49005 Haiti SecondEconomic GovernanceReformOperation(EGRO 11) IDA Grant Number H269-0-HA Release ofthe FloatingTranche -ProposedPartialWaivers of FourConditions Tranche ReleaseDocument I.BackgroundandKeyObjectives 1. On January 30, 2007 the Board of Executive Directors of the International Development Association (IDA) approved the Second Economic Governance Reform Operation (EGRO 11) in the amount of SDR15.2 million (US$23 million equivalent) to support the Republic of Haiti strengthen economic governance reforms launched under EGRO I. The reform program focused on increasing transparency and efficiency in the use o f public resources and external assistance EGRO I1was extended through an IDA grant which was declared effective on May 16, 2007. The operation consists o f a first tranche o f SDR6.6 million (US$lO million equivalent) and a second tranche of SDR 8.6 million (US$13 million equivalent). The first tranche was released inAugust 2007 upon effectiveness. 2. In April 2008, the Bank prepared a US$ 10 million additionalgrant to Haiti. This grant was provided as a supplemental to EGRO 11, and was financed from the Food Price Crisis Response Program Trust Fund established by the Bank to channel grant financing to especially vulnerable countries affected by the crisis. The aim o f the EGRO I1Supplemental was to safeguard the ongoing reform andpoverty reductionprogramthat the EGRO series i s supporting, by helpingto partially fill the unanticipated financing gap created by the food price crisis. The food crisis put pressure on the state to increase its expenditures on social assistance, directly (through school feeding programs, mother- child programs, and labor intensive public works) and indirectly (through subsidies on food commodities, such as rice). The US$lO million Supplemental financing was disbursedinJuly 2008. The closing date for EGRO I T as amendedfrom the original date o f December 31,2008 is now set at December 30,2009. 3. Haiti was hit by a series of shocks, four back-to-back hurricanes, which caused damage estimated at 15 percentof GDP (see paragraph6) and have resulted inadditionalfinancingpressureonthe Government. A financing gap of about US$50 million was estimated by the Government for FY2009. A Donors' Conference in April 2009 helped mobilize an international package o f budget support by donors, including IDB, World Bank, the EuropeanUnionas well as France, Spain, andthe UnitedStates, to fillthisfinancing gap. Thedisbursementofthe secondtranche ofEGROI1ispartofthis package. It i s also part o f the financial support that the Bank has been providing to the Haitian's budget through a series o f DPL operations. A new budget support operation (DPO) planned for FY10 will build upon the EGRO Iand I1operations and will continue supporting the economic governance reforms. This new DPO is consistent with the Bank's assistance to Haiti as described in the new FY09-FY12 Country Assistance Strategy (CAS). The CAS has three pillars: (i) promoting growth and local development; 1 (ii)investing in human capital; and (iii) reducing vulnerability to disasters. The strategy has a two-pronged approach combining longer-term institution building (including economic governance reform) with support for the Government in the delivery o f quick, visible results. In addition, the CAS envisages the preparation o f four investment operations including, Transport and Territorial Development (US$10 million), Community Driven Development I1 (US$9 million), Support for Government Priority Plan (US$l1 million), and the Governance Technical Assistance Operation (US$3 million). 4. This tranche release document summarizes progress in the execution of the reform program and actions taken by the Republic of Haiti to meet the conditions for the release of the remaining US$13 million floating tranche. This memorandum concludes that five conditions for the release o f the tranche have been fully met and the remaining conditions have been partially met. This memorandum requests waivers for those conditions on the basis of: (i) the satisfactory progress made by the Government in advancing the implementation o f those remaining conditions and the overall satisfactory implementation o f the reform program described inthe Program Document o f EGRO 11; (ii)theGovernment's commitmenttoimplementcorrectiveactionstofullycomplywith the remaining conditions; and(iii) urgentneedofresourcesto fillthe financing gap for its FY2009. 5. The key objectives of EGRO I1 included: (a) promoting efficiency, transparency and accountability in public resources use through public financial management and procurement reforms; (b) strengthening the public sector's human resource management and employees' accountability; (c) improving efficiency and transparency in public infrastructure management; and (d) supporting governance reforms in the education sector to promote accountability and transparency in the use o f public education funds, The operation also supported efforts to help create a culture o f public participation inthe monitoring o f economic governance reforms. 11. RecentEconomicDevelopments 6. During2008, Haitiexperienceda series of devastatingshocks that threatened macroeconomic stability and hindered growth. Sharply rising food and fuel prices fueled social and political discontent, and prompted the resignation o f the Prime Minister in April 2008. These events led to a five-month political stalemate that severely constrained government operations. Haiti was also hit by four back-to-back hurricanes and tropical storms in AugustBeptember, which have caused extensive food shortages and damages to infrastructure estimated at about 15 percent o f GDP. This series o f domestic shocks has been compounded recently by the effects o f the global slowdown-- resulting in large unanticipated financing needs (see para 3). Official estimates suggest that real GDP growth slowed to 1.2 percent in FY2008 from 3.4 percent in FY2007, turning negative in per capita terms (after three consecutive years of positive growth). High food and fuel prices led to sharply rising inflation and a deteriorating current The political crisis ended in early September 2008, when Parliament ratified President PrBval's third proposed candidate for Prime Minister, Ms.Michelle Pierre-Louis, and her coalition government. 2 account balance. Twelve-month inflation peaked at 19.8 percent in September 2008, up from 7.9 percent in September 2007, but declined subsequently to 1.0 percent in end- March 2009, on the heels o f rapidly falling international food and fuel pricese2After a small depreciation earlier in the year, the real effective exchange rate appreciated by about 5 percent during the last quarter o f FY2008, while the Gourde remained broadly stable against the dollar. The current account deficit (including grants) widened to 2.6 percent o f GDP. The trade deficit deteriorated by 7.5 percentage points of 2007 GDP (US$463 million), largely because o f higher food and fuel imports (up by US$434 million). The improved services balance was offset by lower current transfers than anticipated. The overall balance o fpayments remained insurplus (US$41.5 million), due inpart to PetroCaribe inflows usedas budgetary support, but reserve coverage remained below 3 months o f import. 7. Despite these negative shocks, macroeconomic stability has been broadly maintained. The IMF supported-PRGF program is on track. The fourth review of the program was completed on February 11, 20093. Program performance through end- September 2008 remained satisfactory. All but one quantitative performance criteria (PC) were met.4 All structural PCs were met, but implementation of end-September benchmarks was mixed. 8. Budget execution, a weak point in the past, was satisfactory in FY2008 (see below). Tax revenue was slightly below target (9.9 percent o f GDP vs. 10.6 percent programmed), mostly owing to revenue losses (0.7 percent o f GDP) from the temporary suspension of fuel price adjustments in response to rising commodity prices. Food and fuel price subsidies were however discontinued in August-October 2008. Spending capacity improved, with domestically-financed investment outlays exceeding expectations. The overall fiscal deficit (excluding grants and foreign-financed projects) exceeded program projections somewhat (2 percent o f GDP instead o f 1.7 percent), and was fully financed with external resources. 9. The financial sector, which has not been significantly affected by the financial crisis, remained sound. External credit lines are small and mostly trade- related. Indicators o f banking sector soundness remained broadly satisfactory at end- April 2009, with increased net profits and declining non-performing loans, although the financial position o f two small banks had weakened further. However, the BNC will need to be recapitalized to accommodate the absorption of Socabank in 2006, and its operational structure reviewed. * Recentestimate by the Institut Hai`tien de Statistiques et d'Informatique (IHSI) indicates an inflationrate of 1percent inend-March2009. A mission for the fifth review of the program was successfully completedin May 2009. A preliminary assessment indicates that the program is on track. The IMF Board discussion of the fifth review is scheduledon June 29,2009. The target for net Central Bank (Banque de la Rtrpublique d'Hai`ti, BRH) credit to the rest of the non- financialpublic sector was missedby G 229 million(about 0.5 percent ofend-of-periodBRHassets, or less than 0.1 percent of GDP). The IMF Board granted a waiver of this breached quantitative performance criteria, as the deviationwas minor andtemporary. 3 10. The joint Bank-Fund low-income country debt sustainability analysis (LIC DSA) indicates that Haiti's risk of debt distress remains high. Under the baseline scenario (before post-completion point debt relief), the NPV o f debt-to-exports ratio would remain above the country-specific debt-burden threshold o f 100 percent in the mediumterm. However, debt ratios do not surpass critical thresholds for other indicators, evenunder the most extreme shock scenario. It is also worth noting that Haiti's very high and stable level o f private remittances (over 20 percent o f GDP in FY2006) provide a reliable inflow o f foreign exchange to the country, which reduces external vulnerabilities. In addition, HIPC and MDRI debt relief (including MDRI-type relief from the IDB) would reduce the NPV o f debt-to-exports ratio to just 40 percent after the completion point, lowering Haiti's risk o f debt di~tress.~ Overall, the DSA thus suggests room for additional external financing after HIPCMDRI debt relief. However, a careful approach to scaling up will remain advisable, given that debt indicators deteriorate rapidly in scenarios with less concessional financing terms or large additional borrowing. 11. Progress in implementingthe Enhanced HIPC Initiative Completion Point triggers has been satisfactory. Several measureshave beentaken or are underway, such as the completion o f the PRSP (the Document de Stratkgie Nationale pour la Croissance et la Rkduction de la Pauvretk, DSNCRP)6;the maintenance o f macroeconomic stability under the IMF PRGF program; tracking poverty-reducing spending; adoption o f an asset declaration law, reinforcing and establishing customs control in main provinces extending the use of central taxpayer file to all taxpayers, increasing immunization rates; establishing a national HIV/AIDS plan, and improving debt management. However, progress on some o f other triggers i s less advanced. The authorities are working on completing the remainingtriggers to reachthe completion point by end-June 2009. 12. The 2008/09 budget approved by the deputies (Lower Chamber) on March 17,2009 is consistentwith the IMF supportedPRGF program. The financing gap for the fiscal year is expected to be financed by increased donor funding. During the April 2009 Donor Conference in Washington D.C., donors pledged at least US$324 million toward the country's economic recovery over the next two years. It is worth noting that this result is based on the LIC DSA carried out in January 2009. A new DSA is being preparedinthe context of the HIPC CompletionPoint, scheduled for Board discussions on June 30, 2009. It will provide an update of Haiti's debt situation. In the context of the HIPC CP, a new macroeconomic framework is beingjointly preparedwith the IMF. The DSNCRP has been approved by the IMF and IDA boards on February 29,2008 and March 11,2008, respectively. A first year implementationprogressreport is beingprepared. 4 Table 1: Haiti: Selected Macroeconomic and Financial Indicators and Medium-Term Macroeconomic Framework, 2008-2012 (Fiscal Year Ending September 30) 2008 2009 2010 2011 2012 (Annual percentage change) National incomeand prices GDP at constantprices 1.2 2.5 2.7 3.2 3.3 Consumer prices(period average) 14.4 5.4 7.4 7.5 6.0 External Sector (value in US$) Exports of goods and non-factorservices 7.3 -4.3 12.7 6.3 6.5 Imports of goods and non-factor services 22.4 2.8 2.7 6.7 7.2 (Inpercent of GDP, unlessotherwise indicated) National Income Consumption 102.2 96.9 97.2 96.3 95.9 Private 95.6 89.8 90.2 89.5 89.2 Public 6.6 7.1 6.9 6.8 6.6 Investment 26.0 31.0 28.7 29.9 30.9 Private 19.1 22.0 21.0 22.5 23.5 Public 6.9 9.0 7.7 7.4 7.4 GDP per capita(US$) 728 765 802 832 864 External Sector Non-interest current account deficit -2.9 -4.4 -3.0 -3.4 -3.4 Exports of goods and non-factorservices 11.8 10.6 11.2 11.3 11.4 Imports of goods and non-factorservices 40.0 38.5 37.1 37.5 38.1 External current account balance 1/ -8.6 -11.9 -8.4 -8.2 -8.5 External current account balance21 -2.6 -4.4 -3.0 -3.0 -2.9 Liquid gross reserves (inmonthsof imports of G&S) 2.9 2.6 2.7 2.9 3.0 Central Government CentralGovernmentoverall balance21 -2.8 -3.9 -3.6 -3.1 -2.6 Total revenue and grants 13.9 15.6 14.5 14.6 14.7 Central Governmentrevenue 1/ 9.9 10.5 11.1 11.2 11.5 CentralGovernmentprimary expenditure 16.1 18.9 17.6 17.2 16.9 1/ Excluding grants 2/ Including Grants ource: WE3 staff calculationsbased on Government and IMFdata. The macroeconomicframework is as of end- February2009. The framework is being updatedbasedon arecentlyconcludedmission. Growth projections are likely to be lower and inflation is also lower than inthe abovetable. 111. ProgressinImplementingthe ReformProgram 13, The Government's program of economic governance reforms to increase transparency and efficiency in the use of public resources and external assistance has been implemented successfully. The activities supported under EGRO I1 components are assessed in the following paragraphs. Fulfillment o f the conditions pertaining to the release o f the floating tranche o f EGRO I1i s discussed in the following section. 5 14. Improvement in public financial management reforms. Significant progress has been made in public financial management reform. Key areas o f progress include budget preparation, execution, and control. The FY2008 budget was submitted to Parliament before the start o f the fiscal year. The FY2009 budget was also submitted to Parliament although late. This was mainly due to the political stalemate and the exogenous shocks, which slowed the preparation process o f the budget. However, the FY2008 and FY2009 budgets reflect the key priorities o f the PRSP. The share o f poverty- reducing spending inthe FY2008 budgeti s estimated at 56 percent, up from 43 percent in FY2007. Moreover, the coordination and consultation process between the Ministry o f Economy and Finance, the spending ministries and the Ministry o f Planning has improved during budget preparation. The budget classification system has also been improved both on the expenditure and the revenue sides. The classification i s based on the administrative and economic nature of the expenditures and is relatively close to international standards. To ensure the sustainability o f the ,large road investments currently being undertaken, the Government i s making efforts to establish a sustainable flow o f resources to finance road maintenance activities. To this end, the FY2008 and FY2009 budget laws also include a specific line for recurrent budget allocation for the Road Maintenance Fund (Fonds d'Entretien Routier, FER) as well as a line item for counterpart funds o f about 9 and 6 million gourdes, respectively. Public expenditures executed through the "comptes courants" accounted for 3 percent o f total operating expenditures excluding wages at end February2009. 15. The Government has started implementing the PEMFAR action plan preparedinDecember 2007 with the joint support of the World Bankand the Inter- American DevelopmentBank.The PEMFARAction Plan serves as a unique matrix for public finance reforms. 16. While budget execution was slow in the first quarter of FY2009, it accelerated in the second quarter. As of end-March2009, more than46 percent of the total Government budget was spent, with about 43 percent o f the poverty-reducing spendingexecuted. It is worth noting that 33 percent of poverty-reducing spending went to investment projects. To accelerate budget execution, the Government has stepped up its efforts to recruit public accountants and financial comptrollers, which will strengthen the capacity of line ministries, departmentsand agencies involved inthe spending chain. Inaddition to the 9 public accountants recruited inFY2007, 10 out ofthe 30 accountants trained in FY2007 were deployed in line ministries in FY2008. At the same time, 8 financial comptrollers were deployed in line ministries. Moreover, during FY2008 and FY2009, the Government has continued to strengthenpublic expenditure management by expanding the integrated financial management system (SYSDEP) to all line ministries. A manual ofprocedures for budgetpreparation and executionwas developed andtraining o f staff o f the Ministry o f Economy and Finance has been done. The Government i s planning to expandthe training to other line ministries. 17. Budget control mechanisms have also been significantly strengthened. The draft budget Review Law (Projet de Loi de RBglement) for FY2006 prepared by the 6 MinistryofEconomy andFinance(MEF) was reviewedby the SupremeAudit Institution (Cours Supe'rieure des Comptes et du Contentieux Administrats CSCCA). The draft budget review law accompanied by the CSCCA's legal opinion was transmitted by the MEF to the Parliament for adoption. The review of the draft Budget Review Act is on the agenda of the Parliament. The FY2004 and FY2005 treasury accounts were audited by CSCCA. 18. Improvement of public procurement processes. In the area of public procurement, progress has been slow due to the delays in submitting the new draft Procurement Law to Parliament. However, partial adoption of improved procedures has occurred despite this delay. Standard bidding documents and manuals have already been introduced to government procurement staff (including members of Commissions Ministe'rielles and Commissions Specialise'es) through a series of seminars in 2006 and 2007. Moreover, additional policy actions were undertaken to advance procurement reforms, including the creation of the Commission Nationale des Marche's Publics (CNMP), adoption of a 2005 decree to amend the existing procurement law, and communication by the Prime Minister of several instructions to purchasing agencies on the standardizationofprocedures. 19. Stepping up of anti-corruption efforts. Important steps have been taken to advance the adoption of the anti-corruptionstrategy. An anti-corruption survey was conducted and the results were disseminated at a workshop in Port-au-Prince in August 2007, followed by a participatory seminar series organized in the provinces between October andNovember 2007. An anti-corruption strategy has beenpreparedand adopted by the Government in March2009. The strategy has been widely disseminated through workshops and other dissemination events financed by the Bank Economic Governance Technical Assistance Grant (EGTAG) project. The strategy has beenposted on the MEF website. 20. Strengtheninghuman resource management.Measureshave also been taken to strengthen human resource management in the public sector and accountability of state employees, though progress in implementationhas been slow. The strategic framework for public administration reforms and several ministerial level arrgte's have been prepared, which establish the different functions of the Management Office of HumanResources(OMRH). The arrgte',which defines the organization and functioning of the Conseil Supe'rieur de 1Idministration et de la Fonction Publique, was approved in March 2008. Another arrgte' which defines the organization and functioning of OMRH was issued by the Prime Minister inSeptember 2008. The Governmenthas also launched the process of updating the registry of state employees. The database to improve the existing registry of state employees was completed in February 2009 by the firm Turbo System. This system will be extendedto other ministries. 21. Improvingefficiency andtransparency in publicinfrastructuremanagement. Important progress was made during the past two years to improve financial transparency, performance, and procurement of public utilities. Following the recommendation of the FY2005 financial audits of Autorite' Portuaire National (APN), 7 Electricite` d'Hazti (EDH), and Telecommunicationsd'Haiti (TELECO), these companies have developed and advanced with actionplans for overhaulingtheir internal systems and procedures. The audit of EDH's financial accounts for the FY2004-05 was completed at the end o f 2006, while the inventory o f technical assets for the FY2005-06 was achieved at the end o f September 2008. APN has followed a similar process. All three companies have also improved their accounting systems (for example by switching from cash-based to accrual accounting). The authorities have also included expenditure lines for electricity, water and telecoms in the FY2008 and FY2009 ministries' budgets to ensure they pay their bills to EDH, TELECO and Centrale Autonome Me`tropolitaine d'Eau Potable (CAMEP). The Government has extended the audits of public utilities to CAMEP. InJuly 2007, it completed the financial, technical and administrative audits for CAMEP for FY2005 and FY2006. However, audits for FY2007 and FY2008 have yet to be launched dueto lack of funding. 22. To promote transparency and accountability in public expenditures for the electricity sector, the Government has adopted a monitoringmechanismand carried out open bidding processes. The monitoring mechanism tracks on a monthly basis, fiscal transfers to EDH, as well as Sogenor and Alstom, the two independent power producers (IPPs). It also shows the volume and price o f petroleum purchased by the government for generation by all three firms, the amount o f electricity produced, EDH's operating expenditures andrevenues, the cash recovery index, and the hours o f electricity provided in Port-au-Prince and the provinces. The information i s provided by EDH, Ministkre des Travaux Publics et des Telkcommunications (MTPTC), and MEF. While the table had been regularly published on the MEF website since 2006, publication has been interruptedsince October 2008.7 Under PPIAF-financing, a consultant was hiredto review the table and improve it, and discussions are taking place with EDH and the Government to finalize a new version. As regards the transparency in awarding of contracts, two open bidding processes were carried out since 2007. Nevertheless, the amendment of an existing contract with Sogenor didnot follow competitiveprocedures. 23, . These efforts to promote transparency complement ongoing donor-financed activities to strengthen EDH and the operation of the electricity sector as a whole. In addition to the measures discussed above, donors (Brazil, Canada, IDA and the IDB) are funding projects to rehabilitate the sector through the reduction o f technical and non- technical losses inEDH and the rehabilitationo f existingplants and the financing o f new capacity. Such measures aim to build a stronger, more self-sustaining sector that will require less government support over the longer term. 24. The Government also plans to revise the legal and regulatory framework for the telecoms sector to enhance sector governance and promote public-private partnerships. The Government has concluded a sector-wide review and prepared a comprehensive action plan aimed at improving sector performance. In addition to the financial audit and accounting rehabilitation, TELECO has been undergoing a restructuring process for its management and staffing, including the appointment o f a well respected professional manager, the replacement of most of the staff in the finance 'www.mefhaiti.gouv.ht. 8 department and the installation of a modern financial management system. The sector as a whole has seen substantial growth after the entry o f the third cellular operator (Digicel), supported in part by an IFC investment. There i s potential for Bank support for a national broadband telecommunications network building on current non-lending technical assistance. IFC has an ongoing advisory mandate with state utility Teleco. 25. The Government has also pursued broad reforms in the water and sanitation. Inthe water sector, several donor-financed projects are ongoing (including an IDA-financed Rural Water and Sanitation Project, US$5 million). The Government has submitted a draft water and sanitation framework law to Parliament that assigns the lead role in the sector to the MTPTC, and aims at gradually decentralizing service provisionto municipalities. 26. To ensure the sustainability of road investments, the Government has committedto establish a sustainableflow of resourcesto finance road maintenance activities. To this end, the Government hasprovidedfundingto the FERfrom earmarked taxes (principally a gasoline tax o f one Gourde per gallon). It has also ensured that the FERuses these resources transparently,efficiently andaccording to the roadmaintenance strategy endorsed by its five-member Board, which includes a representative of road users (named by the transporters' union) to promote greater accountability. 27. To ensure transparency and oversightof the use of road maintenancefunds, the Government has established a dual system of audits for the FER and has regularly completed the audits for FY2004-2007 (see below)'. 28. Civilsociety monitoringmechanismand publicinformation. After a periodof reform stalemate, the civil society monitoring mechanism has recently been revamped. The Government has produced a newreport on EGRO 11. This was sharedwith the Bank inApril 2009. IV. ProgressinMeetingthe Conditionsto Releasethe SecondTranche 29. The Borrower has met the condition of maintaining a satisfactory macroeconomicpolicy framework. Despite a series of devastating shocks as well as a five-month political stalemate, four back-to-back hurricanes and fuel and food crisis, the Government's macroeconomic management and the implementation o f the first PRGF program have been satisfactory. The Government has successfully completed four reviews o f the program. The new Government reaffirmed its commitment to pursue policies for improved macroeconomic management. Details on the Government's macroeconomic performance are provided inparas. 6-9 above. The authorities undertake road maintenance technical and financial audits which examine not only the FER but also the MTPTC (for planning and contracting of road maintenance activities) and MEF (for timely transfer o f funds). 9 30. The tranche release conditions referred to in Schedule 2 o f the Development Grant Agreement between the Borrower and IDA include inrespect of the release o f the second (floating) tranche the following conditions: A. Descriptionof ConditionsFullyMet 31. The borrower has met five out o f nine conditions for the release o f the second tranche. "Satisfactory execution of FY2007 budget (and subsequent FYs ' budgets to conclude no less than six monthsprior to the second tranche release) in accordance with its objectives and approved allocations which the Borrower has met, as further discussed below " 32. The Borrower has met this condition. The execution of the FY2007, FY2008 and revised FY2008 budgets has been satisfactory. As o f end-March 2009, about 47 percent o f revised budget allocations for FY2009 had been executed. At the same time, 43 percent o f budget allocations to poverty reduction expenditures were spent. Good performance o f budget execution was mainly due to the Government's actions. Measures undertaken recently to improve budget execution include: (i)strengthening o f programming units o f key spending ministries through deployment o f trained experts in project formulation and implementation; (ii) deployment o f 34 public accountants and budget controllers to key line ministries; (iii)extension o f the SYSDEP to line ministries; and (iv) improvement o f knowledge of public procurement procedures by public accountants and budget controllers. It is worth noting that satisfactory execution o f FY2008 budget has been realized by usingregular budgetprocesses.The use of "comptes courant$' has continued to decrease in line with the EGRO I1performance indicator: the share o f public spending executed through the use o f "comptes courants" during FY2008 i s estimated at less than 3 percent o f total non-salary current public expenditures. The Government has taken the commitment to continue accelerating budget execution in line with the PRSP priorities. The budget execution reports are available on the MEF website: www.mefhaiti.gouv.ht. Submission to Parliament of FY2008 Budget (and subsequent FY's budgets up to and including such years beginning before the second tranche release), before beginning of FY and that, in the opinion of IDA, is in conformity with the Program objective, reflects key priorities of I-PRSP (and, when completed the PRSP) and includes an annex budget for FER. 33. The Borrower has met this condition. The Budget for FY2008 was submitted to Parliament at the end o f 2007. The percentage o f spending allocated to poverty reduction increased from 43 percent o f total expenses in FY 2007 to 56 percent for FY2008. There i s a budget line for the functioning o f the FER as well as an amount o f 9 million gourdes inthe special section "other compensation funds". A revised budget law was prepared in the third quarter o f 2008 and was approved by Parliament. The budget allocations broadly reflect the PRSP priorities. Moreover, the FY2009 budget law was transmittedto Parliament for approval in mid-December 2008. The delay in submitting 10 the FY2009 budget to Parliament reflects mainly a six month political stalemate that followed the resignation o f the previous Prime Minister (PM) and the urgency o f the economic and social situation caused by a series of hurricanes which hit Haiti hard last sumrner. The situation was only resolved in early September 2008 with the ratification by Parliament of the new P M Michele Pierre-Louis and her government. The FY2009 budget also reflects PRSP priorities with a particular focus on reconstruction activities following the damages brought about by the hurricanes. An amount o f 400 millions gourdes (0.5 percent o f total budget) has been allocated to reduce the country's vulnerability. The agriculture sector has been allocated about 6.4 billion gourdes (8 percent o f the total budget) while education and health sectors have received 7.4 billion (9.2 percent o f the total budget) and 8.7 billion (10.8 percent of the total budget), respectively. Strengthen budget controls through submission to Parliament of the Loi de RBglement for FY2006, and submission to Parliament andpublication of the Cours Supe'rieuredes Comptes et du Contentieux Administratif (CSCCA) audits of the FY2004 and FY2005 Treasury accounts. 34. The Loi de rkglement for FY2006 has been submitted to Parliament on January 10, 2009. The Cours Supe'rieuredes Comptes et du ContentieuxAdministratif(CSCCA) audits o f the FY2004 and FY2005 Treasury accounts have been published on the MEF website on April 20,2009. Adopt and widely disseminate an Anti-Corruption Strategy including definition of institutional arrangementsfor implementation of the strategy and that in the opinion of IDA, is in conformity with theprogram objectives. 35. The Borrower has met this condition. The Anti-Corruption Strategy was adopted by the Government in March 2009 and the strategy has been widely disseminated through the MEF website. The dissemination o f the results o f the already- completed diagnostic survey on governance and corruption, a critical input to the preparation o f a national anti-corruption strategy, as the survey was an essential tool in the design of the strategy, was launched through a workshop inPort-au-Prince (August 2007). This was followed by participatory workshops in the provinces to present the results o f the survey outside the capital and allow participants to provide recommendations for governance reform, which were integrated into the Anti- Corruption strategy. With the support o f MINUSTAH, the ULCC delivered an initial series of workshops in20 provincial towns in October-November 2007. InMarch 2009, another dissemination series was done and completed. Completion of auditing requirements in respect of public sector road maintenance activities and operationsfor at least one year and ending no more than twelve months before the second tranche release date. 36. The Borrowerhasmet this condition. The audits for FY2005 andFY2006 have been completed. The audit reports have been approved by the FER Board and published, 11 in a way satisfactory to IDA. The copies of these reports have been submitted to the World Bank mission that visited Haiti from September 10-14, 2007. The audits for FY2007 and FY2008 have also been completed. The FER has now become fully operational and can now count on significant budget resources to finance road maintenance investments. However, institutional bottlenecks in the Ministry o f Public Works, Transport and Communications (MTPTC) are still hampering the planning and implementation o f a wide scale road maintenance program that is becoming increasingly necessary given the large number o f roads currently being rehabilitated, with support from the international community. A road maintenance strategy has been prepared and endorsed by the MTPTC in order to tackle this issue. Finally, road maintenance i s also important in the broader context o f Haiti's vulnerability reduction agenda to natural disasters: the few roads whose maintenance has been financed by FER have proved to resist better than non-maintainedinfrastructure, duringthe 2008 hurricane season. B. Descriptionof ConditionsPartiallyMet and Requestfor Waivers Adoption by key sector ministries and public enterprises (Ministries of Education, Health, Public Works and Justice, and EDH and APN) of standard bidding documents and procedure manual prepared by CNMP as evidenced by an independent review of procedures of these ministries and public enterprises by an audit firm of international repute competitively selected. 37. The Borrower has partially met this condition. The delay infully meetingthis condition is due to obstacles encountered insubmittingthe new draft Procurement Law to Parliament, including the five-month political stalemate in 2009. Despite the absence o f a consistent legal framework for procurement, a partial adoption o f improved procedures by some key government entities has occurred. However, more significant change in government procurement practices depends now on full implementation o f the new legislation to consolidate the procurement reforms introduced since 2004. The draft Procurement Law was passed by Haiti's Parliament in June 2009 and constitutes a solid legal basis for the establishment o f a modern and transparent procurement system. The CNMP estimates that it will take a further six months after the law becomes effective to broaden compliance with the standard documents and procedures in all the target agencies to a level which could be subjected to independentaudit with the expectation o f a positive result. The independent audit o f these first six months of experience under the new law would also require one or two months, so the earliest date by which the government can commit to meet the condition i s eight months after the law becomes effective. 38. Staff recommendsthat the conditionbewaived primarily on the basis of past performanceand continuedcommitment of the CNMP to advance the procurement reformsin a difficultenvironment. Eveninthe absence of a coherent legal framework for procurement, improved procurement practices have already been adopted by some government entities. This progress has been achieved largely through the efforts o f the CNMP, which introduced standard bidding documents and a procedures manual to government procurement staff (including newly-appointed members o f Commissions 12 Ministe'rielles and Commissions Spe'cialise'es)through a series of seminars delivered in 2006 and 2007. These standardized procedures and documents are consistent with the law prepared by the CNMP for submission to Parliament and their distribution even before the law was passed is expected to speed the adoption of improvedprocurement practices once the new legal framework is inplace. Since its creation in early 2005, the CNMP has assumeda leadershiprole andimprovedpublicprocurementpracticesthrough its review/approval of hundreds of procurementprocesses each year, as well as hands-on training of procurement staff in key purchasing entities. As a result, there is evidence that the percentage of noncompetitiveprocurement (value of contracts awarded without competition as percent of all contracts awarded) has declined from an estimated 85% in 2004 to 59% in 2006. At the same time the CNMP drafted the new procurement law which was first submitted to the Prime Minister'sOffice (PMO) in July 2007 for review and comments. The delays inthe law'sarrival at Parliament began only after the CNMP hadcompletedtheir technical work, Dueto the limitednumber of legal staff at the PMO andthe full legislative agendathat year, an indepthreview ofthe law only beganinMay 2008. The PMO's review and eventual submission of the law to Parliament was further delayedbythe social, politicalandeconomic crises that intervened. Improve human resource management by updating and thereafter maintaining updated, registry of state employees and defining system, applicability and procedures for new merit-based appointments andpromotions. 39. The Borrower has partially met this condition. It has made significant progresstowards fully meeting the condition. The registry of state employees for key line ministries was completedby the firm Turbo System inFebruary 2009. Procedures for newmerit-basedappointmentsandpromotions are still to beput inplace. 40. Staff recommends that a waiver be granted based on progress made and the following actions that the Government intends to undertake: (i) issuance o f an arrCtC which defines the organization and functioning of OMRH by the Prime Minister by end- September 2009; (ii)completion of procedures for merit-based appointment and promotions by end-September 2009, and (iii)extension of the registry to all line ministriesandGovernmentagenciesby end-September2009. From January I, 2007 onwards, competitively procure any further contractual arrangements for the purchase of power (whether through new contracts or the modification or extension of existing contracts)for the supply of electricity to Port-au- Prince and the main provincial towns, with due regard for IDA'S environmental recommendations in the matter. 41. The Borrower has partially met this condition. Two bidding processes were completed for the provision of energy in the provinces and Port-au-Prince in 2007 and 2008. However, the signing o f an amendment to the contract for power purchaseVarreux I1with the firm Sogener, dated August 28th 2007, did not follow a competitive process. This amendment, of which a copy has been sent to the World Bank, differs from the proposed amendment made by EDH in April 2007 - that had been considered in 13 conformity with that EGRO I1condition - in two respects: (i)the amendment included the repair o f the facilities o f the Varreux Isite - partially destroyed by a fire in August 2007, as a result o f that, the prices o f the contract had been changed, and (ii)the amendment prolongs the length o f the contract from 5 to 14 years. However, the Government i s committed to resolve the issues raised by the Bank. InNovember 2008, the Government transmitted to Bank staff the information requested for further analysis o f the amendment and the two other contracts (E Power and Haitian Tractor). The Bank Procurement team reviewed the documents provided by the Government and concluded that the E-Power and Haitian Tractor contracts were awarded as a result o f an open bidding process. However, the Sogener amendment was not awarded competitively. To improve transparency and accountability in the sector, a monitoring mechanism which tracks on a monthly basis, fiscal transfers to EDH has been put in place (see paragraph 22). 42. Staff recommends that a waiver be granted based on the following actions that the Governmentintends to undertakeas discussed duringEGRO I1November 17-21,2008 mission(see Aide-MBmoire of EGRO I1mission) and reaffirmedduring the preparation of this disbursement memorandum: (a) establishment of a comprehensive system o f monitoring and evaluation of Power Purchasing Agreements (PPAs) within EDH, including: immediate activation o f all fuel meters (including within EDHplants), andmonitoring ofthe fuel consumed at the plants(EDHandproviders) and o f the energy provided by the power providers, with imposition o f penalties, when applicable, (b) implementation o f monthly audits of: fuel consumption, equipment in place, based on the terms o f the contract that set targets for installed capacity, and energy provided vs. energy billed. The audits shall be carried out by internationally certified firms over the life o f the contracts, and the results o f the audits shall be published on the web site o f the Ministry of Finance; (c) monthly publication on the MEF website o f the monitoring table for transfers from the Government to the electricity sector, which will be audited by internationally certified firms on a bi-yearly basis; and (d) publication o f the contracts and amendments signed with the Independent Power Producers on the MEF website. Regularly publish on MEF website, circulate to the media and transmit to Parliament summaries of civil society organization quarterly monitoring reports after their adoption by CC and discussionwith MEF onprogress achieved. 43. The Borrower has partially met this condition. The publication of civil society organization monitoring reports was stalled due to a lack of clarity regarding responsibilitiesand funding for the monitoring mechanism. However, significant progress has been made recently under EGTAG Ifunding. The five civil society organizations started their assignment in mid-January 2009. They have produced their first report. This first report should be discussed with the MEF, publishedon the MEFwebsite, andtransmittedto the Parliament. The Government has committed to circulate the report to the media and transmit it to Parliament by end-June 2009. Government has also made a commitment to ensure timely delivery o f the 14 reports by: (i) a consultant to support the monitoring process by end-June 2009; hiring and (ii)holding regular meetings to validate the reports. 44. In addition, it is worth notingthat the CivilSociety monitoringmechanism predates the installation of the Parliamentarians of Haiti's 4Sth Legislature, mid 2006. Since then, the lawmakers have played their check-and-balance role by holding frequent hearings (albeit sometimes in a dysfunctional fashion) on economic governance issues in general, rangingfrom alleged corruption cases to statutory ex-post control o f uses o f public funds. Such hearings and their results are covered widely by the media and followed by the public at large with great interest. Furthermore, an independent civil society watchdog organization (Observatoire Citoyen pour l 'Action des Pouvoirs Publics et Parapublics -OCAP), created only last year, is also monitoring the Government's reform agenda and the sectoral ministriesaction plans. Moreover, an increasing parallel demand for transparency by the Parliament and other independent watchdog institutions has proved effective in enforcing government's accountability with respect to economic governance ingeneral, 45. Staff requests that a waiver be granted for this condition given the significant progress made to date towards its achievement and the Government's intentto ensuringthat the actions identifiedabove are carried out on schedule. C. ProgressAgainst OutcomeIndicators 46. Despitethe delay inimplementingsome of the tranche release conditions, the Government has made significant efforts to meet the program outcome indicators. Since FY2006, budget executionreports are routinely made available to the public within one month o f their completion. These reports are available on the MEF website. The Government has made efforts to improve the execution o f spending and cut the use o f "comptes courants". Over the past two years, inno more than 2 o f the last 4 calendar quarters actual non-foreign financed expenditure deviated from budgeted expenditure by more than 5- 10 percent. Disbursement o f cumulative non-salary current public expenditures since October 2006 through the "comptes courants was kept below the 10 " percent threshold. The Government has also strengthened budget control. External audit reports on central government consolidated operations are regularly made available to the public after beingcompleted. 47, In the area of public procurement some progress has been made in reducing the Government's use of sole source contracting and in improving the quality of biddingdocuments and awarded contracts. There is evidence that the percentage of noncompetitive procurement (value o f contracts awarded without competition as a percentage o f all contracts awarded) has declined from an estimated 85 percent in2004 to less than 60 percent in 2006. Although comparable statistics are not yet available for 2008, it is likely that the Government's recourse to open and competitive procurement methods has continued to expand. The quality of bidding processes and contractual documents has also improved, as indicated by the increased percentage o f bidding documents and contract awards approved by the CNMP. In2005, the CNMP's first year 15 of operation, only 20 percent o f the procurement documents submitted for the Commission's review were approved as presented. By 2007 the percentage o f submitted documents that satisfied the CNMP requirementshadrisento 63 percent. 48. In the area of public infrastructure management, since 2006, the Government has regularly published electricity monitoring reports on the MFE website. However, publication has been interrupted since October 2008 in a difficult context o f devastating exogenous shocks that slowed down the Government's overall reformprogram. The publicationprocess has beenrecently revamped (see para 22). 49. In the area of governance in the education sector, the Government has improved accountability and transparency in the use of public resources in the education sector. The law which creates the National Education Partnership Office (NEPO) has been passed, and its location identified. However, NEPO has yet to be operational. 16