Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB1937 Project Name Public Sector Financial Management Reform Support Operation Region EUROPE AND CENTRAL ASIA Sector Public Sector Management (100%) Project ID P063081 Recipient (s) GOVERNMENT OF GEORGIA Implementing Agency Ministry of Finance 70, I. Abashidze Street Georgia 0162 Tel: 995 32 29 13 54 Fax: 995 32 29 13 54 Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared December 22, 2005 Date of Appraisal Authorization December 15, 2005 Date of Board Approval February 16, 2006 1. Country and Sector Background Georgia, a country with a population of 4,3 million 1 , is strategically located as a transit corridor in the Caucasus. The country declared independence from Soviet rule in 1991. Since then its efforts to construct a democratic state and re-build the economy have been challenged by a number of factors including two separatist conflicts in Abkhazia and South Ossetia resulting in a high number of internally displaced people and loss of 30% of country’s territory, civil war, domestic political controversy, crisis in Russia, and a series of natural calamities. Significant structural reforms undertaken in the late 1990s led to an early rebound in 1996-1997, though momentum slowed afterwards. Achievements in such areas as trade liberalization, legal and regulatory reform, privatization and competition, banking sector restructuring, and judicial and health sector reforms were diluted by weak fiscal management and poor public sector capacity, which negatively affected the implementation of second-generation reforms requiring sustained commitment and capacity across Government. Dramatic deterioration of governance hindered broad-based economic growth and poverty reduction, eventually prompting massive protests during Parliamentary elections in November, 2003 and leading to the resignation of President Shevardnadze. The new Government obtained an overwhelming majority in both Presidential and Parliamentary elections which reflected full public support for an announced political program calling for a deep and far-reaching fight against corruption and poor governance. Economic performance during the first 18 months following the November Revolution of Roses has been encouraging. GDP continues to be robust, estimated at 6.2 percent in 2004 and 6.8 percent for the first half of 2005. Inflation remained at about 9 percent in the 12 months ended in June, 2005. Tax revenues as a percentage of GDP have improved dramatically in 2004 and overall tax collection to GDP rate is 3.5 percent higher then in 2003. On the expenditure side, the government repaid some GEL 62 million in 1 This number does not include population of Abkhazia and Osetia regions. Page 2 domestic arrears, minimum pensions were doubled to GEL 28 per month (about US$15) from January 2005, and the Government continues to clear arrears accumulated under the previous administration. Poverty, however, remains high affecting more than 50% of the population, and delivery of public services requires significant improvements. The Government acknowledges the key role of a well functioning public sector in sustaining the improvements made and addressing the challenges ahead. The EDPRP Annual Progress Report of 2004 takes note of shortcomings in Georgia’s public sector management as an impediment to coherent implementation of the state reform program. Accordingly, it identifies enhancing efficiency and accountability of public institutions and creation of a public service that meets modern demands as priority areas in the medium term. The Bank supports the Government’s development policy through a series of three Poverty Reduction Support Operations (PRSO) of which the first was approved in August, 2005 in the amount of USD20 million (USD13.5 million IDA credit and USD6.5 million IDA grant). Strengthening public sector accountability, efficiency and transparency is the first of the four key pillars of the PRSO program. This pillar builds on the following areas: à Strengthening public budgeting and expenditure management, à Enhancing transparency and efficiency in the public procurement system, à Improving the transparency and effectiveness of public financial management, à Strengthening local governance and intergovernmental fiscal relations, à Strengthening public administration, and à Enhancing public sector transparency and accountability. 2. Objectives The Project Development Objective is to enhance governance, particularly in the public financial management domain through: i) strengthening the institutional capacity of key agencies to more effectively and efficiently use public resources; and ii) improving accountability in the use of public resources . This development objective is appropriately broad, given the location of the project within the Government’s broader ‘Strategic Vision’ and the need to accommodate the plans being further developed by the Government. In addition, it provides for flexible funding arrangements to be set up for the PSFMR-SO that will enable the Government to attract additional resources from various donors. 3. Rationale for Bank Involvement The rationale for the Bank to re-engage in governance and public sector reform is multi-faceted. Whereas in many countries in the region public sector reforms have slowed down or stalled, in Georgia a committed government is undertaking renewed efforts. As noted above, the commitment of this new Government is based on its popular mandate to address the weaknesses and failures of the previous Government such as corruption and a low capacity to implement government programs. The growth and poverty reduction efforts of the Government depend critically upon fundamental improvements in core government functions. In the ongoing dialogue with the Bank, the Government has indicated that as it attempts to address weaknesses and to implement further policy reforms, it will require support and technical assistance, which this project aims to provide. In short, without strengthening of core Page 3 government capacities, the Government will remain constrained in its ability to achieve its growth and poverty reduction objectives and limited in its ability to make effective use of the direct budgetary support provided through the PRSO. If successful, public sector reforms in Georgia will have a significant demonstration effect for other countries in the region that also seek to pursue improvements in public sector management. The new Government’s dedication to reform and to build a democratic state has stimulated a number of donors to re-engage in the development of Georgia. Because of the Bank’s comprehensive engagement with the Government and its capacity on the ground, other donors look to the Bank for leadership in dialogue on public sector management issues and in facilitating collaboration between Government and external partners around this theme. 4. Description The PSFMR-SO is designed around four components: (1) MTEF and Budget Management; (2) Treasury Reform and Budget Execution; (3) Human Resources Management Information System, and (4) Public Accountability and Oversight of Public Financial Management. The Information Technology (IT) solutions for the first three components are viewed as elements of the integrated Public Financial Management System (PFMS). The support provided through the pooled funding arrangement will be complementary to that provided by other donors and will be managed by the Government within the framework of its wider arrangements (described in Section C) for coordinating support to PFM reform. Component 1: MTEF and Budget Management [US$2.27 million]: This component builds on Government’s strong commitment to improve its capacity to plan and budget more strategically for the medium term. This commitment, as reflected in a sequenced reform action plan, is a crucial step in Government’s efforts to translate its policies into action and to reverse some of the long established procedures and habits of managing public finance in Georgia (widely regarded as inefficient). Recognizing the need for a more strategic multi-year approach to budget planning and management, the MoF introduced a medium-term expenditure framework (MTEF) during 2005. This established a strategic phase into the budget planning cycle which takes place during the first four months of the year and contributes to the preparation of the Basic Data and Directions (BDD) document submitted to Cabinet in April. The initial MTEF exercise is recognized as having achieved some significant successes. It also highlighted a number of issues to be tackled in the future development of the MTEF and budget process. The MoF’s medium-term strategy sets out a series of measures necessary to address these issues emphasising an integrated approach that embraces not only the strategic stage of the budget process, but also the downstream tasks of budget preparation and monitoring and oversight of budget implementation. The Project component supports implementation of these measures, through further reform and development of budget planning and management functions in the MoF and line ministries. The main project-related outcomes for this component could be summarized as: (i) establishment of the MTEF as the principal decision-making tool for linking budgetary resource allocations to Government policy objectives and program priorities, and for ensuring greater budget predictability for line ministries; and (ii) strengthening budget planning and management processes within the MoF and line ministries so that the budget is implemented consistent with the strategies and priorities identified in the MTEF. External and local consultant services are the key inputs provided through this component which focuses on capacity building in the MoF and line ministries. These services will include: long-term general MTEF support; assistance with macroeconomic and fiscal analysis forecasting; support with strategic budgeting and budget management in the MoF and in ministries; as well as short-term expertise in areas such as Page 4 budget and public finance legislation; internal budget planning and execution procedures in line ministries; inter-governmental finance, and public investment management. These TA inputs will complement the substantial investment in developing and introducing IT solutions for the Integrated Public Financial Management System. The component will also provide resources for workshops and training to support the MTEF/Budget planning cycle and the introduction of improved budget planning and management procedures. The inputs provided under this component will translate into the following outputs: · The MTEF becomes fully integrated and institutionalized within the budget planning process, and the planning takes place against a realistic macro-fiscal framework; · Strengthened strategic and annual budget planning processes are established within the MoF, along with the improved arrangements for monitoring and oversight of budget implementation; · Capacities and procedures for strategic expenditure planning, budget preparation and budget management are strengthened in line ministries; · Improved arrangements in place for the financing of the budget of the territorial units; · An internal budget policy and public expenditure review process is introduced; · Capacity building and training strategy for staff in MoF Budget Department and line ministry budget units developed and implemented; · There is greater transparency and public accountability institutionalized in the budget process. Component 2: Treasury and Budget Execution [US$8.0 million] : Georgia has recently made great strides in enhancing budget comprehensiveness and reliability. Treasury reform is at the heart of this effort. As reflected in the Government’s Strategic Vision, the Treasury reform has three related elements: accounting reform, cash management reform, and IT systems development. For the treasury reform to succeed, reform is also needed in line ministries, especially focused on resource management processes— particularly pertaining to cash and procurement management. While Treasury sets the standards and introduces the Treasury system, line ministries are actually responsible for ensuring disbursements are used to implement their formulated budgets.. The objectives of the component are to: (i) support Treasury in playing its role, especially leading accounting reform, cash management improvement, and IT systems development: and (ii) encourage accounting, cash and procurement improvement in the line ministries. The TA inputs provided under the component will be a combination of international and national advisory services including: professional accounting support to Treasury leadership in dealing with technical issues related to accounting reforms, including legislation, drafting accounting regulations, etc.; support for the Treasury in developing necessary capacity to manage cash disbursements under a new accounting and systems framework; assistance finance departments in line ministries and PLEs in implementing the new accounting reforms and taking up the responsibilities of managing public resources in budget execution (including providing oversight of PLEs, managing cash flow, and procurement). There will be a significant training input, centered on the first few years of the government-wide accounting training strategy. In addition, major investments will be provided to IT solutions for the Treasury as part of the integrated PFMS. Page 5 In order to achieve the objectives outlined above, the component is structured to produce the following outputs: · Treasury develops appropriate role in leading accounting reform process, including playing the role in defining accounting standards, regulations, etc; · A robust training program is set in place that leads to certification of public accounts and gradual adoption of IPSAS cash and then accrual accounting standards; · A professionalized public accounting community is introduced in Georgia; · Resource management processes (including cash and procurement management) and budget accounting and reporting products are significantly enhanced in line ministries, PLEs and other general government entities; · Cash management procedures are significantly improved, in the Treasury and spending agencies (with longer horizons for cash plans and more reliable access to financial resources); · Procurement related information sharing is more efficient; · An integrated, modern Public Financial Management System (PFMS) is implemented by the end of 2008 and fully operational in 2009. The PFMS will be integrating 3 key sub-components: „ Core Treasury System to be implemented by the Treasury Service (Component 2.A) „ PFMS modules to be implemented by the Ministry of Finance (Component 2.B) „ HRMIS to be implemented by Public Service Bureau (Component 3) A countrywide network connecting all central and local units of the Treasury, central units of the Budget, Tax, Customs and other departments of the MoF, as well as the National Bank, State Procurement Agency, Public Service Bureau, Chamber of Control and other related government agencies will be established as Government contribution (physical connections). All necessary hardware and network equipment will be provided by project funding. Functional requirements and technical specifications of the integrated PFMS will be prepared through technical assistance of international consultants. An integrated application software will be developed to satisfy functional requirements of MoF, Treasury and PSB (combining the capabilities of commercial off- the-shelf software with locally developed modules, and benefiting from existing IT capacity). After a successful pilot, the system will be replicated across the designated scope of the project. Central and local hardware + network equipment installations will be completed before the roll out phase. Data migration from existing databases to new PFMS will be completed after completion of central systems (incl. data cleaning, file re-formatting and loading). All IT staff and the end users of the PFMS will be trained to use and manage the new web-based applications. IT specialists will have advanced training in all major system components to be able to manage the system, diagnose basic problems and provide technical support to users. Application software programming training will be provided to programmers. Component 3: Human Resources Management Information System [US$2.14 million] : The Government that assumed office after the Rose Revolution of November, 2003 inherited weak and disorganized public administration institutions and an unmotivated and a poorly managed cohort of civil servants. The Government is fully aware that these factors have negatively influenced the expected improvements in policymaking as well as in public service delivery, and that the poor quality of the civil service remains a decisive factor in the continuing problem of corruption and forms a constraint for the implementation of all the other reforms that the government intends to undertake. It is therefore in the Page 6 context of the National Anti-Corruption Strategy (approved by the President in June 2005), that the Government has planned a number of actions in the area of civil service reform. This list of actions is an initial step in developing a comprehensive approach to reform of the civil service. Thus far, the Government has left the initiative for this type of reform mainly to the individual Ministries and Agencies, with mixed results. This approach is gradually being revised as the need for a centrally driven reform becomes clear. The absence of comprehensive data on the size, composition and remuneration of the civil service is now recognized by the Government as a major impediment, one that hinders proper costing of programs in the budget and in the MTEF and that constrains the formulation of a feasible medium-term road-map for the civil service reform. The need to develop a comprehensive database of personnel is particularly acute at this stage in Georgia. After the rose revolution, large scale restructuring of ministries has taken place, including amalgamation of ministries and merging of previously separate departments into core ministries. Moreover, there have been several replacements of ministers. With each change of minister it is common that all staff submit their resignation, and is reinstated – if the new minister is agreeable to that. The number of times re-organizations of central government ministries and departments have taken place between January 2004 and July 2005 varied between 1 and 6 times, with an average of more than 2 re-organizations 2 per ministry. In more than 90% of the cases there was no “attestation” or only for some posts at re-instatement. It is therefore understandable that under these circumstances there is little or no certainty over accuracy of personnel data in most ministries. As a result, the budget preparations by MoF in 2004 were held up for 10 days as there were no up to date and accurate salary data on public sector employees. Beyond these immediate needs related to public expenditure management, there is also a need to develop an HRMIS as a foundation stone for future reforms of public sector employment. Development of a Human Resources database as an instrument to achieving immediate public expenditure management as well as boarder civil service improvements is therefore now recognized as a necessity. In view of the above, the objectives of the HRMIS component are to: (i) establish a mechanism to collect, process, and update comprehensive data on the size and composition of the civil service; (ii) establish an automated payroll for the civil service and ensure that the civil service wage bill is properly reflected in the budget and MTEF; and (iii) to support decision-making on a feasible medium-term, civil service reform strategy that leads to improvements in performance of personnel management functions. The development of the human resources management information system (HRMIS) is an appropriate tool to contribute to these objectives. The component will provide inputs necessary for technical design and preparation of the HRMIS, and making it operational as part of the integrated PFMS. In addition to introduction of the HRMIS, technical assistance will be made available for development of a pay and grading system. HRMIS will be developed as another component of integrated PFMS implementation. HRMIS central hardware will be located in PSB premises and be connected to System Center through a dedicated line connection. Payroll calculation module will be developed a part of the MoF PFMS component. HRMIS and Payroll calculation modules will be closely linked for online data exchange. Development of HRMIS application software will be a part of integrated PFMS software development efforts. Similarly, necessary hardware and network equipment will be installed within the scope of integrated system infrastructure establishment efforts. 2 Report: “Personnel Management Practices in Central Government Organizations of Georgia, Reforms Since 2004, Staffing Decisions, Attestation, Selection and HR Planning” Page 7 The HRMIS will cover approximately 63,440 civil servants working in central government ministries and agencies in central and deconcentrated offices. There is no intention to include local government employees at this stage. The HRMIS will provide the functionality to furnish information about the following HR management tasks: · Personnel Records Management · Payroll Administration · Performance Management · Selection and recruitment · Training and Development Further details of how each of these functions will be incorporated in the system and what the implications are for the dimensions and specifications of the system have been determined in close collaboration with the PSB. All ministries and units that are included in the Treasury System will be covered by the HRMIS. Each of these ministries and units will have access to the HRMIS to input data on its staff and to record HR management actions for which it has responsibility, i.e.: personnel records management, performance management, selection and recruitment and training and development. The PSB will receive the same information and will process the data for analysis at aggregate levels. The PSB is responsible for maintaining the accuracy and timeliness of data inputs by line ministries and agencies. The organizational arrangements for the HRMIS have been developed with the view to ensure that this system is useful for the users, accurate and kept up to date. The ministries are responsible for entering all data in the HRMIS. The PSB is responsible for the management of the HRMIS, including its upkeep and accuracy. MoF is responsible for O&M from the IT side. MoF is also responsible for the pay roll calculation of each employee, based on the data provided by ministries through the PSB. This includes the calculation of the salaries and allowances of all civil servants in the HRMIS, based on monthly up- dated data for each employee received from PSB. This arrangement implicitly entails that only those employees who have been included in the HRMIS database will receive their salary. This arrangement ensures that the HRMIS is always kept up to date and also helps to reduce the risk of ghost workers from being included on the payroll. The expected outputs of the HRMIS can be summarized as follows: · An automated Human Resources Management Information System (HRMIS) that provides a comprehensive and accurate database of all staff employed by the Government, including essential personnel data, such as employment status, salary and entitlements, educational background, job classification, etc.; · An automated payroll that provides direct inputs into budgeting and expenditure management functions, and forms the basis for elaboration of other reforms of the civil service; · Improved access to accurate and timely information about the size and the cost of personnel in each unit, as necessary inputs to targeted restructuring and retrenchment operations; · Measurable improvements of the execution of remuneration management functions. Beyond the HRMIS there is a need for more systemic reforms of the civil service. As mentioned, the Government holds the view that it is not yet appropriate to develop a top down, comprehensive strategy for such reforms. It is therefore more suitable to develop a different approach, one that fits better with the circumstances in Georgia. A proposal has been formulated for a so-called Performance Improvement Page 8 Fund, an incentive based facility that creates the opportunity to stimulate civil service reforms at the level of individual ministries. This proposal has been received positively by the Government and discussions are ongoing about how this approach can be implemented. It is however not foreseen that this approach to civil service reform will be included within the scope of the PSFMR-SO, although there will certainly be connections at the level of policy dialogue between Government and DPs. Component 4: Public Accountability and Oversight of Public Financial Management [US$1.92 million] : The new Government has made improved public oversight and accountability one of the guiding principles of its political and economic reform program. There is a strong emphasis on promoting open and client oriented government. The Strategic Vision presented by the MoF underlines the importance of transparency of government operations and their independent scrutiny for promoting the effective and efficient use of public resources. Subsequently, in describing the future reform actions the document focuses on fundamentally refocusing the activities of the Chamber of Control (CCG) to become an independent government auditor and deliver audit services to the Georgian public sector in accordance with international best practice. The document also concentrates on strengthening the role of the Parliamentary Accounts Committee and wider accountability to society that currently is constrained by inadequacies in the dissemination of information on the Budget and public finances. Building on this Strategic Vision as well as the CCG’s Five-year Corporate Development and Reorganization Implementation Plan, the objectives of this component are: (i) to facilitate the strengthening of the Chamber of Control’s operations and structure and the development and implementation of a training program on external audit; and (ii) to help with institutionalizing budget process mechanisms within and from the executive that will enable public accountability. Activities aimed at achievement of the second objective above will be mainstreamed within the support to the MoF and Treasury under the Components 1 and 2 above. Inputs targeted specifically towards the CCG under this component include international and national advisory services to the CCG to provide the management of the Chamber with strategic professional guidance, to develop secondary and other related legislation, to devise audit and staff manuals and quality control procedures, to advise on HR policies and management. The component will finance development of appropriate training policies, procedures and materials, setting up training database and library, and delivery of training, principally in value-for-money and performance auditing concepts, also provision of on-the-job practical training for the CCG auditors. The component will support experts on information and communication policies, procedures and management including media relations, to strengthen CCG interaction with Parliament as well as strategic alliances with civil society. As a result the following outputs will be produced: · The Chamber of Control is transformed into a supreme external audit institution; · The Human Resources capacity of the CCG is responsive to the needs of the organization; · An audit methodology for the CCG is in line with international best practice; · Greater transparency is provided in and more informed public discussion of the activities and findings of the CCG. While reforms to the nuts and bolts of budgeting, accounting and auditing systems and processes are critical to improve the public finances and public service delivery, such reforms need to take place within the context of accountability to the electorate for government effectiveness. In addition to this project, DFID, together with other bilateral donors, are planning to support specific interventions with players outside the Executive. The objective of this project will be to make the allocation and use of funds against priorities more transparent and to engage key stakeholders, such as civil society and parliament, more effectively in the budget process. Such a project is expected to operate under the same wide public financial management umbrella and complement ongoing activities financed by the Netherlands Embassy Page 9 in Georgia – a two years (2005-2007) program in support of Georgia’s Parliament Democracy – assistance to Budget and Finance Committee, and a project directed towards the media on MTEF related issues. In addition to the above main components, US$0.67 million is allocated for Project Management support to ensure: (i) the project activities are well coordinated; (ii) issues affecting or potentially affecting project implementation are identified in a timely manner; (iii) technical advice is provided to component managers in critical arrears of project management, such as how to develop work plans, write terms of reference and effectively manage consultant services: iv) necessary project inputs are provided in a timely and cost-efficient manner, (v) project resources are appropriately managed in accordance with Bank and Development partners requirements for procurement and financial management, and (vi) effective project monitoring and progress reporting is carried out. 5. Financing Source: ($m.) RECIPIENT 0.9 IDA Grant 3 UK: BRITISH DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFID) 4.5 NETHERLANDS, MINISTRY FOR DEVELOPMENT COOPERATION 2.1 SWEDEN: SWEDISH INTL. DEV. COOPERATION AGENCY (SIDA) 4.5 Total 15.00 6. Implementation Partnership arrangements The PSFMR-SO intends to maximize support for the Government’s efforts to implement reforms in the public sector in Georgia. For this purpose the Bank has collaborated closely with other interested donors. In view of the limited resources available for TA in this area and the strong impetus to reform on the side of the Government, it was considered appropriate to strengthen this collaboration by developing a programmatic approach to reforms in public financial management and civil service, underpinned by a pooled funding arrangement. Bilateral donors including UK Department for International Development (DFID), the Embassy of Netherlands and Swedish International Development Cooperation Agency (SIDA) committed to partner with IDA by contributing to the pool. A pooled fund arrangement reflects the Government of Georgia preference for SWAps as opposed to individual donor support. It also provides a viable alternative for donors who are faced with the capacity constraints due to the limited size of their in country presence. The Project management and implementation arrangements as presented in the paragraph 2 below fit a comprehensive coordination framework currently under consideration by the Government. This framework is shown in the Box 1 and will be put in place by the Government to ensure effective coordination in the planning and implementation of all donors’ support provided for the PFM reform. Central of this coordination mechanism will be the establishment of a PFM Reform Support Committee that will meet at least twice each year under the chairmanship of the Prime Minister or the Minister of Finance and on which all key PFM stakeholders and donors will be represented. The Government’s Strategic Vision will be used to guide the PFM reform process, to identify requirements for additional Page 10 financing for the implementation of reform measures, and to secure financial support from Georgia’s development partners and donors. Institutional and implementation arrangements The division of institutional mandates, roles and responsibilities for the management of the Project is summarized below and described in greater detail in Technical Annex 6: Implementation Arrangements. The Project Management Committee (PMC) will provide overall oversight and policy guidance. The PMC includes senior decision makers within the Government (at Minister/First Deputy Minister level or equivalent). The Development Partners (DPs) who participate and contribute to the PSFMR-SO are also represented. The PMC reviews the Annual Work Plan (AWP) to ensure it is consistent with and contributes to the Government’s broader reform agenda, and approves the AWP. The Project Implementation Team (PIT) is coordinated by the Deputy Minister of Finance responsible for international aid and donor coordination. It will consist of all PSFMR-SO Component Managers, who will on a regular base monitor progress of the project, including procurement and disbursements. The PIT prepares the AWP, based on inputs from Component Managers. The PIT is the secretariat for the PMC to PFM Reform Support Committee - coordinates all Development Partners support for PFM - chaired by Prime Minister or Minister for Finance - membership includes PFM stakeholders in Government and all PFM donors Direct Support Donor A PFMRSP Pooled Fund Direct Support Donor B Direct Support Donor C PFMRSP Project Management Committee PFMRSP Project Implementation Team Box 1: Support for PFM Reform – Coordination Framework Page 11 whom it reports. The PIT is supported by an IT Coordinator (the Head of the IT and Analytical Department MoF) and an Administration and Procurement Support Team (APST). Component Managers (CMs) are managers within the PSFMR-SO beneficiary agencies (Ministry of Finance, Chamber of Control, Public Service Bureau) responsible for implementation of the respective components of the project. The Component Managers will be fully responsible for their PSFMR-SO components on the basis of their line management function. The Component Managers report along their normal lines of accountability within their respective organizations. The IT Coordinator is responsible for providing technical coordination of all IT related activities under the project. The Administrative and Procurement Support Team (APST) provides support to the CMs and coordinates reporting on the Project. The APST is familiar with the Bank’s financial management, disbursement and procurement rules and procedures, and has substantial experience in implementing Bank funded projects. In line with the Government’s desire to mainstream stand alone project implementation units into existing ministry structures, the APST is viewed as a transitional facility providing support to the CMs. Such arrangements allow to maximize the use of existing capacity and staff with their gradual integration into the executive structure and processes. The major part of project financial management will not be performed by the APST but rather by Treasury and the CMs in accordance with standard Budget execution and reporting procedures. The aspects of project financial management that will be done by the APST include: producing consolidated project financial reports from the Budget execution reports provided by the CMs and Treasury and organizing the project’s annual audits. The APST will provide on-job training to CMs to build their capacity to independently assume project implementation tasks. As to the pooling of donor funds, the Treasury maintains a foreign currency account at the National Bank of Georgia (NBG) into which the foreign currency contributions from the various DPs for this PSFMR- SO will be received. Treasury will create and manage sub-accounts of this foreign currency account, one for each donor, and institute procedures to track the various donor funds held in these sub-accounts. This will enable DPs’ funds to be maintained in foreign currency and be separately identifiable until such time as they are pooled with the Budget. Pooling will occur when Treasury sells the DPs’ foreign currency from the relevant foreign currency sub- account to the National Bank of Georgia (NBG) and deposits an equivalent Lari amount in Treasury’s Lari-denominated Treasury Single Account. Pooling will happen immediately upon receipt into the relevant sub-account of a DP’s contribution to the PSFMR-SO. To mitigate the risk of delays in DPs’ funds being made available for the execution of the Project, the level of DPs’ disbursement will be adjusted periodically based on performance and the completeness of budget execution against agreed targets. 7. Sustainability The project supports reforms that are central to the policies of the Government. Improvements in governance are at the heart of the popular mandate of this Government. The mechanism that brings together multiple donors further enhances the longer term nature of this support. These are key factors in the operating environment of this project that contribute to its sustainability. The expected duration of the project is four years. However the reform initiatives it supports have a longer term perspective. The design of project components builds on the Government’s existing strategies for reforms in budgeting, accounting, resource management, and external audit which are combined in the MoF Strategic Vision for Public Financial Management (PFM) reform. Subsequently, implementation of the project components is fully institutionalized in the agencies that represent key players within the PFM system. Such institutional arrangements will provide for strengthening and Page 12 maintaining adequate organizational capacity necessary to sustain immediate project outputs and to proceed with further developments in the public sector as per the national policies to evolve. 8. Lessons Learned from Past Operations in the Country/Sector The design of the project draws on the lessons learned from IDA supported investment and policy-based operations in Georgia as well as from implementation of similar projects in other regions. Special consideration was given to the following aspects: Government ownership of the reform agenda is essential to ensuring effective implementation and future sustainability of the project. For that reason, the PSFMR-SO fully recognizes the crucial importance of having a national strategy in place. It will support priority interventions identified as per extensive consultations with the counterparts within the framework of the PFM Strategic Vision and National Anti-corruption Strategy. Extensive consultations have been undertaken to ensure good understanding and acceptance of approaches under the PSFMR-SO by the main stakeholders of the project. A key condition for effectiveness will be the endorsement, by decree of the Cabinet, of the reform direction proposed in the Strategic Vision document, and the specific reform dimensions in the Government Accounting Strategy. The proposed pooled funding arrangements for this project are new for Georgia. Hence, experience with other Bank operations applying similar funding mechanisms was carefully considered and adapted to reflect the country context. The FMS team conducted an assessment of the feasibility of using Georgian public financial management systems to implement World Bank-financed projects in general, and the proposed project in particular. In the course of this work the capacity of the Treasury systems was assessed for managing project funds, providing the required level of banking services and reporting on the use of project funds. Disbursement arrangements were discussed at length with the MoF and Treasury service and agreements were reached on specific aspects of the accounts be established within the Treasury as well as financial management procedures to be introduced. The implementation time-frame builds on the experience of other operations in ECA region that have substantial IT investment component and reflects technical discussions with the counterparts. Special considerations were given to IT procurement. In parallel to system design, 18 months are envisaged for the completion of procurement process and about 30 months are allocated for the implementation of the systems. It is expected that a significant part would be commercially developed software. By mid- 2009 the system will be ready for the full scale implementation. The last year of the project will provide an opportunity to test the new systems, make necessary adjustments as well as complete respective training requirements. Project implementation capacity has been identified as one of the key determinants of success for all Bank financed projects in the country and region. To reinforce the accountability of each beneficiary organization for the accomplishment of the project objectives, the proposed implementation arrangements envisage that primary responsibility for project components will be assigned to the representatives of the relevant government entities – Component Managers, on the basis of their line management function. At the same time, recognizing the importance of balancing ownership for individual components and related technical knowledge with specific project management skills, the decision was made that during the initial stage of the project implementation the Component Managers and the MoF would rely on an existing administrative and procurement support team (the Institutional Building PIU) which has more than six years of experience in implementing Bank funded projects. This PIU will eventually be integrated in the structure of the Ministry of Finance thus ensuring sustainability of the implementation capacity required for this project. Page 13 Donor coordination was an important factor taken in account when designing the PSFMR-SO. The proposed funding, implementation and project management arrangements were opted for as the most appropriate vehicle to ensure effective and targeted use of donors’ resources and to strengthen the capacity of Government institutions’ to manage the external assistance provided. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP / GP 4.01) [ ] [X] Natural Habitats ( OP / BP 4.04) [ ] [X] Pest Management ( OP 4.09 ) [ ] [X] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [ ] [X] Involuntary Resettlement ( OP / BP 4.12) [ ] [X] Indigenous Peoples ( OD 4.20 , being revised as OP 4.10) [ ] [X] Forests ( OP / BP 4.36) [ ] [X] Safety of Dams ( OP / BP 4.37) [ ] [X] Projects in Disputed Areas ( OP / BP / GP 7.60) * [ ] [X] Projects on International Waterways ( OP / BP / GP 7.50) [ ] [X] 10. List of Factual Technical Documents 1. Strategic Vision: Public Financial Management Reform; MoF, September, 2005; 2. Medium Term Expenditure Framework (MTEF): Methodology and Implementation; MoF, 2005; 3. Georgian Government Basic Data and Directions 2006-2009; GoG, 2005; 4. Accounting Reform Strategy (Draft); MoF/Treasury Service, September, 2005; 5. Treasury Single Account Functional and Technical Design: Costing and Action Plan; MoF Treasury Service, April, 2005; 6. Master Plan For Development of Information Infrastructure of Ministry of Finance; MoF, 2005; 7. Chamber of Control of Georgia: Corporate Development Strategy and Reorganization Plan; CCG, June, 2005; 8. Five Year Training Plan for Chamber of Control of Georgia: 2006-2011; K. Dye, September, 2005; 9. National Anticorruption Strategy of Georgia, Presidential Decree #550 of June 24, 2005; 10. Action Plan for National Anticorruption Strategy, Government Decree #377 of September 12, 2005; 11. Economic Development and Poverty Reduction Program of Georgia; GoG, June, 2003; 12. Economic Development and Poverty Reduction Program of Georgia: Annual Progress Report; GoG, June, 2005; * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 14 13. Reform and Development Program: 2004-2009; GoG, June, 2004; 14. PSFMR-SO: Project Operation Manual (Draft), MoF, November 2005 15. Personnel Management Practices in Central Government Organizations of Georgia: Reforms Since 2004; D. Chkadua, September, 2005; 16. Assessment of Administrative Reforms in Selected Government Agencies: Interim report; Sh. Machavariani, June, 2005; 17. Country Financial Accountability Assessment; World Bank, September, 2003; 18. Country Procurement Assessment Report; World Bank, June, 2002; 19. Poverty Reduction Support Operation: Program Document; World Bank, August 18, 2005. 11. Contact point Contact: Elene Imnadze Title: Public Sector Mgmt. Spec. Tel: 5252+240 Fax: Email: Eimnadze@worldbank.org Location: Tbilisi, Georgia (IBRD) 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 15 wb148635 L:\Elene\PSRS\Project Information Document - Appraisal Stage-Dec09.doc 12/09/2005 1:11:00 PM