual. Also, it reduced nearly [reeducate?] the chronic debt problem. Given these plausible outcomes, the Royal Government of Cambodia can draw a firm conclusion that essential budget credibility was successfully established, which formed a solid basis for further strengthening Stage 2, gearing mainly toward improving financial accountability and introducing information technology to the public financial management. 3) It is true that despite good planning and preparedness, unexpected risks are unavoidable. When the reform yield fruition of the budget credibility (When the income is high, the Government can save up every year), the Government shall continue to improve financial accountability so as to increase clarity, integrity and punctuality of accounting and financial recording and reporting system which is an important basis for evaluation and analysis in order to increase transparency, feasibility and effectiveness of the policy through the introduction of Consolidated Action Plan Stage 2 at the beginning of 2009, and unexpected challenges might occur consequently. The first challenge is the complexity of the preparation for introducing new and sophisticated information technology which involves modification of the whole working system which affects the improvement of institutional structure, change management and human resource development for the new system. The second challenge is global economic and financial crisis which affects the income expense implementation and Cambodia’s budget policy. Especially, it hurts the budget credibility. The third challenge is Cambodian-Thai border crisis and flood which has impacts on the expense and expense policy, affecting some key expense indicators. The last challenge is budget shortfalls to support the operationalization of information technology project resulting in reduction of the FMIS completed modules to treasury centric module. 39 4) However, the outcomes of this four-year reform of budget credibility gave important experience and enhanced capacity for Cambodia to address the above-mentioned challenges which occurred repeatedly and continually during 2009, 2010 and 2011. Especially, it minimized the impact of global financial and economic crisis and refrained from borrowing international loan which could make Cambodia fall into the trap of debt crisis. Meanwhile, despites consuming a great deal of time, spending 5 years preparing for the implementation of the information technology for public financial management also gave us time to absorb, learn and gain more experience, increase credibility and trust as well as helped us be more prepared for the launch of the information technology which would be eventually introduced at the beginning of 2015. 5) In 2014 which is the sixth year of the implementation of Stage 2, there will be continued efforts to implement the Consolidated Action Plan 2 (CAP2) which consists of 14 objectives, 73 activities divided into 3 sections. Section for enhancement of budget credibility has 4 objectives and 19 activities. Section 2 for improvement of financial accountability has 8 objectives and 49 activities and Section 3 for preparation for the next platform has 2 objectives and 5 activities, focusing on pilot program budget implementation and integration improvement and budget comprehensiveness. Additionally, 2014 is the final year to finalize the 3 plus 2 strategy implementation which focuses on preparing the information technology for treasury centric module and shall be put into operations at the beginning of 2015. 6) Therefore, besides further strengthening the budget credibility towards a strong and stable system, essential financial accountability improvement shall be achieved to be able to go to Stage 3, which focuses mainly on Platform 3 or increased budget link to the policy. To what extent the essential financial accountability shall be determined by which indicators and how to do it is what to answer through the outcome of the review of the implementation of public financial management reform and Cambodia’s public financial management system evaluation by PEFA. 7) As indicated above, Stage 3 shall be launched when the basic budget credibility system is stable and the financial accountability is achieved supposedly at the end of 2014 or the end of 2015 after the implementation of the information technology for treasury centric module, implementation of new budget contents and new accounting map which can increase clarity, integrity and punctuality of the accounting and financial record and statement system and which responds to IPSAS at a reasonable level as well as the implementation of new budget transaction system (expense guarantee, procurement and payment) which can guarantee the improvement of the efficiency, effectiveness and transparency of budget implementation. Moreover, Stage 3 shall be launched with the rolling out of Platform 1 of the budget system reform (The beginning of 2015 or 2016). Stage 3 can be phased out at the end of 2019 or 2020 with the implementation of Stage 4 and hopefully the four objectives of the whole public financial management reform program will be successfully concluded by 2025. 40 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders N.A. 41 Annex 9. List of Supporting Documents Deloitte. August 31, 2012. Public Financial Management Reform Program 2012 External Advisory Panel Report General Secretariat. Steering Committee of the Public Financial Management Reform Program. February 2014. Report on the Review Outcomes of the Implementation of Public Financial Management Reform Program. Implementation Completion Memorandum (ICM). Public Financial Management Reform Program in Cambodia. TF054545. Implementation Status and Results Report (ISRs) for Investment Projects. Cambodia Public Financial Management Accountability (P087945). #1-9 Kingdom of Cambodia. Ministry of Economy and Finance. February 05, 2014. FMIS Project Progress and Lessons Learnt; fall and rise. Power Point Presentation. Nunberg, B. and Taliercio, R. 2012. “Sabotaging Civil Service Reform in Aid-Dependent Countries: Are Donors to Blame?” World Development Vol. 40. No. 10 PDP Australia Pty Ltd. April 20, 2017. Public Financial Management Reform Program 2007 External Advisory Panel Report PDP Australia Pty Ltd. February 2010. Public Financial Management Reform Program 2009 External Advisory Panel Report Rajaram, Anand, Tuan Minh Le, Jim Brumby and Nataliya Biletska (2010), “A Diagnostic Framework for Assessing Public Investment Management”, World Bank Policy Research Working Paper No. 5397, Washington D.C. Royal Government of Cambodia, 2008. The Rectangular Strategy for Growth, Employment, Efficiency, and Equity Phase II. Royal Government of Cambodia, September 2013. The Rectangular Strategy for Growth, Employment, Efficiency, and Equity Phase III. Royal Government of Cambodia, December 2004. Public Financial Management Reform Program: Strengthening Governance through Enhanced Public Financial Management. Royal Government of Cambodia, December 2008. Public Financial Management Reform Program Stage 2: Building on Improved Budget Credibility toward Achieving Better Financial Accountability. 42 Royal Government of Cambodia, 2006. National Strategic Development Plan (NSDP) 2006-2010. Taliercio, R. 2009. Unlocking Capacity and Revisiting Political Will: Cambodia’s Public Financial Management Reforms, 2002-2007. Chapter 8 of the Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 175-206. World Bank. May 2011. Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER) Cambodia More Efficient Government Spending for Strong and Inclusive Growth World Bank. September 2013. Policy Note. Public Financial Management Reforms. The Future of Public Financial Management in Cambodia: Automation. World Bank. September 2013. Policy Note. Public Financial Management Reforms. Public Sector Accounting: Why Standards Matter to Cambodia. World Bank. May 31, 2016. Project Appraisal Document (PAD). Public Financial Management and Accountability Project. Report No: 35966-KH World Bank. November 4, 2013. Project Appraisal Document (PAD). Public Financial Management Modernization Project (Treasury Modernization and Revenue Mobilization). Report No: 76854-KH World Bank. April 18, 2005. IDA and IFC Country Assistance Strategy the Kingdom of Cambodia. World Bank. April 17, 2008. IDA Country Assistance Strategy Progress Report for the Kingdom of Cambodia for the Period FY05-08. World Bank. May 2011. Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER); Cambodia More Efficient Government Spending for Strong and Inclusive Growth. Poverty Reduction and Economic World Bank. OPCS. August, 2006. Implementation Completion And Results Report Guidelines. World Bank Aide Memoires:  August 12 – 16, 2013. Supervisory Mission for Implementation Support to the PFMRP Program Stage 2; Platform 2: Preparations for the FMIS implementations.  May 24, 2012. Aide Memoire for Implementation Support to the PFMRP Program Stage 2; Platform 2: Further Development of the Integrated Treasury Information System. 43  September, 2009. World Bank Management Report. Public Financial Management Reform Program (PFMRP).  September 1, 2004. Cambodia Third/Final Joint Public Financial Management Preparation mission July 2004.  February 6, 2004. Cambodia Joint public Financial Management Preparation Mission January-February 2004 Mission. World Bank Progress Reports by Steering Committee Secretariat for PFM:  Progress Report of 2012. Public Financial Management Reform Program. (Power Point Presentation)  Progress Report of 2012. Public Financial Management Reform Program.  Progress Report of 2011. Public Financial Management Reform Program.  Progress Report of 2010. Public Financial Management Reform Program. World Bank Restructuring Paper on a Proposed Project Restructuring of Cambodia Public Financial Management and Accountability Project, P087945:  June 27, 2006 to the Kingdom of Cambodia June 6, 2011  June 27, 2006 to the Kingdom of Cambodia July 19, 2011  June 27, 2006 to the Kingdom of Cambodia July 20, 2011  June 27, 2006 to the Kingdom of Cambodia November 07, 2011  June 27, 2006 to the Kingdom of Cambodia November 1, 2012 44 Annex 10: MAP OF CAMBODIA 45