AFRICAN DEVELOPMENT FUND

Poverty Reduction Support Loan II for Mozambique

Appraisal Report

UA 60 Million

July 2008

GOVERNANCE, ECONOMIC & FINANCIAL MANAGEMENT DEPARTMENT

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Language: English Original: English

PROGRAMME: Poverty Reduction Support Loan II COUNTRY: Mozambique

APPRAISAL REPORT

Date: [day, month, year]

Appraisal Team

Team Leader: : Jerry Mutonga, Chief Budget Officer, OSGE.1 Team Member: Lisandro Martin, Governance Expert, OSGE.1 Sector Manager: Carlos Santiso, OSGE.1 Sector Director: Gabriel Negatu, OSGE Regional Director: Frank Black, ORSB

Peer Reviewers

Peter Mwanakatwe, Chief Economist, OREB Juliana Almeida, Country Economist, ORSB Ashie Mukungu, Country Economist, ZMFO

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TABLE OF CONTENTS CURRENCY EQUIVALENTS……………………………………………………………....iv FISCAL YEAR ………………………………………………………………………………iv ACRONYMS & ABBREVIATIONS………………………………………………………...v LOAN INFORMATION…………………………………………………………… …….....vi PROGRAMME TIMEFRAME……………………………………………………………...vii PROGRAMME EXECUTIVE SUMMARY………………………………………………..viii RESULT-BASED LOGICAL FRAMEWORK………………………………………………x I –THE PROPOSAL .…………………………………………………………..…………....1 II – COUNTRY AND PROGRAM CONTEXT…………………………………….……...1 2.1. Government overall development strategy and medium-term reforms priorities..……….1 2.2. Recent economic and social development, perspectives and constraints.………………...2 III – KEY DESIGN ELEMENTS………………………………….……………..…………4 3.1 Link with the CSP, analytical works underpinnings, and country readiness assessment…4 3.2 Collaboration and coordination with other donors……………………..………………….5 3.3 Bank comparative advantages………..…………………………………………………....5 3.4 Outcomes and lessons from past similar operations………………………………..…..…6 3.5 Relationship to other Bank operations…………………………..……………………..….7 IV – THE PROPOSED PROGRAMME AND EXPECTED RESULTS..………….…….7 4.1. Objectives of the programme………………………………………..…………………....7 4.2. Programme’s pillars, components and expected outcomes………………………….……8 4.3. Financing needs and arrangements………………….……………………………….…..15 4.4 Beneficiaries of the programme……………………………………………………….....16 4.5 Impacts on gender…………………………………………………………………….….16 4.6 Environmental impacts……………………………………………..…………………....17 V – IMPLEMENTATION, MONITORING AND EVALUATION………………….….17 5.1. Implementation arrangements…………………………………………………………....17 5.2. Monitoring and evaluation……………………………………………………………….18 VI – LEGAL INSTRUMENTS AND AUTHORITY……………………………………..18 6.1. Legal instruments ………………………………………………………………………..18 6.2. Conditions associated with Bank’s intervention………………………………………....18 6.3. Compliance with Bank Policies…………………………………………….……………19 VII - RISK MANAGEMENT………………………………………………………………19 VIII – RECOMMENDATION……………………………………………………..………20

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ANNEXES

I - Administrative Map of Mozambique II - Letter of Development Policy

III - IMF Policy Support Instrument Note IV - Performance Assessment Framework Results for 2007

V - Performance Assessment Framework Results for 2008-2010

VI - Ongoing Projects in Mozambique

VII - Summary of Public Expenditure and Financial Accountability Assessment

VIII - Governance Indicators IX - Public Financial Management Reforms & Decentralization

X- Summary of lessons Learnt from Previous GBS Operations in Mozambique

XI Socio-economic Indicators for 2007

Currency Equivalents

As of 9 June 2008

1 UA = 1.62069 US$ 1 US$ = 23.86965 Mozambican Meticais

Fiscal Year Fiscal year beginning 1 January – end 31 December

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Acronyms and Abbreviations ADB African Development Bank ADF APRM ATM

African Development Fund African Peer Review Mechanism Tax Authority of Mozambique

BoM CGP

Bank of Mozambique Country Governance Profile

CPR Country Portfolio Review CSP Country Strategy Paper CUT DBSL

Single Treasury Account (Conta Única do Tesouro) Direct Budget Support Loan

DP Development Partners DSA Debt Sustainability Analysis FSTAP Financial Sector Technical Assistance Project GDP Gross Domestic Product GoM Government of Mozambique HIPC Heavily Indebted Poor Countries HDI Human Development Index ICU IMF

Internal Control Unit International Monetary Fund

IFRS International Financial Reporting Standards IGF Inspectorate General of Finance JR MF

Joint Donor Review Ministry of Finance

MOU Memorandum of Understanding MTEF Medium Term Expenditure Framework OECD DAC OGE

Organisation for Economic Cooperation Development Assistance Committee State Budget

PAF Performance Assessment Framework PAPs Program Aid Partners PARPA PBL

Plan of Action for the Reduction of Absolute Poverty Policy Based Loan

PCR PD PEFA PER PEM

Project Completion Report Paris Declaration Public Expenditure and Financial Accountability Public Expenditure Review Public Expenditure Management

PFM Public Financial Management PIU Project Implementation Unit PRSP PRSL

Poverty Reduction Strategy Paper Poverty Reduction Support Loan

PSR Public Sector Reform RMC Regional Member Country SADC Southern African Development Community SISTAFE TA

Financial Management Information System Court of Auditors (Tribunal Adminitrativo)

UA Units of Account - SDR UAC Anti-Corruption Unit UN United Nations UFSAP Public Procurement Supervision Unit UTRAFE State Financial Administration Reform Technical Unit UTREL Technical Unit for Legal Reform UTRESP Technical Unit for Public Sector Reform WB World Bank

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Loan Information

Client’s information BORROWER: Government of the Republic of Mozambique EXECUTING AGENCY: Ministry of Finance Financing plan for the three fiscal years 2008 to 20101

Source Amount (UA) Instrument ADF 60.00 million loan DFID 103.19 million grant World Bank 94.84 million loan European Commission 81.00 million grant Sweden 62.14 million grant Norway 34.25 million grant Netherlands 31.17 million grant Germany 24.05 million grant Ireland 18.76 million grant Denmark 12.30 million grant Finland 12.12 million grant Spain 10.58 million grant Canada 8.79 million grant Switzerland 8.16 million grant Italy 6.58 million grant Belgium 5.20 million grant Austria 4.31 million grant France 3.46 million grant Portugal 2.03 million grant

ADF key financing information

Loan Currency

Unit of Account (UA)

Repayment currency In currency of disbursement selected by the borrower at signature among SDR currencies basket: (USD, EUR, GBP, JPY)

Maturity 50 years Grace period Up to 10 years Principal Repayment 1% (from year 11 through year 20) 3% (thereafter) Service charge 0.75% of the principal amount disbursed and

outstanding on semi-annual basis Commitment fee 0.5% on the undisbursed portion

1 Figures for 2009 and 2010 are indicative figures.

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Timeframe - Main stepping stones (expected)

Concept Note approval

March, 2008

Programme approval October, 2008 Effectiveness November, 2008 Completion December, 2010 Last repayment October, 2058

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Programme Executive Summary

Program Poverty Reduction Support Loan II (PRSL II) Borrower Republic of Mozambique Implementing Agency Ministry of Finance Amount UA 60 million Terms ADF loan: 50 year maturity, with 10 year grace period Program period Three fiscal years ending 31 December 2008, 2009 and 2010 Number of Tranches Single UA 20 million tranche for each of the three years Program Description The overarching purpose of the Poverty Reduction Support Loan II (PRSL II) is to improve economic and financial accountability by enhancing the external and internal audit functions and the local government framework for decentralised financial management within districts. Over the three years of its implementation, the overall program that will be supported by 18 other donors is expected to support the GoM: consolidate macroeconomic stability; enhance governance through deepening the reform of accountability institutions and further the decentralisation program; and create an enabling environment for economic and private sector development. The PRSL II which is a follow-up to the PRSL I program supports the Government of Mozambique’s (GoM) poverty reduction strategy paper, PARPA II, which covers the period 2006-2009. The main pillars of the PARPA II are: (i) governance; (ii) human capital; and (iii) economic development. This program is aligned with the PARPA II’s and the Bank’s Country Strategy Paper’s governance pillars and also with the 2008-2012 Bank Governance Strategic Directions approved by the Board in May 2008. The Bank’s experience from previous programs has been that the instrument is effective in influencing the development of policies that support other Bank-financed operations. Another lesson learnt is the need to take measures that facilitate enhanced harmonization with other donors through greater alignment of practices related to program monitoring and the conditions that trigger disbursements. In this regard, the disbursement conditions for 2008 have been reduced from ten for the previous program to two conditions taken from the performance assessment framework (PAF) agreed between donors and government plus the opening of a special foreign currency account. For 2009 and 2010 the Bank will fully harmonise with other donors by triggering disbursements based on a single condition related to the satisfactory overall outcome of the Joint Review (JR). A memorandum of understanding (MOU) detailing the undertakings of all parties was signed by donors and government. ADF support will focus on public financial management (PFM) and on decentralisation and program implementation shall be monitored based on the PAF. The PAF has five pillars broken down into 40 indicators. About 29 working groups shall monitor program implementation and report in April and October of each year to a (government/donors) JR meeting. It is expected that the ADF program will result in a more efficient and effective external audit office -Tribunal Administrativo (TA) as well as internal control units within sector ministries, plus a robust and functional framework for devolved financial management within districts.

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Program Benefits The program will assist in covering the budget’s funding deficit and thus contribute towards the funding of the PARPA II’s reform program and the maintenance of Mozambique’s macroeconomic stability through its provision of foreign currency. The deepening of the reform program especially in the areas of PFM and decentralisation is intended to directly benefit government’s accountability institutions such as the Supreme Audit Institution and Internal Control Units (ICUs) within ministries, plus the District Consultative Councils (DCCs). Indirect beneficiaries of the program include the rural poor because of the potential for enhanced voice through representation in DCCs. For a country that is 172 out of 177 on the Human Development Index, improved resource flows also create budget room for government to fund basic needs for the population; thus contributing towards the attainment of the MDGs by 2015. Risks Given the global fuel price increase and mounting food prices, the principal risk that the program faces is that of macroeconomic stability induced by external shocks. To mitigate this risk, government has to continue its rigorous fiscal and monetary policy implementation with donor assistance. In this respect, the program’s support to the enhancement of financial management and control is all the more crucial. Despite the signature of the MOU between donors and government, there is the risk that one of the parties might not fully honour their undertaking. On the one side, one or more donors might significantly delay the disbursement of their funding commitments or drastically reduce the amount. The periodic donors’ meetings and the monthly dialogue with government are intended to mitigate such a risk. On the side of government there are also two risks: the first being weak implementation capacity and the other; being the unlikely risk of policy reversal leading to the stalling of the reform program. Of these risks, the one relating to capacity constraints would be mitigated by the government’s capacity building programs that are supported by the Public Sector Reform Donor Group (PSRDG). In line with the division of labour agreed within the PSRDG, the ADF finances an Institutional Support Project (ISP) that supports capacity building for senior civil servants and decentralised service delivery. With regard to the risk of policy reversal by government, mechanisms are in place for the Bank and other donors to intensify dialogue at the highest level in order to address the problem. In the event of failure, the Bank could suspend disbursements.

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Poverty Reduction Support Loan II (DBSL) Result-based Logical Framework OBJECTIVES EXPECTED RESULTS

(OBJECTIVELY VERIFIABLE INDICATORS-OVIS)

REACH PERF. INDICATORS (MEANS OF VERIFICATION-MOVS)

BANK’S INDICATIVE TARGET & TIMEFRAME

ASSUMPTIONS, RISKS &BANK MITIGATION MEASURES

STRATEGIC GOAL To enhance transparency and accountability in the use of public resources, both at the national and district levels

Long-Term Impact 1. Improved transparency in the

management of public resources to minimize opportunities for misuse of funds.

2. Improved institutional channels for

citizens to demand transparency and participate in budget decisions that affect their own development.

3. Enhanced Governance and

accountability as incentives for sustained private sector investment.

Beneficiaries 1. Population of

Mozambique at large. 2. Population of

Mozambique living in districts outside the capital, with special emphasis on women.

3. Private Sector

Indicators and Progress anticipated in the Longer-Term Indicators 1. Improving Corruption Perceptions Index (CPI) of

Transparency International (TI). 2. Improving Human Development Index (HDI) and Gender Development Index (GDI). 3. Improving Country Policy and Institutional Assessment (CPIA) ratings 4. Improving the Global Competitiveness Index (GCI). Source: Data from Annual Country Portfolio Performance Review, Transparency International, Human Development Index. Periodicity: Annual

1. Improved ranking on the CPI index by the end of 2008 and by 5 places by the end of 2010.

2. Improved rankings on the HDI and GDI by end of 2008 and by 5 places by the end of 2010.

3. Increased the CPIA score above 3.62 by the end of 2008 and by 15% by the end of 2010.

4. Improved ranking of the GCI by end of 2008 and by 6 places by the end of 2010.

FINAL OBJECTIVE OF THE PROJECT 1. OVERARCHING PURPOSE Improve economic and financial accountability by enhancing the internal and external audit functions and the Local Government Framework of Decentralized Financial Management within districts.

Outcomes of the Project 1. Increased breadth of government

entities whose financial management become available to public scrutiny.

2. Increased relevance of audit findings and public interest in follow actions up.

3. Increased oversight role of parliament.

4. Enhanced culture of accountability and financial rigour, accompanied by proactive controls.

5. Decentralised financial management within districts which operate as transparent budget units subject to internal and external audit, and overseen by a watchful civil society.

6. Enhanced demand side for transparent local financial governance.

Beneficiaries 1. Population of

Mozambique at large. 2. Population living at the

district and local levels, particularly women.

3. Private sector.

Outcome Indicators

1. Improving the scoring of selected PEFA indicators in 2009/10 in relation to previous two PEFA reports.

Source: PEFA Analysis 2009/10, Mid Term and Final Joint Review Reports.

Progress anticipated in t he medium and long term

1. Improving the scoring of PEFA indicator PI-26 (i) from D to C in 2008/10. 2. Improving the scoring of PEFA indicator PI-26 (iii) from B to B+ in 2009/10. 3. Improving the scoring of PEFA Indicator PI-21 (iii) from C to C+ in 2009/10. 4. Improving the scoring of PEFA indicator PI-28 from C+ to B in 2009/10.

Assumptions: 1. Mozambique continues honouring strong strategic and co-financing partnership arrangements with PAPs which ensure uninterrupted budget support. 2. Government’s commitment to decentralization continues and deepens by operationalization of approved reforms. Risks: 1. Difficulties in hiring certified accountants due to lack of capacity and funding sources can not be overcome. 2. More qualified auditors might move to the private sector given national scarcity. 3. Ability to produce timely audits is dependent on the capacity of audited entities to produce quality and timely accounts. 4. Lack of existing donor initiatives to increase the capacity of the Parliament is not addressed collectively. 5. Depends on political will which

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Inputs for project and program activities

a) External Audit

1. Increase the number of qualified auditors to improve the coverage, quality and timeliness of external audit.

2. Develop a plan to expand the oversight role of the Legislature in regard to external audit reports.

3. Design and support capacity building initiatives that enhance the role of the parliament in the scrutiny of external audit.

b) Internal Audit

4. Make operational a number of provincial delegations of the IGF during 2008 in order to accelerate the establishment of ICUs at the provincial level and improve coordination with districts.

5. Enhance coordination between the TA and the IGF in order to reach international accountability standards.

c) Devolved Financial Management Within Districts.

6. Finalize and publish the Regulatory Framework for the Organization and Functioning of the Local and District Consultative Councils during 2008.

7. Upgrade policy dialogue on necessity to speed-up the decentralization reform, a priority within PARPA II, by ensuring that funds allocated in the National Budget are effectively transferred to the municipal, provincial, and district levels.

Short-term results and Immediate Outputs of the project 1. Increased capacity of Tribunal

Administrative to perform external audit.

2. Operationalized internal control units

at the national and district levels. 3. Budget Allocations and transfers to

district correspond to PARPA’s vision of effective decentralization.

4. District Consultative Councils are

operational and allow for regulated citizen participation.

Beneficiaries 1. Population of Mozambique at large. 2. Population living at the district and local levels, particularly women. 3. Private sector. 4. Civil society at large.

Output of Medium-Term Outcomes Indicators

1. Increasing number of financial audits published in the TA Annual Activities Report.

2. Increasing percentage of ICU that publishes activities in the Annual Activities Report on the Internal Control Subsystem.

3. Achieving the PAF targets regarding DCCs and

transfers to districts and document in accordance to PAF requirements.

4. Achieving the PAF target for transfers to

districts. Source: PEFA Analysis 2009/10, Mid Term and Final Joint Review Reports

Bank’s Indicative Target

1. Number of financial audits published in the TA Annual Activities Report increase from 90 (2007) to 118 (2008/09) and to the agreed PAF target in 2010.

2. Increasing percentage of ICU that publishes activities in the Annual Activities Report on the Internal Control Subsystem increases from 30% (2007) to 65% (2008) and to the agreed PAF target in 2010. 3. Percentage of DCCs that hold at least three meetings per year increases from 60% to 80% in 2009 and 100% in 2010. 4. Increasing percentage of transfers to districts (3%) to 3.7% in 2009 and the targets to be agreed within the PAF for 2010.

has not always been there. 6. Government ownership has varied from one sector ministry to the other. 7. Government’s commitment towards meaningful decentralization perceived by some donors to be waning. 8. Severe technical and physical constraints to make DCCs operational are not addressed collectively by donors. Mitigating Measures: 1. Upgrade coordination with other donors to emphasise the need for reinforced decentralization t the policy dialogue level. 2. Mainstream a comprehensive approach to capacity building by establishing links with other Bank’s projects and non lending activities. 3. Enhanced participation of field office in supervision and donor coordination efforts to monitor progress closely.

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REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO MOZAMBIQUE FOR

THE POVERTY REDUCTION SUPPORT LOAN II (PRSL II) PROGRAMME

I- THE PROPOSAL Management submits the following Report and Recommendation on a proposed three-tranche loan for UA 60 million to finance the Poverty Reduction Support Loan II (PRSL II) programme in Mozambique for three fiscal years ending December 2010. The program is in line with the country’s Poverty Reduction Strategy Paper (PRSP), the PARPA II, the governance pillar of the Country Strategy Paper (CSP) for the period 2006-2009 and the Bank’s Governance Strategy for 2008-2012. The program was prepared following a request made by the Government of the Republic of Mozambique in October 2007.

II – COUNTRY AND PROGRAM CONTEXT 2.1 Government overall development strategy and medium-term reform priorities 2.1.1 The Government’s Poverty Reduction Strategy Paper (PRSP), the Plano de Acção Para a Redução da Pobreza Absoluta (PARPA II) covers the period 2006 – 2009 and derives from the nation’s long-term vision, Agenda 2025. Given Mozambique’s recent conflict driven past, the country’s long-term strategy aims at strengthening national unity, building effective institutions and establishing an enabling environment for sustainable economic growth. These cross-cutting objectives are reflected in the country’s current medium term strategy. The government is encouraging donors to conform during implementation of the PARPA II to the five key principles of the Paris Declaration which are: (i) country ownership of the program; (ii) alignment of donor interventions with the program; (iii) harmonisation of donor practices to reduce transaction costs; (iv) managing the program to achieve agreed results; and (v) holding both donors and government accountable to agreed performance benchmarks. 2.1.2 PARPA II’s overarching development pillars are: (i) governance, (ii) human capital and (iii) economic development. The governance pillar places emphasis on the rule of law, transparency and fiduciary controls in the discharge of public duty and use of public resources. In this regard, the latest available evidence from Mo Ibrahim Index of African Governance and the World Bank Institute’s analysis (Annex VIII, Figure 2) indicate that for the past 10 years to December 2005 Mozambique ranks the same or better than the average for Sub-Saharan Africa and that year on year the country has held steady. Government should be commended for achieving most of the fiduciary and governance indicators agreed with donors as the Performance Assessment Framework (PAF) for the PARPA II (Annex IV).2 In addition to the agreed indicators, Government is also taking additional measures to improve governance through the reform of outdated laws or the enactment of new laws to enhance the rule of law and equitable application of justice to all. Lack of capacity is however hampering the application of the new laws. 2 While useful when reviewing long-term trends, governance indicators should be interpreted with caution due to their relativity and the limitations related to their composite data.

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2.1.3 The PARPA II’s pillar of human capital covers principally access to basic services such as water and sanitation, health and education, critical sectors which consume a significant portion of the budget. It focuses on vulnerable groups, such as children, communities in remote rural areas and the fight against killer diseases like malaria, tuberculosis and HIV-AIDS. The third pillar of economic development focuses on the reduction of bottlenecks for the establishment and growth of especially small and medium sized enterprises, which range from availability of capital - both human and financial, bureaucratic red tape, infrastructure, land tenure and labour laws. 2.2 Recent economic-social developments, perspectives and constraints 2.2.1 For the four years up to 2006 economic growth has averaged 8% but moderated to an estimated 7.2% in 2007. During the same period, the average growth rate3 has averaged 5.8% for Southern Africa and 5.7 for the whole of Africa. Economic growth in Mozambique has been underpinned by prudent fiscal and monetary policies and supported by the donor community. Sectors that have accounted for about 76% of the growth are, in order of importance, agriculture and fisheries, manufacturing, finance and business services, trade and transport and communication (Figure 2). In 2007, growth was restrained by inflation which averaged 8.2%4 and exceeded the target set by Government due to external shocks related to rising oil and imported basic foodstuffs. Figure 2: Sectors’ Share of GDP Growth (2007)

Source: ADB/OECD/UNECA 2008 African Economic Outlook 2.2.2 Looking forward, the rate of real GDP growth is forecast to decline from approximately 8% over the past few years to 7.0% in 2008 and 6.8 in 2009, pulled down by a rise in fuel costs and inflation that is projected to average 10.6%5, combined with a slow down 3 UNECA, Growth and Social Development in Africa in 2007 and Prospects for 2008. 4 Joint Aide Memoire of Government and Budget Aid Donors, April 2008. 5 Although still high, this is an improvement over the past two years where inflation averaged 13.2%.

Hotels & restaurants 1.70

Other services 1.80 Construction 3.30

Electricity & water 5.70

Government services 9.70

& Transport communication 9.90 Trade 12.10

Manufacturing 15.00

Agriculture & fisheries27.40

Mining & quarrying1.10

Finance & businessservices 12.30

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in energy and mining mega projects. Nonetheless, agricultural output is projected to improve and significant FDI investment in mining and industry is expected in 2008 and 2009 but without much effect on GDP growth. Given the relative importance of some large mining projects foreseen, in the medium term it is important that the country has shown an interest in the Extractive Industries Transparency Initiative (EITI) and the so-called “EITI ++”. Government’s expenditure on the social sector is expected to continue growing moderately but with a population growth rate of 1.9 percent,6 no statistically significant change in social indicators is expected. The government’s financing needs are provided in section 4.3 below (Table 4), including fiscal policy and performance and budget deficits. 2.2.3 If Mozambique were to achieve the social indicators set out in the PARPA II, the country, which has ranked 172nd out of 177 on UNDP’s Human Development Index, would be on course to attain the MDGs by 2015. However, indications that are also supported by statistic presented in Annex XI; suggest that only a few of the MDG goals would be met, despite investing an average of 37% of the budget on basic services related to health, education, water and sanitation.7 Nonetheless, significant gains have been registered as evidenced by the positive trajectory of a number of key social indicators. For example, the percentage of the population living below the national poverty line has declined from 69.4% in 1997 to 50% in 2007, while child mortality per 1000 has dropped from 219 to 152. School enrolment at primary level has risen to 80%, from about 64% ten years earlier although the quality remains low and only a third of the students complete primary school. However, on the negative side, since 1997 the HIV rates among the 15-49 year olds almost doubled from 4.2 to 8.2% and average life expectancy is only 41.6 years. Malaria is still a major killer, accounting for 30% of hospital deaths, while only 41% of the rural population has access to safe drinking water. 2.2.4 Mozambique faces a number of challenges that affect the delivery of public services as well as the growth of private sector-led economic development. These relate to excessive bureaucracy, limited administrative capacity, some outdated laws and weak fiduciary controls. Government and donors’ efforts to improve the situation are showing slow but steady progress, notably through the PARPA I and now PARPA II. An example of progress is reflected in the improvement in the country’s ranking in the International Finance Corporation’s (IFC) 2008 Doing Business Report. The IFC’s report indicates that Mozambique has climbed up from 140th in 2007 to 134th in 2008, out of a total of 178 countries. Areas requiring further improvements include the legal framework for financial sector regulation and the labour market. In the area of public financial management, areas requiring further strengthening include the fiduciary safeguards and the demand side of governance. While it has been noted in 2.1.2 that general governance indicators have held steady for the past ten years, there are still some areas requiring improvement. A category of governance that requires further attention by both Government and donors is the control of corruption which, according to Annex VIII is an area requiring improvement; because of its direct impact on economic growth. According to the 2008 Freedom House Report, Mozambique’s corruption score worsened from 3.23 in 2007, compared with 2.78 in 2005 (on a descending scale from 1-7, where 7 is the worst). There is however a need to put this recent trend in context. Mozambique’s score on Transparency

6 Estimate for the period 2005-2010 by UNdata. 7 AfDB, OECD, UNECA African Economic Outlook, May 2008

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International’s Perceptions of Corruption Index had remained static at 2.8 (on a scale from 1-10, where 10 is a good score) for the four years to 2005.

III- KEY DESIGN ELEMENTS 3.1 Link with the CSP, analytical works underpinnings and country readiness assessment 3.1.1 Link with the CSP - This operation is fully consistent with Mozambique’s CSP for 2006-2009 which identifies governance as one of the two pillars for Bank Group intervention. The CSP aims to: (i) scale up financial resources through budget support and project financing in support of good governance and increased economic infrastructure; (ii) improve the performance of the current portfolio; (iii) assist in capacity building; (iv) increase policy dialogue, underpinned by economic and sector analytical work; and (v) enhance coordination and harmonisation with development partners. All of these five objectives will be addressed to varying degrees by the proposed program.

3.1.2 Analytical Works Underpinnings - A number of analytical diagnostic works inform the design of donor support to the PARPA. Among others, the following key analytical reviews and studies have been undertaken: (i) Public Expenditure Review in 2003; (ii) Public Financial Management Review in 2004/2005; (iii) Bank Country Governance Profile in 2005; (iv) Public Expenditure and Financial Accountability in 2006; and (v) the IMF has conducted annual (Article IV) Country Staff Reviews since 1999. In addition the country signed on to the African Peer Review Mechanism (APRM) and the process leading to the country report was initiated in late 2007. A Country Procurement Assessment Review (CPAR), in which the Bank is participating, was initiated in early 2008. Some of the main conclusions that can be drawn from this upstream diagnostic work are that: (i) commitment exists and steady progress is being made in various spheres of public administration; (ii) there is a need for further reforms, legal and administrative, in order to improve public service delivery; and (iii) capacity enhancement is required in most domains and, hence, donor support is crucial. The PEFA summary findings in Annex VII provide a summary of progress since 2004 and key PFM areas requiring further attention. 3.1.3 Country Readiness Assessment - This policy-based loan is the continuation of a long partnership between the Bank and the Government of Mozambique (GoM), dating back to 1988. The most recent loan provided by the Bank, the Poverty Reduction Support Loan (PRSL I) for UA 60 million was approved by the Board in October 2006. Mozambique fulfils both the technical8 and general9 prerequisites of the Bank for Direct Budget Support Lending (DBSL). Among the key technical prerequisites discussed in detail in the PSRL I appraisal document are the arrangements relating to effective implementation mechanisms and strong donor coordination. As evidenced by the progress made over the past few years (Annex IV- PAF and 8 These are: (i) existence of effective PRSP implementation mechanisms; (ii) adequate recent fiduciary reviews; (iii) viable macroeconomic and fiscal framework; (iv) strong partnership between country and donors; and (v) effective program implementation mechanisms. 9 General prerequisites pertain to: (i) the existence of economic and political stability; and (ii) Government’s commitment to the program.

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Annex VII – PEFA), Mozambique has demonstrated the capacity and the will to implement the reforms necessary under the PARPA II. Effective program implementation and monitoring mechanisms, in the form of the PAF that is jointly reviewed twice a year, are also in place. With regard to general prerequisites, the country is stable both economically and politically and the Bank, other donors and other independent analysts foresee no major changes in the near future. The ADF program is being prepared following a request made by Government to budget support donors, most of whom already had their programs approved in early 2008. 3.2 Collaboration and coordination with other donors 3.2.1. Mozambique has a total of 19 development partners contributing to budget support. Significant effort goes into donor harmonization to reduce transaction costs. Analytical and diagnostic works that underpin budget support programs are generally conducted by at least two donors and the results shared with the rest. Donor coordination is headed by the Committee of Heads of Agencies and is steered by a rotating Secretariat Chair that performs the role of official interface with Government. The Secretariat coordinates development partners’ funding commitments and disbursement schedules, in consultation with Government. Subject to constraints imposed by institutional rules and regulations, PAPs endeavour to align their assistance to the cycle of the PARPA and to rely on country systems. PAPs conduct periodic (at least monthly) meetings to discuss program-related issues. Any important issues requiring the attention of Government are tabled, debated and agreed at these meetings. Joint Reviews (JRs) are conducted twice a year and are attended by technical representatives of all PAPs coordinated by the Secretariat and relevant sector ministries led by the Ministry of Finance. The technical coordination, including program supervision that informs the JRs, is conducted by technical working groups comprising Government and donor representatives. An area that requires improvement is the coordination of the planning, appraisal and implementation of complementary projects, programs and technical assistance funded by the PAPs.

3.3 Bank’s comparative advantages 3.3.1. The Bank recently approved its Governance Strategic Directions and Action Plan for the period 2008 - 2012 in which public financial management is one of the key focal areas. This will build on the considerable knowledge and expertise that has been gained over the years through engagement in policy-based lending and budget support operations focused on improving PFM. Hence, the Bank will use its experience gained from other countries in Africa and its recently strengthened field presence to better support Mozambique’s reform efforts. Knowledge of the country’s challenges in the domain of governance in general and PFM in particular gained over the years through both project and budget support operations will be a particular asset. For example the Bank is the only budget support donor that participates as a partner in the African Peer Review Mechanism (APRM) for Mozambique. The Bank is the fourth largest donor and the only regional development institution among the 19 PAPs. In addition, the Mozambican authorities are aware that the Bank intends to assume a leadership role on governance in Africa.

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3.4 Outcomes of past and on-going similar operations and lessons 3.4.1 As already pointed out (paragraph 3.1.3), since 1988 the Bank has provided 6 policy based loans to Mozambique, jointly with other donors (refer to Lessons Learned in Annex IX). These have contributed significantly to the country’s budgetary resources and have enabled the Bank and other donors to focus policy dialogue and conditionality on key public policy and public expenditure priorities. This joint support has contributed to notable improvements in social, macroeconomic and governance indicators (refer to section 2.2). More recently, the 2007 Joint Review conducted in April 2008 concluded that PARPA II’s overall implementation was positive, in spite of variations within the range of PAF targets (Annex IV). In summary, the results of the 2007 PAF’s 40 targets were: (i) 22 attained; (ii) 11 not attained but progress made; and (iv) 7 not attained. A key lesson to emerge from the review is that Government is committed to reducing poverty and improving governance, but faces significant challenges in implementing the program. For example, the issue of human capital and coordination is important given that there are 29 technical working groups for program monitoring,10 in which Government is represented. The review also highlighted the governance pillar as an area that requires special attention and concerted efforts from donors and government, particularly with regard to promoting transparency and deepening decentralization. In view of the lessons drawn from previous operations, this DBSL seeks to add value by assisting the government in enhancing transparency and decentralisation - two of the weaker areas of the reform process. 3.4.2 The proposed project builds on the recommendations of the 2008 AfDB Policy Based Lending Retrospective. First, it pays special attention to monitoring DBSL implementation through centralized data collection at the country office. Second, it proposes a two-tier strategy towards full harmonization with other donors regarding the use of common conditionality frameworks and clear disbursement commitments to ensure aid predictability. Third, it proposes a reduced number of binding conditions in order to help focusing government’s efforts and ensure efficient project implementation. Finally, it complements the specific intervention in financial governance with the Institutional Support Project for Public Sector Reform (see 3.5.1). 3.4.3 The PRSL I Project Completion Report (PCR) concludes that the Bank should continue providing budget support to Mozambique in order to influence policy dialogue, that in turn affects the environment in which sector projects are implemented. Main challenges encountered by the Bank in the execution of the previous programs that are also articulated in the PCR are: i) lack of Bank program’s alignment with the practices of other PAPs, through imposition of specific conditions that entail parallel reporting and translation (to English) by government, resulting in disbursement delays; and ii) weak monitoring and insufficient communication with government due to limited capacities in the field office. Annex XI provides more details of lessons learnt from PRSL I.

10 PAPs are represented in 23 out of the 29 technical working groups and the Bank in only one due to lack of sufficient Country Office staff. The country office’s staff situation is expected to improve and the Bank would be represented in at least two technical working groups.

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3.4.4. This operation seeks to avoid these problems by adopting a progressive strategy towards full harmonization with the practices of other donors, particularly with regards to conditionality, benchmarks, and timing of disbursements. The first disbursement will be triggered by a reduced number of conditions while the conditions for the release of the second and third tranches would be fully harmonised with those of other donors. The Bank’s Field Office has also recruited a resident international economist and is in the process of finalising the recruitment of a local economist, which will enable it to be more fully engaged on policy dialogue with the government and other donors. Another issue raised by the PCR relates to limited oversight of the PARPA II by the National Assembly and involvement by civil society. This issue will take longer to address as it requires detailed analysis and discussion of the practicalities of the proposal given that the current monitoring system is to some extent already unwieldy due the numbers and interest groups involved in the PAF process. 3.5 Relationship to on-going Bank’s operations 3.5.1 Given that the budget supports all sectors, a list of all ongoing Bank Group operations in Mozambique is attached as Annex VI. The two projects undertaken in consultation with other donors and with the objective of supporting Government’s policy reforms are the Financial Sector Technical Assistance project (FSTAP) and the Institutional Support Project for Public Sector Reform (ISPPSR). Other donors, such as DFID, the World Bank, the European Union, Sweden, Netherlands and Norway also have complementary projects in the area of governance and, in particular, in the fields of transparency and accountability. In addition, UNDP, the Netherlands and Norway are also supporting decentralization projects. The objectives of the FSTA are to improve the soundness, efficiency, reach and depth of the financial sector in Mozambique, including the financial regulatory framework and anti-money laundering. The ISPPSR project supports public sector reform and in particular decentralisation through the establishment of 6 one-stop-shops throughout the country. The one-stop-shops are intended to enhance public service efficiency and governance through increased reach and simplification of service provision. This is expected to contribute to the reduction of opportunities for rent seeking. The PRSP II program, through the PAF, complements the two projects by focusing policy dialogue on both decentralization and the financial sector’s regulatory framework. IV – THE PROPOSED PROGRAMME AND EXPECTED RESULTS 4.1. Objectives of the programme 4.1.1. The objective of the PRSL II is to enhance transparency and accountability in the use of public resources, both at the national and district levels. The programme intends to strengthen the capacity of the Supreme Audit Institution (Tribunal Administrativo) and the District Consultative Councils to effectively perform their roles. In the context of the Mozambican decentralization framework, districts are meant to be the ultimate operational level of government. Building sustainable accountability mechanisms therefore requires strengthening institutions at both national and district levels.

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4.1.2. Important reforms towards enhanced transparency and accountability have been enacted by Government over the last few years, particularly in PFM (Annex IX, Box 1).11 Within the framework of harmonised division of labour among PAPs, it has been agreed with Government that the Bank would provide budget support, focusing its intervention on enhancing transparency and accountability in the use of public resources. Other PAPs with complementary programs are mentioned in paragraph 3.5.1. The Bank’s PRSL II therefore supports the country’s reform effort by addressing the implementation challenges in key areas, the most salient of which being: (i) weak external controls; (ii) deficient internal controls; and (iii) complex legal framework for the State’s administrative bodies at the local level, compounded by challenges related to inadequate capacity and insufficient clarity in the delineation of functions and responsibilities. Thus, this operation specifically seeks to: (i) Enhance the external and internal audit functions by reinforcing the institutional capacity of

the Administrative Court (Tribunal Administrativo) and advancing the operationalization of external control units at both the central and decentralised government levels; and

(ii) Strengthen the local government framework of devolved financial management within

districts by ensuring that decentralized prerogatives are accompanied by sound budgetary allocations, and by enhancing transparency and community participation in the implementation of the Fund for Local Investment (Fundo de Investimento de Iniciativa Local -FIIL) at the district level.

4.1.3. In the medium term, PRSL II will support national processes of democratic accountability by reinforcing both the supply of, and the demand for, sound economic and financial governance within Mozambique’s decentralization process. These efforts will contribute to the vision of a Mozambique free of corruption, with an efficient and transparent public financial management system implemented by a competent civil service and overseen by an effective Parliament and an active civil society. Such a country would offer an improved enabling environment for increased and sustained private sector development. 4.2. Programme’s pillars, components and expected results 4.2.1. Mozambique has reached a situation where its PFM reforms are beginning to reap genuine benefits. In the domain of the two specific objectives of this operation, however, important challenges remain and the gains achieved remain unconsolidated. Thus, this operation will support the implementation of the core reform elements in these pillars. Table 1 below summarises the context, objectives, measures being taken by government, specific measures that will be supported by PRSL II and the agreed PAF target for measuring progress. Pillar 1: Improved Government’s Financial Accountability through Enhanced External and Internal Audit Functions. 4.2.2 Status of the external audit function. The TA has a judicial status, acting as the Tribunal de Contas in reviewing and reaching final decisions over the audits of individual

11 The International Finance Corporation’s Doing Business Report for 2008 points to an improvement.

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departments, as well as resolving administrative, fiscal and customs disputes.12 In addition, the TA must notify the Central Anti-Corruption Office (GCCC), the Office of the Attorney General, and the Prosecutor General of the Republic of any irregularities it detects. This notification of the GCCC does not always happen in practice due to capacity constraints. At present, the equivalent of Parliamentary Finance and Audit Committee is not performing its role effectively due to workload and capacity constraints. This issue will continue to be raised by the Bank as a priority area in multi-donor consultation meetings and in policy dialogue with government.

Table 1: Programme’s pillars, components and expected results

Pillar 1: Improved Government’s Financial Accountability through Enhanced External and Internal Audit Functions Context Objective Measures being taken by

Government ADF Support Agreed

Target by 2009

The TA’s major constitutional duties that are not discharged fully are: (i) audit of national accounts as well as veto power over institutional expenditure; (ii) handing over to the public prosecutor cases for due process; and (iii) judicial power to arbitrate fiscal & financial disputes.

A. Objective 1: Strengthened Capacity of the TA as the Supreme Audit Institution

A diagnostic review of the TA in 2006 led to the following operational and procedural changes in 2007 and 2008: (i) preparation of a new audit manual, consistent with INTOSAI standards; (ii) number of auditors increasing markedly; (iii) scale of capacity building growing - TA now able in 2008 to establish permanent offices at provincial level. Some of the progress achieved in the audit coverage, quality and follow-up are described in paragraphs 4.2.2 to 4.

Implementation of improvements in audit coverage, quality of audits and the follow up of audit findings.

Coverage of the State Budget audited by the TA in conformity with the technical norms of INTOSAI and following the Mozambican legislation; reaching 35%.

The internal audit function is at present mainly performed directly by IGF of the Ministry of Finance. The IGF acts at the national level with support from two regional delegations and focuses on conducting property and financial controls of all State institutions. Internal audits focus on systemic issues and generally meet professional standards.

B. Objective 2: Advanced Operationalization of the ICUs at all Administrative Levels of Government

Under current integrated financial management reforms, the IGF acts as the supervision body for the internal control subsystem, while line ministries have created their own ICUs. Today, IGF and only a minority of ministries have fully operational ICUs of their own at central and provincial level. IGF intervention would now be ex-post inspection of annual execution of institutions.

Creation of ICUs in the remainder of ministries and ensuring their effective functioning at all levels.

100% of institutions at central and provincial level with functioning ICUs. (Means of verification will be report on activities of internal control subsystem).

4.2.3 Coverage of external audit. As shown in Table 2, the number of realised audits has more than doubled in 2007 compared to 2006. Another notable trend is the expansion of the 12 The legal framework governing the TA consists of the Constitution of the Republic of Mozambique (Chapter III, Section III) and the a series of laws passed since 1992 governing: prior inspection of the public expenditure of the TA; basic principles for preparing, managing, executing, controlling and inspecting the OE and CGE; and on the organization, operation and process relating to the third section of the TA, and the SISTAFE Law.

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scope of audit to cover areas beyond those of purely financial audit. The initiation of audits of public works projects in 2007 and of performance audits in 2008 are two important examples. Nevertheless, limited audit coverage remains a concern, given that capacities are still only sufficient to cover 25% of the accounts of the State in the annual audit process. Table 2: Number of Audits Planned and Realized

N.º Audits Realized Year N.º of Planned Audits Provincial

Level District Level

Municipalities Central Govern-

ment

Diplomatic Missions

SOEs Foreign Interests

Works CGE Total

2004 0 20 0 0 9 0 0 0 0 0 29

2005 60 42 0 0 26 0 0 1 0 0 69

2006 70 60 55 2 47 3 0 1 0 4 172

2007 90 86 101 10 74 7 3 0 79 0 360

2008 320

TOTAL 540 188 156 12 147 10 3 2 79 4 601

Source: PEFA Report for 2006 (completed in 2008) 4.2.4 Quality of external audits. The quality of audits has consistently improved mainly as a result of steady improvements in staff numbers and capacities. External auditing is performed in an impartial and independent manner. Nevertheless, there are weaknesses in the quality of analysis of the CGE, which derive from the continued lack of access of the TA to the e-SISTAFE system. The project’s objective of strengthening the capacity of the TA will go some way towards addressing these weaknesses. 4.2.5 Follow-up of audit recommendations. This remains an area of particular concern. There is scope for improving the impact of external audits by ensuring more rigorous follow-up to audit recommendations and greater scrutiny of the accounts of provincial and district governments. Links with the work of Inspectorate General of Finance (IGF) also need to be strengthened in order to ensure a closer follow-up of audit recommendations.13 4.2.6 External Audit - Benchmark 1 (Condition 1 for 2008): Number of financial audits approved by the Administrative Court. Per the PAF, the mutually agreed number of audits approved by the TA for the fiscal year ending December 2007 is 90. However for the 2008 and 2009 fiscal years the PAF indicator is determined by dividing the budgetary allocations of audited institutions over the overall State budget (in percentage). This measure which is termed “materiality of audit coverage” is considered a more meaningful yardstick and is in line with international best practice. It has been agreed with Government that the 2008 target is 30 percent and the 2009 target is 35 percent. Additionally, it has been arranged that this coverage should extend to all administrative levels of government, including central, provincial and district levels. Close attention will also be paid to the quality of external audit

13 In terms of the audit of the CGE, it is the “Commisão Parlamentar” that recommends follow-up measures and a report on their implementation is included in the TA’s audit report (“parecer”) for the following year’s CGE. There is thus a formal response and follow-up to the TA’s report and opinion on the CGE. There is evidence that some of these are implemented and there is a procedure for assessing follow-up, when the CGE of the subsequent year is analyzed. The type of corrective actions recommended usually refers to actions by the Ministry of Finance and are often system-wide in nature.

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vis-à-vis international standards. Compliance with INTOSAI technical norms has been proposed as a possible measure of the country’s performance in external audit beginning in 2010. 4.2.7 Planned Actions: Improvements in the quality of external audit and of legislative scrutiny of audit reports will depend on improving the coverage and timeliness of external audit. Essentially, coverage needs to be gradually expanded from 25 percent of government entities annually to a percentage high enough to support a statistically justified sample size from which to draw an opinion on national accounts. This can only be done by increasing the number of qualified auditors within the TA. It will necessarily be a slow process within the Mozambican context. The Bank will over the next three years review with Government and other donors the practicality of expanding the oversight role of the legislature in regard to external audit reports. The feasibility of this will depend on the existence of both greater capacities of the TA to conduct more audits and of the Legislature to review the findings. Audited entities will be encouraged to not only provide a response to the external audit recommendations, but also detailed action plans to address deficiencies. The Bank’s assistance to the GoM and its participation in the donor working groups will seek to: (i) increase the coverage of external audits, as well as improve their quality by reinforcing the institutional capacity of the Administrative Court through training and technical assistance; (ii) improve the timeliness of external audits, including the CGE; (iii) support capacity building initiatives that enhance the role of the Parliament in the scrutiny of external audit; and (iv) encourage follow-up of external audits’ findings and recommendations. All these activities will be closely coordinated within the donor working group on external audit in which the Bank will be represented by field office’s staff. 4.2.8 Internal Audit. The internal audit function covers approximately 50 percent of central government entities (measured by the value of expenditure that they represent on the state budget). In principle, the expansion and roll-out of e-SISTAFE would make it possible to fully monitor expenditure commitments and ensure effective internal controls. Nonetheless, at present the e-SISTAFE’s internal controls have limited reach, because only about half of goods and service operations are executed through the e-SISTAFE direct budget execution. Benchmark 2 below is intended to help address these capacity constraints (Annex IV, Box 2). 4.2.9 Internal Audit - Benchmark 2: Percentage of organs at central and provincial levels with operational internal control unit. The PAF establishes a target of 65% for 2008 and of 100% for 2009. The 2010 target will be taken from the PAF target to be agreed in the 2009 JR. This benchmark will be closely monitored and lessons will be drawn in order to identify opportunities for further assistance in enhancing internal controls. This indicator has been selected as a benchmark but not as a condition because several political and technical challenges intervene in the ex-novo creation of an internal control system. As a matter of fact, the review of the internal control subsystem by the Parliament has delayed the full implementation of the reforms. The objective is to monitor performance to enhance incentives for speeding-up the operationalization of ICUs. Special attention will be given to the effective operationalization of these units beyond their formal creation. Thus, this benchmark will monitor the number of units that (i) have full-time personnel; (ii) have developed internal

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operating procedures; (iii) have published a plan of action; and (iv) have produced internal control reports in accordance to what is stated in their plans of action. 4.2.10 Planned Actions: The Government has committed to make operational a number of provincial delegations of the IGF during 2008. This commitment seeks to accelerate the operationalization of ICUs at the provincial level and improve coordination with districts. IGF delegations have the mandate of assisting provinces in developing internal operating procedures and strategic plans for their ICUs. At the same time, it has been agreed with the Government that specific efforts will be made to enhance coordination between the TA and the IGF. Although coordination and articulation between the IGF and the TA is still incipient, information has been regularly exchanged since 2006 following creation of an auditors’ forum. In 2007, agreement was reached as to the districts that each would inspect and, for FY2008, prior IGF audits have been programmed in bodies that will subsequently be inspected by the TA. A more substantial coordination is nevertheless required between these two agencies in order to reach international accountability standards. Although, internal audit reports are issued regularly for all inspected entities, they are only submitted to the inspected entity and to the Ministry of Finance. In order to ensure greater accountability and compliance with PEFA standards, internal audit reports should also be forwarded to the TA so that external audits can assess the degree of follow-up to internal audit recommendations. The Bank will raise this issue at the policy dialogue level and offer technical assistance for germane developments. Pillar 2: Strengthened local government framework for devolved financial management within districts. 4.2.11 To ensure greater responsiveness of public policy and service delivery to citizen needs, community consultation has been institutionalized and mainstreamed in district development planning and budgeting. Despite this important progress, however, much remains to be done to deepen decentralization (Annex IX, Box 3), strengthen the demand-side for good economic and financial governance and advance social accountability. The risk is that given the high expectations, a decentralized but unresponsive state would diminish public support for reform and the Government’s poverty reduction agenda more generally. 4.2.12 Districts have been given the mandate to constitute institutions for community participation called the Institutions of Participation and Community Consultation (IPCCs) to facilitate the allocation of 7 million meticais provided by the local investment initiatives budget (OIIL). The consultative process within the IPCC commences with grassroot consultations through the Conselho Consultivo Povoação that assemble at the community/village level. This is followed at local area level through Conselho Consultivo da Local (Local Consultative Councils). The main function of this council is to prioritise community problems and solutions from several villages. This council is constituted by individuals comprising: influential individuals such as shop owners; organised groups such as associations; interest groups (including women groups, youth groups, agriculture clubs, etc.) meant to enable communities to contribute directly to local development plans. Thereafter, the outcomes of the local council are transmitted to the Conselho Consultativo Distrital (District Consultative Council) for consideration and further prioritisation. Once selected by District Consultative Councils, these priorities are included in the district development plans and resources are allocated

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accordingly. The OIIL represents a meaningful step in the process of fiscal decentralization and in the efforts aimed at transforming the district governments into operating budget units in accordance with the law of local organs of the state (LOLE). 4.2.13 These arrangements are the seeds of innovative social accountability mechanisms14 with participatory mechanisms inscribed in laws and regulations which are extremely rare, even internationally. Gender equity concerns are also institutionalized: women’s participation in the local councils is guaranteed through a 30 percent quota, established in the 2003 Guidelines on Participation and Community Consultation and the 2005 regulations. Moreover, the reforms legally recognize community authorities as interlocutors between rural communities and the district administration, reversing decades of legal marginalization of traditional institutions and leaders in local governance.15 4.2.14 Benchmark 3: Percentage of District Consultative Councils operational (3 meetings per year). The minimum of three meetings responds to the mandate of these councils: the first to recommend budgetary allocations, a second to follow-up and monitor those recommendations, and a third to evaluate performance and recommend further improvements. The PAF framework establishes a target of 80% for 2008 and 100% for 2009. The 2010 target will be taken from the PAF target to be agreed in the 2009 JR. This indicator has been agreed as a benchmark but not as a condition due to the variety of challenges that both the Government and local communities face in the implementation of the LOLE. Close monitoring will identify opportunities to strengthen what is an innovative scheme of social accountability. This benchmark will monitor the actual scope and depth of participation of local communities in the State’s planning cycle and in determining the budgetary priorities at the local level. The measurement of this benchmark will be done through the minutes of the DCCs kept in the district secretariats and aggregated by the provincial secretariat. At present, some districts in provinces such as Nampula have made significant strides, with the technical support from UNDP and financial assistance from the Netherlands and Norway. During the course of the program, the Bank would assess possibility of financing an assessment of a representative sample of DCCs to identify common challenges, identify best practices and draw practical lessons. 4.2.15 Planned Actions: It has been agreed with the Government that the Ministry of State Administration (Ministerio da Administracao Estatal, MAE) will elaborate an annual report with detailed information on the number and type of meetings held by all DCCs. Based on this report, MAE will conduct visits to selected districts to verify the information, provide technical assistance and gather lessons learned for future improvements. At the same time, it has been agreed that the Bank, together with other donors, may join the Government in some field visits or propose an additional number of visits with the same ascribed purposes. On the other hand, the Government has committed to finalize and publish the Regulatory Framework for the Organization and Functioning of the Local and District Consultative Councils during 2008.

14 Social accountability is defined as “an approach towards building accountability that relies on civic engagement, i.e. in which it is ordinary citizens and/or civil society organizations who participate directly or indirectly in exacting accountability” (Malena, 2004: 1). 15 Kyed and Burr (2006).

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4.2.16 Benchmark 4 (Condition 2 for 2008): Percentage of the budget transferred to provinces, districts and municipalities. The PAF target for 2008 is 22 percent for provinces, 2.7 percent for districts and 0.7 percent for “autarquias.” The target for 2009 is 23.3 percent for provinces, 3.7 percent for districts and 0.9 percent for “autarquias.” The PAF target for 2010 will be defined in the next JR (Annex V – indicator 10). This indicator provides a proxy for the level of government commitment to decentralization. In the context of the decentralization framework, districts must become independent budget units before the end of 2008. Incentives to participate in the district planning process are undermined by the slow pace of fiscal decentralization to districts. Except for limited discretionary funds available to district governments, most budgetary decisions about district investments are made nationally. So, budgets proposed locally by the district government - drawing on the input of DCCs - are merely proposals that may be aggregated into a unitary budget at central level, which is then submitted to Parliament for approval. At present, district planning and budgeting remains more of a mapping and priority-setting exercise in which citizens and communities are asked to make recommendations. 4.2.17 An effective decentralization of competencies requires the empowerment of users throughout the budget cycle from priority setting to budget execution. Close monitoring of actual transfers to local governments suggests that, while the approved National Budgets contain resource allocations that are coherent with the vision of PARPA II in support of decentralization, the trend of fiscal transfers has not fully corresponded with those intentions. In fact, the 2007 and 2008 JRs warned that the decentralization process has so far been mainly a matter of administrative de-concentration. Therefore, donors are seeking to engage more directly at provincial and district levels to encourage budget empowerment reforms. Table 3 Programme’s pillars, components and expected results Pillar 2: Strengthened local government framework for devolved financial management within districts.

Context Objective Measures being taken by Government

ADF Support

Agreed Target by 2009

The decentralization is a key component of Mozambique’s strategy to reduce poverty, with strides recently made to advance municipal and district devolution. The Law of Local State Bodies considers districts as the definitive level for local level planning and resource allocation to facilitate community development and decentralisation.16

Objective 3: Advanced Operationalization of District Consultative Councils.

Recognition of the district as a planning unit has been demonstrated by budget allocations of approximately USD 300,000 (7 million Meticais) per district since the beginning of March 2005 to fund district plans.

Field visits to DCCs to verify how they are functioning; provide advice.

100% of operational DCCs (holding at least 3 meetings per year) with accountability to government.

16 Districts are State entities with administrative autonomy to execute their own budgets, which are included in the budgets of line ministries. In practice however, they have made limited use of this prerogative, and district budgets are defined and executed as part of provincial budgets.

15

In the context of the decentralization framework, 17 districts must become independent budget units before the end of 2008. At present however most budgetary decisions on district investments are made nationally as only limited discretionary funds are available to district governments.

Objective 4: Enhanced decentralisation and ownership of local budgets.

Government is currently reviewing ways of enhancing decentralisation. At present, budget allocations are effectively transferred to the municipal, provincial, and district levels.

The Bank will handle this issue with other donors at the policy dialogue level. A study to inform final decision is likely.

23.3% for provinces, 3.7% for districts and 0.9% for “autarquias”.

4.2.18 An area requiring further attention is the fact that budget documents do not report on the fiscal position of sub-national governments. The only expenditures of local governments included in the state budget (OE) are the transfers that are received from the central government through the Municipal Compensation Fund and the Local Investment Fund. The total amount of both funds is identified in the State budget, but their distribution is not included in the proposed OE sent to the national assembly. The same applies to the national accounts (i.e. CGE), which do not contain any details on the fiscal accounts of municipalities, with the exception of an inventory of physical assets that was included for the first time in the 2005 CGE. Local governments are required to submit their fiscal accounts to the TA, but the latter does not produce any opinion or analysis on them. 4.2.19 Planned Actions: The Bank will insist, at the policy dialogue level, on the necessity to speed-up decentralization reform, a priority within PARPA II, by ensuring that funds allocated in the OE are effectively transferred to the provincial, district and “autarquia” levels. 4.3. Financing needs and arrangements 4.3.1 For nearly a decade since Mozambique qualified for HIPC debt relief, the country has maintained a prudent debt management policy, which has also seen some commercial debt buy-back, the most recent in October 2007, in addition to the cancellation of some bilateral and multilateral debt. Therefore, at present, the country’s debt sustainability is good,18 even though maintenance of a prudence borrowing policy is important for the medium term covered by the PARPA II period and the foreseeable future. The country’s Medium Term Expenditure Framework (MTEF), which has been implemented with rigour, confirms that there is little danger of going off-track, as the percentage of debt for financing the national budget has gradually decreased, albeit slowly. This has been made possible by the expansion of the tax base. For example, in 2007, the total expenditure needs of the national budget grew by 11 percent in nominal terms from 2006, while donor’s contributions only increased marginally. In 2008, the budget growth rate is projected at 49 percent to 2.62 billion dollars while donor

17 The most recent legal framework for decentralisation is the LOLE adopted by the Parliament in May 2003 that gave greater impetus to decentralisation. This law regulates the functioning of the State Structures at local level and creates a facilitating environment to enhance accountability, transparency and good governance. 18 In 2007 the IMF and the World Bank conducted a Debt Sustainability Analysis (DSA) of Mozambique that found a low risk of debt distress.

16

financing is projected to increase by 4819 percent mainly due to planned major projects. Budget growth is expected to persist from 2009 to 2010 as shown in Table 4. Table 4 Financial Envelope and External Resources

(US$ million ) 2006* 2007* 2008ª 2009ª 2010ª

Total Expenditure Needs Domestic Resources/Revenue Principal External Resources

1547.63 780.55 767.08

1958.361195.89762.47

2622.94 1492.32 1130.62

3107.89 1844.78 1263.11

3441.582150.361291.22

Support of the Budget (PGBS) 353.58 313.49 445.19 385.71 424.49Project Financing 413.50 448.98 685.43 877.4 866.73As % of GDP Total Resources 20.7 21.1 28.5 27.6 27.8 State revenues 10.4 11.9 12.4 13.1 14.1 External Resources 10.3 9.3 16.0 14.3 13.5As % of Resource Envelope Total Resources 100.0 100.0 100.0 100.0 100.0 State revenues 50.3 61.1 56.9 59.4 62.5 External Resources 49.7 38.9 43.1 40.6 37.5

Source: Ministry of Planning and Development. *Exchange rate for January of given year. ª Exchange rate for August 2008 4.3.2 As the Table 4 shows, total budgetary requirements for the three year period of the PRSL II program are $9.2 billion, of which $5.5 billion will be mobilised locally by Government while $3.7 billion (40 percent) will be financed by donors. Of the amount financed by donors, about $2.4 billion, or two thirds, are grants mainly from bilateral donors while one third are loans mainly from multilateral institutions. The $3.7 billion comprises $2.4 billion of project support and $1.3 billion in direct budget support. Government has stated its preference for direct budget support and would like donors to gradually move in that direction. 4.4 Beneficiaries of the programme 4.4.1 In addition to the foreign currency provided by the Bank contributing to macro-economic stability, the PRSL II will benefit directly public institutions which play a pivotal role in furthering transparency and accountability in the management of public resources, most notably internal audit units within government, the administrative tribunal, and local government bodies. At a secondary level, the program will benefit the people of Mozambique through the deepening of fiscal decentralisation and the promotion of an enabling environment for private sector-led economic growth that benefits the whole population. Indirectly, improved transparency, accountability and enhanced fiduciary arrangements also tend to have trickle down benefits to the most vulnerable members of society, including women and the rural poor. 4.5 Impacts on gender 4.5.1 PARPA II makes specific mention of the need to improve access to services by women and further encourages women to take part in decentralised planning processes at provincial and district levels. This program proposes to pay special attention to enhance opportunities to strengthen the demand side for good economic and financial governance at the 19 These a indicative figures as consultations between Government and donors relating to 2009 and 2010 funding are not expected to be concluded before October 2008.

17

district level, where women play predominant roles, particularly in agricultural production but not so much in the decentralization structures. Improvement of access to services by women and, their ability to engage in local decision making, will contribute to advancing the development agenda, especially at the district level. 4.5.2 The 2008 JR noted considerable progress over the last year in the implementation of the government’s reforms towards more gender equality. However, the gender-related Human Development Index (GDI) ranks Mozambique the lowest in comparison to neighboring countries.20 As noted in the recent Mozambique National Human Development Report, nevertheless, the improvements in gender-related development during the last four years have been faster than that in human development, suggesting a narrowing of the gap between women and men. 4.6 Environmental impacts This program has been classified under category 3 of the Bank Group’s environmental classification and it is, therefore, not expected to generate any negative impact on the environment. Environmental sustainability is one of the key goals of PARPA II. V. – IMPLEMENTATION, MONITORING AND EVALUATION

5.1. Implementation arrangements 5.1.1 The implementing agency for the PRSL II is the Ministry of Finance, which works in close collaboration with the Ministry of Planning and Development. Sector ministries are responsible for ensuring implementation of their programs and the attainment of respective performance indicators drawn from the PAF for the PARPA II. The PAF has 40 indicators for the period 2008-2010 which cover four thematic areas drawn from the PARPA II pillars (refer to paragraph 2.1.2) plus cross-cutting issues like gender and environment. These thematic areas are: Public Financial Management, Governance, Human Capital and Economic Development. Monitoring of the PAF is conducted by Government, in partnership with the representatives of PAPs that are grouped into thematic technical working groups (TWG) that meet periodically to monitor and review progress. The TWGs report to the Committee of Heads of Agencies and Senior Government officials from the Ministries of Finance and Planning who have the mandate to take binding decisions on the PAF. There are two formal JRs each fiscal year consisting of a mid-year review around October and a more rigorous and comprehensive end-of-year review around April of the following year, the outcome of which is used by the majority of donors to trigger disbursements. With respect to 2008, the Bank selected two specific conditions mentioned in paragraphs 4.2.5 and 4.2.15 as triggers for disbursement. The program Task Team participated in the April 2008 Joint Review that examined the attainment of the conditions among other PAF indicators. In 2009 and 2010, the Bank will fully harmonise its disbursement conditions with other donors by triggering disbursements upon the successful conduct of a positive JR of the applicable year.

20 This is also the case regarding the Human Development index

18

5.1.2 There is a total of 19 PAPs of which DFID, the World Bank, European Commission, ADB, Sweden, Netherlands and Norway are the major partners accounting for over 75% of total donor contributions. In accordance with the Memorandum of Understanding (MoU) signed between Government and PAPs, disbursements are made into a Common Program Account. The borrower shall designate in writing the Common Account into which the Bank’s three-year program will be disbursed; in 3 single annual tranches of UA 20 million each. To ensure the predictability of aid flows including the Bank’s own disbursements, individual donors agree with the Government on prior actions or conditions, based on which annual disbursements are made. With respect to the fiscal year ending 31 December 2008, the Bank agreed with government during program identification and at appraisal, on the specific conditions outlined in paragraph 6.2 below. In order to advance harmonization and reduce transaction costs, Government and donors agreed on a common ex-post independent audit that will among other objectives verify that disbursed funds are transferred to the Common Treasury Account and used for the program. The program audit will be conducted and a report issued within six months of the end of each fiscal year. 5.2. Monitoring and evaluation 5.2.1 The key tenets governing program monitoring and evaluation are contained in the MoU signed between the Government and program donors. Both the Government and program donors share responsibility for monitoring the implementation of mutually agreed indicators through bi-annual joint reviews of each of the 40 indicators and of overall progress. Sector ministries are responsible for the day to day monitoring of implementation and gather required evidence for joint review. Detailed reviews of the evidence pertaining to the indicators are carried out by thematic TWGs comprising representatives of both Government and donors and reports are prepared. The outcome of each JR are summarised in a Joint Aide Memoire which also provides an evaluation of progress and areas requiring the attention by the Government. The Bank will pay particular attention to the monitoring of its areas of focus and will arrange for representation in the relevant thematic working groups through its country office. At the end of the program the Bank will prepare a Program Completion Report (PCR) which provides an overall evaluation and draw lessons for the future.

VI – LEGAL INSTRUMENTS AND AUTHORITY 6.1. Legal Instrument 6.1.1 The program is financed by an ADF loan of UA 60 million to be disbursed in a currency to be selected by the borrower at signature from among SDR currencies basket (USD, EUR, GBP and JPY). Loan maturity is 50 years and the grace period is up to 10 years, while principal repayments shall be 1% from year 11 through year 20 and 3% thereafter. The service charge shall be 0.75% of the principal amount disbursed and outstanding on semi-annual basis and commitment fee shall be 0.5% on the undisbursed portion.

6.2. Conditions associated with Bank’s intervention 6.2.1 Conditions precedent to Entry into Force of the Loan Agreement:

19

Entry into force of this loan shall be subject to fulfilment of the provisions of section 5.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the African Development Fund (ADF). 6.2.2 Conditions precedent to First Disbursement of the Loan:

(i) Provide evidence of opening by the Borrower of a foreign currency account with the Bank of Mozambique into which the proceeds of the loan will be deposited.

(ii) Provide a copy of the 2008 Aide Memoire of the Joint Review of the 2007 Performance Assessment Framework, issued by the Borrower and the donors, evidencing that indicator number nine (9) of the 2007 Performance Assessment Framework, which pertains to the Public Financial Management sub-pillar, has been met. The indicator requires that ninety (90) financial audit reports be approved by the Administrative Tribunal (TA) by December 31, 2007.

(iii) Provide a copy of the 2008 Aide Memoire of the Joint Review of the 2007 Performance Assessment Framework, issued by the Borrower and the donors, evidencing that indicator number ten (10) of the 2007 Performance Assessment Framework, which pertains to the Governance pillar, has been met. The indicator requires that the following percentages of the national budget be transferred to the sub-national governmental entities as follows: 22% to provinces, 2.7% to districts, and 0.7% to municipalities.

6.2.3 Conditions precedent to Second Disbursement of the Loan: Provide a copy of the 2009 Aide Memoire of the Joint Review of the 2008 Performance Assessment Framework, issued by the Borrower and the donors, evidencing the overall satisfactory performance of the 2008 Performance Assessment Framework (PAF). 6.2.4 Conditions precedent to Third Disbursement of the Loan: Provide a copy of the 2010 Aide Memoire of the Joint Review of the 2009 Performance Assessment Framework, issued by the Borrower and the donors, evidencing the overall satisfactory performance of the 2009 Performance Assessment Framework (PAF). 6.3. Compliance with Bank Policies 6.3.1 This program complies with 2004 ADB Group Guidelines on Development Budget Support Lending which describe the rationale of budget support as an instrument to improve the effectiveness of poverty reduction by encouraging ownership and increasing transparency, as well as to ensure better predictability of aid fund. These guidelines establish general and technical conditions to be met by a country as pre-requisite for budget support. All these conditions have been met in the case of Mozambique (see Paragraph 3.1.3).

VII - RISK MANAGEMENT 7.1 The global fuel price increase and mounting food prices constitute an external shock that poses a prime risk with potential to lead to macroeconomic instability. To mitigate this

20

risk, the Government has to continue its rigorous fiscal and monetary policy implementation with donor assistance. In this respect, the program’s support to the enhancement of financial management and control is all the more crucial. Despite the signature of the MoU between donors and Government, there is also the risk that one of the parties might not fully honour their undertakings. There is the risk that one or more donors might delay the disbursement of their funding commitments or reduce the amount. The periodic donors’ meetings and the monthly dialogue with the Government are intended to mitigate such a risk. In order to ensure the predictability of funding for the fiscal year ending December 2008, all PAPs agreed on prior conditions for the first disbursement which were met at the JR in April 2008. 7.2 Another major risk for the program is the non attainment by the Government of the agreed performance benchmarks that will be subject of the JRs of April 2009 and April 2010. The risk for non-attainment of the benchmarks could either be due to the following three causes: (i) diminished commitment by Government to carry through the reforms agreed; (ii) failure by one or more PAPs to honour financing commitments; or (iii) matters beyond the control of Government. In the event of diminished commitment by the Government, the Bank, which is the fourth largest financier of the program after DFID, the World Bank and the European Union, will seek a joint solution in the interest of maintaining predictability. This will however include the option of suspending the operation. Dialogue among PAPs and with Government would forestall the risk associated with failure of one or more donors honouring funding commitments. Ways would be agreed to fill the financing gap. If the program went off-track due to matters beyond the control of Government, then a solution would be sought through dialogue with all parties through dialogue. VIII – RECOMMENDATION 8.1. Management recommends that the Board of Directors approve the proposed loan of UA 60 million to the Government of The Republic of Mozambique for the purposes, and subject to the conditions stipulated in this report.

ANNEX I Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ADMINISTRATIVE MAP OF MOZAMBIQUE

This map was provided by the African Development Bank exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgment concerning the legal status of a territory nor any approval or acceptance of these borders.

ANNEX II Mozambique - Poverty Reduction Support Loan II

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ANNEX II Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ANNEX II Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ANNEX II Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ANNEX II Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ANNEX II Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ANNEX II Mozambique - Poverty Reduction Support Loan II

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ANNEX III Mozambique - Poverty Reduction Support Loan II

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Press Release No. 08/123

FOR IMMEDIATE RELEASE

May 28, 2008

IMF Completes Second Review Under the Policy Support Instrument (PSI) for Mozambique

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Mozambique’s economic performance under a three-year Policy Support Instrument (PSI). The Executive Board also granted a waiver of nonobservance of two end-December 2007 quantitative assessment criteria pertaining to base money and to net credit to the Government, as well as one structural assessment criterion on a draft law on excise tax on alcoholic beverages.

The PSI for Mozambique was approved on June 18, 2007 to support the nation’s economic reform efforts. It is aimed at consolidating macroeconomic stability and at achieving sustained economic growth and poverty reduction through the pursuit of prudent macroeconomic policies as well as promoting structural reforms. The strategy to achieve this goal remains set in the Mozambican authorities’ national poverty reduction strategy, Plano de Acção para Redução da Pobreza Absoluta (PARPA II).

Following the Board’s discussion on Mozambique, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:

“Mozambique’s overall macroeconomic performance under the Policy Support Instrument has been satisfactory, reflecting prudent fiscal and monetary policies in the context of a flexible exchange rate regime and the authorities’ commitment to avoid monetary financing of the budget. Economic growth remains resilient to shocks, and average annual inflation has decelerated despite high oil and food import prices.

“The authorities are to be commended for the progress in improving tax administration and public financial management. Implementation of the e-SISTAFE (public financial administration system) has progressed well, but timely donor financial support will be important for its completion. The causes of the 2007 shortfalls in aid disbursements will need to be addressed to allow a scaling-up of aid in 2008. It will be important for the

ANNEX III

Mozambique - Poverty Reduction Support Loan II

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government to use well-targeted and fiscally sustainable measures to mitigate the social impact of further increases in oil and food prices, while at the same time resisting pressures for unsustainable additional spending related to the elections. It will also be important to ensure that the civil service wage and pension reforms do not compromise fiscal sustainability.

“The Bank of Mozambique has continued to strengthen its monetary policy framework and internal audit procedures. The Treasury’s commitment to provide weekly cash-flow projections to the central bank is an important step towards better liquidity management.

“Reforms to stimulate private sector development and improve management of Mozambique’s natural resources are a high priority. It will be important to implement the medium-term strategic plan to improve the business environment. Good progress has been made in implementing the mining and petroleum fiscal regime laws. It will be important to enhance the Ministry of Finance oversight of the fiscal terms of new megaproject agreements. Adherence to the Extractive Industries Transparency Initiative will help make Mozambique’s business environment more transparent.

“Strengthening public governance remains a key focus of the reform agenda, and implementation of the government’s governance strategy needs to be completed in a timely manner,” Mr. Portugal said.

The IMF’s framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners. This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. Members’ performance under a PSI is reviewed semi-annually, irrespective of the status of the program

ANNEX IV Page 1 of 3

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

Pillar / Area Indicator [Source of Verification]

Target2007 Result Score Indicator

Number

MACROECONOMY AND POVERTY

Analysis of Poverty and Monitoring Systems

Nº of Provinces with OPPs carried out[Syntheses of the OPP on OP and DNP website]

11 Target not attained, but progress observed 3 1

Aggretated expenditures with % of OE approved[OE]

≥95% and ≤105% Attained 1 2

Allocation in the OE in line with the CFMP.[CFMP and OE] X Target not attained, but

progress observed 3 3

Public Expenditures Tracking System ("PETS") carried out biannually[MF 7 MPD]

Iniciated and carried out effectively at MEC level

Target not attained, but progress observed 3 4

No. of Ministries, State institutions and UGEs[MF]

25 Ministries, institutions and at least 291 UGEs Attained 1 5

Total revenue in % of GDP[OE] 14.9% Attained 1 6

Procurement system operational[DNPE-MF] X Attained 1 7

% of institutions at central and provincial level with functioning internal control units[Annual report on activities of internal control subsystem, SCI]

30 Target not attained, but progress observed 3 8

No. of financial audit reports approved by TA[Annual report of activities]

90 Attained 1 9

GOVERNANCE

% of the budget transferred to:- provinces,- districts- and municipalities*[EO]

P: 22% D: 2.7% M: 0.7% Attained 1 10

% of operational District Consultative Councils (at least 3 meetings per year) with accountability to Government[MAE]

60% Target not attained, but progress observed 3 11

Approval and implementation of salary policy and harmonisation of three data bases

Census and CFAE established Attained 1 12

Proposal for the increase of number of municipalities deposited at AR[MAE]

Legislation of criteria approved by CM

Target attained, but with delay 2 13

No. of verdicts per year [Official statistics of TS]

This year's No. of verdicts exceeds Last year's No.

of verdictsAttained 1 14

Cumulative number of functioning district branches of IPAJ

38 Attained 1 15

No. of corruprion cases:A) DenouncedB) Under investigationC) a- Accused b- Not accused (wating for production of better proofs) c- ArchivedD) Judgement pronounced[PGR]

Annual statistics of the PGR Not attained 4 16

% of cases instructed within the time limit of preparatory instruction[MINT/PGR]

50% Not attained 4 17

% of crime processes clarified[MINT] 74% Target not attained, but

progress observed 3 18

Public Finance Management

Justice, Legality and Public Order

INDICATORS OF THE PERFORMANCE ASSESSMENT FRAMEWORK (RESULTS – PAF 2007)

Reform of the Public Sector

ANNEX IV Page 2 of 3

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

HUMAN CAPITAL

Coverage rate for DPT3 and HB in children of 0-12 months[SIMP]

95% Attained 1 19

Coverage rate of institutional child births[SIMP]

52% Attained 1 20

% of pregnant women and children under 5 yrs with at least one REMTI, in each district without pulverisation[Malaria Porgramme]

≥95% Not attained 4 21

Total No. of people benefiting from ARVT[HIV/AIDS Programme] 96420 Target not attained, but

progress observed 3

No. of children benefiting from paediatric ARVT[HIV/AIDS Programme]

11 820 Not attained 4

Net enrolment rate for 6 yr old girls in Grade 1 [MEC Statistics]

67% Attained 1 23

Conclusion rate EP2 - Girls[MEC Statistics]

27% Attained 1 24

Ratio pupils per teacher in EP1[MEC Statistics] 71 Not attained 4 25

Water and Sanitation

No. of newly constructed isolated water sources[Annual reports of the DPOPH]

1,055 Attained 1 26

Social Action

No. of children, aged people, people bearers of deficiency, women heads of households which benefit from social protection programmes[Periodic reports of PES with disaggregated data per programme and target group]

120437 Attained 1 27

ECONOMIC DEVELOPMENT

% of banks complying with the norms and the IAS/IFRS[BM]

100% Target attained, but with delay 2 28

Submission the the Council of Ministers / Parliament[Publication in BR] Review of the regime of

financial guarantees. Regulation on private

pension funds

Attained 1 29

Study concluded on the current investment strategy, existing regulations and implementation of recommendations. Report on periodic actuarial studies and assessment of implementation level.[INSS]

Realisation of actuarial study and design of investment strategy

Attained 1 30

No. of days needed to start a business.[Annual Report of Worldbank “Doing Business Annual Report”]

60 Attained 1 31

Costs of contracting and firing of workers * *[Ranking in "Doing Business"] 80 Target not attained, but

progress observed 3 32

Total No. of farmers supported by the public extension services, including subcontracting.[REL]

222300 Attained 1 33

No. of new irrigation hectars, rehabilitated with public funds and managed by the beneficiaries.[REL]

4000 Target not attained, but progress observed 3 34

% of processes handled and registered within 90 days[MINAG] 90% Target not attained, but

progress observed 3 35

Roads% of roads in good or reasonable condition[ANE Report] 76% Attained 1 36

Education

Health

22

Private Secor

Agriculture

Financial sector

ANNEX IV Page 3 of 3

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

CROSS-CUTTING ISSUES

HIV

% (and number) of HIV positive pregnant women receiving full prophylactic treatment in last 12 months, in order to reduce vertical transmission from mother to child[MISAU]

13% (22500) Attained 1 37

Gender

PES/OE and BdPES reflecting activities, budgets and programmes aimed at gender issues[Sector BdPES/OE and joint review of MMAS]

MMAS, MISAU, MEC, MINAG, MINT, MOPH,

MPD.

Target not attained, but progress observed 3 38

Rural Development

Cumulative No. of functioning Local Economic and Finance Development Agencies[Monitoring reports DNPDR]

8 Target not attained, but progress observed 3 39

Environment

Cumulative No. of elaborated and approved District Development Strategic Plans (PEDD) with integrated spatial component (land use)[Sector BdPES]

26 Not attained 4 40

ANNEX V Page 1 of 3

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

INDICATORS OF THE PERFORMANCE ASSESSMENT FRAMEWORK (PAF/QAD 2008-2010)

Pillar / Area Indicator [Source of Verification] Proposed 2008 target Indicative 2009 target Indicative 2010 target Comments Indicator

number

MACROECONOMIA E POBREZAAnálise de Pobreza e Sistemas de Monitoria

Nº of Provinces with OPPs carried out[Syntheses of the OPP on OP and DNP website] 11 11 11 It was decided to introduce qualitative aspects into the

NT 1

Aggretated expenditures with % of OE approved[OE] ≥95% and ≤105% ≥95% and ≤105% ≥95% and ≤105% 2

Allocation in the OE in line with the CFMP.[CFMP and OE] X X X 3

Public Expenditures Tracking System ("PETS") carried out biannually[MF 7 MPD] Implementation plan agreed based

on results and conclusions of PETS in education area

Study concluded 4

Public Finance Management

No. of Ministries, State institutions and UGEs[MF] 90% of the EO of the UGEs in

goods and services, and investment through direct EO

90% of the EO of the UGEs in salaries,

pensions, goods and services, and invest-

ments through direct EO

To be defined 5

Total revenue in % of GDP[OE] 15.5% 16% of the GDP 16,5% of the GDP 6

Procurement system operational[DNPE-MF] X X X 7

% of institutions at central and provincial level with functioning internal control units[Annual report on activities of internal control subsystem, SCI]

65 100 8

Coverage of the State Budget audited by the TA in conformity with the technical norms of INTOSAI and following mozambican legislation 30% 35% 9

GOVERNANCE

% of the budget transferred to:- provinces,- districts- and municipalities*[EO]

P: 23.3% D: 3.7% M: 0.9% To be defined SR 2008 must establish target for 2009 10

Reform of the Public Sector% of operational District Consultative Councils (at least 3 meetings per year) with accountability to Government[MAE]

80% 100% 100% 11

Approval and implementation of salary policy and harmonisation of three data bases

Management system for HR established and functional in MFP

and Salary Policy approvedTo be defined SR 2008 must establish target for 2009 12

Proposal for the increase of number of municipalities deposited at AR[MAE]

Proposal of new municipalities deposited in AR To be reviewed in 2008 Proposal to change the indicator to a process

indicator for 2009 13

No. of verdicts per year [Official statistics of TS] 15% increase compared to 2007 To be defined in Semester Review 2008 SR 2008 must establish target for 2009 14

Cumulative number of functioning district branches of IPAJ 48 68 15

No. of corruprion cases:A) DenouncedB) Under investigationC) a- Accused b- Not accused (wating for production of better proofs) c- ArchivedD) Judgement pronounced[PGR]

Statistics published To be defined SR 2008 must establish target for 2009 16

% of cases instructed within the time limit of preparatory instruction[MINT/PGR]

To be defined before the Joint Review

According to NT, the JR 2008 must establish the targets for 2008 and 2009 17

% of crime processes clarified[MINT] 74% 75% 18

Justice, Legality and Public Order

ANNEX V Page 2 of 3

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

HUMAN CAPITAL

Coverage rate for DPT3 and HB in children of 0-12 months[SIMP] 95% 95% 95% 19

Coverage rate of institutional child births[SIMP] 53% 56% 20

% of pregnant women and children under 5 yrs with at least one REMTI, in each district without pulverisation[Malaria Porgramme]

≥95% ≥95% ≥95% 21

Total No. of people benefiting from ARVT[HIV/AIDS Programme] 132.280 165,000

No. of children benefiting from paediatric ARVT[HIV/AIDS Programme] 20.826 30,000

Net enrolment rate for 6 yr old girls in Grade 1 [MEC Statistics] 74% 80% 23

Conclusion rate EP2 - Girls[MEC Statistics] 34% Previous 50% New 47% 24

Ratio pupils per teacher in EP1[MEC Statistics] 69 67 25

Water and SanitationNo. of newly constructed isolated water sources[Annual reports of the DPOPH] 1 055 1034 26

Social Action

No. of children, aged people, people bearers of deficiency, women heads of households which benefit from social protection programmes[Periodic reports of PES with disaggregated data per programme and target group]

152.763 294.400 294,400 Take into consideration the allocation of resources in the CFMP elaboration 27

ECONOMIC DEVELOPMENT

Submission the the Council of Ministers / Parliament[Publication in BR]

IFRS transition plan & proposal of insurance contract law

The target to be established in 2008 depending on the evolution of the transition plan

28

Study concluded on the current investment strategy, existing regulations and implementation of recommendations. Report on periodic actuarial studies and assessment of implementation level.[INSS]

Implementacao das recomendações do estudo actuarial e da estratégia de investimento Implementation Implementation 29

Time needed to carry out an importation and exportation" Imports = 20 days Exports = 20 days

SR 2008 must establish target for 2009 30

Costs of contracting and firing of workers * *[Ranking in "Doing Business"] 80 60 31

Total No. of farmers supported by the public extension services, including subcontracting.[REL]

222,300 411,000 32

No. of new irrigation hectars, rehabilitated with public funds and managed by the beneficiaries. [REL] 3,400 3,000 33

No. of local communities delimited and registered in the Cadastral Atlas (REL) 242 266 34

Energy Number of new connections to electrical power 70,000 70.000 35

Roads% of roads in good or reasonable condition[ANE Report] 70% 73% 36

22

Health

Education

Agriculture

Financial Sector

Private Sector

ANNEX V Page 3 of 3

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APPRAISAL REPORT

CROSS-CUTTING ISSUES

HIV

% (and number) of HIV positive pregnant women receiving full prophylactic treatment in last 12 months, in order to reduce vertical transmission from mother to child[MISAU]

17% (30,400) 22% (42,000) 37

GenderPES/OE and BdPES reflecting activities, budgets and programmes aimed at gender issues[Sector BdPES/OE and joint review of MMAS]

MMAS, MISAU, MEC, MINAG, MINT, MOPH, MPD.

MMAS, MISAU, MEC, MINAG, MINT, MOPH,

MPD., MJ e MAE38

Rural developmentCumulative No. of functioning Local Economic and Finance Development Agencies[Monitoring reports DNPDR]

10 39

EnvironmentCumulative No. of elaborated and approved District Development Strategic Plans (PEDD) with integrated spatial component (land use)[Sector BdPES]

20 40 40

* No financial operations are included in the computation of targets. The result of the percent targets was obtained by adding the expenditures of investment and functioning in each territorial unit, compared to the total expenditure.** Depends on the approval of the law.

ANNEX VI

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

ONGOING PROJECTS IN MOZAMBIQUE EXCLUDING PROJECTS IN PIPELINE

Sector Name Source Long name StatusApproval

Date Effect. Date Closing Date Approved Amount Cancellations

Disbursed Amount Disb. %

Agriculture ADF MASSINGIR DAM AND SMALLHOLDER AGRICULTURAL REHAB. OnGo 24/11/1993 30/05/1996 30/12/2008 55,000,000 - 53,355,084 97.01%Agriculture ADF SMALL SCALE IRRIGATION PROJECT OnGo 02/12/1998 26/09/2000 30/03/2009 12,430,000 - 7,156,799 57.58%Agriculture TAF SMALL SCALE IRRIGATION PROJECT OnGo 02/12/1998 26/09/2000 30/03/2009 1,210,000 - 775,565 64.10%Agriculture ADF FAMILY SECTOR INCOME ENHANCEMENT PROJECT OnGo 31/10/2000 27/07/2001 30/12/2009 12,460,000 - 7,142,811 57.33%Agriculture TAF FAMILY SECTOR INCOME ENHANCEMENT PROJECT OnGo 31/10/2000 27/07/2001 30/12/2009 1,000,000 - 577,119 57.71%Agriculture ADF ARTISANAL FISHERIES DEVELOPMENT PROJECT OnGo 14/11/2001 04/04/2002 31/12/2008 14,170,000 - 3,421,329 24.14%Agriculture TAF ARTISANAL FISHERIES DEVELOPMENT PROJECT OnGo 14/11/2001 28/03/2002 30/12/2008 1,730,000 - 354,794 20.51%Agriculture ADF RURAL FINANCE INTERM.SUPPORT PROJECT OnGo 12/11/2003 21/12/2004 30/06/2011 11,520,000 - 2,939,234 25.51%Agriculture TAF RURAL FINANCE INTERM.SUPPORT PROJECT OnGo 12/11/2003 21/12/2004 30/06/2011 3,840,000 - 239,183 6.23%Agriculture TAF Women's Entrepreneurship And Skills Deve APVD 25/01/2006 17/05/2007 31/12/2012 2,510,000 - - 0.00%Agriculture ADF MASSINGIR DAM AND SMALLHOLDER AGRICULTUR OnGo 02/03/2007 30/11/2007 31/12/2009 17,000,000 - - 0.00%Agriculture Total 132,870,000 - 75,961,916 57.17%Finance TAF Financial Sector TA Project (FSTAP) OnGo 04/10/2005 23/11/2005 31/01/2012 6,800,000 - 942,167 13.86%Finance Total 6,800,000 - 942,167 13.86%

Ind/Mini/Quar ADF MINERALS RESOURCES MANAGT CAP. BUILDING OnGo 03/09/2001 22/03/2002 30/06/2008 3,290,000 - 2,415,313 73.41%Ind/Mini/Quar Total 3,290,000 - 2,415,313 73.41%Multi-Sector TAF Inst. Support for Public Sector Reform OnGo 22/06/2005 17/10/2006 31/08/2009 2,126,000 - 261,041 12.28%Multi-Sector Total 2,126,000 - 261,041 12.28%Power ADF RURAL ELECTRIF.PROJECT (ELECT III) OnGo 03/09/2001 28/03/2002 31/12/2009 11,120,000 - 2,352,715 21.16%Power ADF Energy Reform and Access Program OnGo 05/11/2003 14/12/2004 31/12/2008 9,017,000 - 1,655,899 18.36%Power TAF Energy Reform and Access Program OnGo 05/11/2003 14/12/2004 31/12/2008 1,965,000 - 60,848 3.10%Power ADF ELECTRICITY IV PROJECT OnGo 13/09/2006 24/01/2008 31/12/2012 26,300,000 - 169,986 0.65%Power Total 48,402,000 34,678,444 71.65%Social ADF EDUCATION III PROJECT OnGo 15/07/1998 17/11/1999 30/06/2008 10,687,000 - 9,792,162 91.63%Social TAF EDUCATION III PROJECT OnGo 15/07/1998 17/11/1999 30/06/2008 1,628,000 - 603,491 37.07%Social ADF HEALTH II PROJECT OnGo 21/12/2000 31/05/2001 31/12/2008 9,000,000 - 3,001,717 33.35%Social TAF HEALTH II PROJECT OnGo 21/12/2000 29/12/2000 31/12/2008 600,000 - 78,849 13.14%Social ADF EDUCATION IV PROJECT OnGo 13/09/2001 17/04/2002 31/12/2008 10,000,000 - 768,594 7.69%Social Total 31,915,000 - 14,244,811 44.63%Transport ADF VANDUZI-CHANGARA ROAD REHABILATATION PROJECT OnGo 15/12/1999 11/08/2000 31/12/2009 16,790,000 - 9,201,681 54.80%Transport ADF MONTEPUEZ-LICHINGA ROAD PROJECT APVD 27/10/2006 31/08/2011 30,100,000 - - 0.00%Transport Total 46,890,000 - 9,201,681 19.62%Water Sup/Sanit TAF MAPUTO WATER SUPPLY AUGMENTATION PROJECT OnGo 17/06/1999 17/08/2000 30/06/2008 2,160,000 - 717,289 33.21%Water Sup/Sanit ADF INTEGRATED WATER SUPPLY AND SANITATION PROJECT OnGo 08/12/2000 29/08/2001 29/06/2008 15,770,000 - 7,348,906 46.60%Water Sup/Sanit TAF INTEGRATED WATER SUPPLY AND SANITATION PROJECT OnGo 08/12/2000 28/08/2001 29/06/2008 1,000,000 - 286,086 28.61%Water Sup/Sanit ADF URBAN WATER SUPPLY, SAN.& INST. SUPPORT OnGo 20/12/2002 17/12/2003 30/12/2009 19,064,810 - 8,500,569 44.59%Water Sup/Sanit TAF URBAN WATER SUPPLY, SAN.& INST. SUPPORT OnGo 20/12/2002 17/12/2003 30/12/2009 2,310,000 - 627,733 27.17%Water Sup/Sanit Total 40,304,810 - 17,480,584 43.37%Grand Total 312,597,810 - 155,185,957 49.64%

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Summary of PEFA 2004 & 2006 by Performance Indicator Indicator Dimension 2004

Assessment 2006

Assessment

PI – 1: Aggregate expenditure out-turn compared to original approved budget

(i) The difference between actual primary expenditure and the originally budgeted primary expenditure (i.e. excluding debt service charges and externally financed project expenditure)

A (B)

B

PI – 2: Composition of expenditure out-turn compared to original approved budget

(i) Extent to which variance in primary expenditure composition exceeded overall deviation in primary expenditure (as defined in PI-1) during the last three years

B C

PI – 3: Aggregate revenue out-turn compared to original approved budget.

(i) Actual domestic revenue collection compared to domestic revenue estimates in the original, approved budget

B C

(i) Stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock.

A A B+ PI – 4: Stock and monitoring of expenditure payment arrears (ii) Availability of data for monitoring the stock of

expenditure payment arrears. D

D+

B

PI – 5: Classification of the Budget

The classification system used for formulation, execution and reporting of the central government's budget

B B

PI – 6: Comprehensiveness of information included in budget documentation

Typology of information in the budget documentation most recently issued by the central government

B B

(i) The level of extra-budgetary expenditure (other than donor-funded projects) which is unreported i.e. not included in fiscal reports.

B (C)

B PI – 7: Extent of unreported government operations (ii) Income/ expenditure information on donor-funded

projects which is included in fiscal reports C

C+ (C)

C

C+

(i) Transparent and rules based systems for the horizontal allocation among SN governments of unconditional and conditional transfers from central government.

A A

PI – 8: Transparency of inter-governmental fiscal operations (ii) Timeliness of reliable information to SN governments

on their allocations form central government for the C

C+

C

C+

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Indicator Dimension 2004 Assessment

2006 Assessment

coming year.

(iii) Extent to which consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral categories.

D D

(i) Extent of central government monitoring of autonomous government agencies and public enterprises

C C PI – 9: Oversight of aggregate fiscal risk from other public sector entities

(ii) Extent of central government monitoring of SN governments' fiscal position

D

D+

D

D+

PI – 10: Public access to key fiscal information

Typology of fiscal information which is publicly available

C B

(i) Existence of and adherence to a fixed budget calendar. A A

(ii) Clarity/comprehensiveness of and political involvement in the guidance on the preparation of budget submissions (budget circular or equivalent).

C A

PI – 11: Orderliness and participation in the annual budget process

(iii) Timely budget approval by the legislature or similarly mandated body (within the last three years).

C

B

C

B+

(i) Preparation of multi-year fiscal forecasts and functional allocations

C C

(ii) Scope and frequency of debt sustainability analysis A A

(iii) Existence of sector strategies with multi-year costing of recurrent and investment expenditure

C C

PI – 12: Multi-year perspective in fiscal planning, expenditure policy and budgeting

(iv) Linkages between investment budgets and forward expenditure estimates

C

C+

D

C+

(i) Clarity and comprehensiveness of tax liabilities B B

(ii) Taxpayer access to information on tax liabilities and administrative procedures

A A

PI – 13: Transparency of Taxpayer obligations and liabilities

(iii) Existence and functioning of a tax appeal mechanism C

B

B

B+

(i) Controls in taxpayer registration system B B

(ii) Effectiveness of penalties for non-compliance with registration and declaration obligations

C B

PI – 14: Effectiveness of measures for taxpayer registration and tax assessment (iii) Planning and monitoring of tax audit and fraud

investigation programmes C

B

B

PI – 15: Effectiveness in collection of tax

(i) Collection ratio for gross tax arrears, being the percentage of tax arrears at the beginning of a fiscal year, which was collected during that fiscal year

D D+ D D+

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Indicator Dimension 2004 Assessment

2006 Assessment

(average of the last two fiscal years).

(ii) Effectiveness of transfer of revenue collections to the Treasury by the revenue administration.

B B

payments

(iii) Frequency of complete accounts reconciliation between assessments, collections, arrears and receipts by Treasury.

B A

(i) Extent to which cash flows are forecast and monitored. A A

(ii) Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment

C B

PI – 16: Predictability in the availability of funds for commitment of expenditures

(iii) Frequency and transparency of adjustments to budget allocations, which are decided above the level of management of MDAs

D

D+

C

C+

(i) Quality of debt data recording and reporting B A

(ii) Extent of consolidation of the government's cash balances.

B B

PI – 17: Recording and management of cash balances, debt and guarantees (iii) Systems for contracting loans and issuance of

guarantees. A

B+

A

A

(i) Degree of integration and reconciliation between personnel records and payroll data

D B

(ii) Timeliness of changes to personnel records and the payroll

D B

(iii) Internal controls of changes to personnel records and the payroll

C B

PI – 18: s of payroll controls

(iv) Existence of payroll audits to identify control weaknesses and/or ghost workers.

C

D+

B

B

(i) Evidence on the use of open competition for award of contracts that exceed the nationally established monetary threshold for small purchases (percentage of the number of contract awards that are above the threshold)

C B

(ii) Extent of justification for use of less competitive procurement methods

C C

PI – 19: Competition, value for money and controls in procurement

(iii) Existence and operation of a procurement complaints mechanism

C

C

B

B

(i) Effectiveness of expenditure commitment controls D B PI – 20: Effectiveness of internal controls for

(ii) Comprehensiveness, relevance and understanding of other internal control rules/procedures

C

D+

B

B

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Indicator Dimension 2004 Assessment

2006 Assessment

non-salary expenditure

(iii) Degree of compliance with rules for processing and recording transactions.

C B

(i) Coverage and quality of internal audit function B B

(ii) Frequency and distribution of reports C B

PI – 21: Effectiveness of Internal Audit

(iii) Extent of management response to internal audit findings

C

C+

B

B

(i) Regularity of bank reconciliations. B B PI – 22: Timeless and regularity of accounts reconciliation

(ii) Regularity of reconciliation and clearance of suspense accounts and advances

B

B

B

B

PI – 23: Availability of information on resources received by service delivery units

Collection and processing of information to demonstrate the resources that were actually received (in cash and kind) by the most common front-line service delivery units (primary schools and primary health clinics), irrespective of which level of government is responsible for the operation and funding of those units.

C D

(i) Scope of reports in terms of coverage and compatibility with budget estimates

C C

(ii) Timeliness of the issue of reports B B

PI – 24: Quality & timeliness of in-year budget reports

(iii) Quality of information C

C+

B

C+

(i) Completeness of the financial statements C C

(ii) Timeliness of submission of the financial statements A A

PI – 25: Quality and timeliness of annual financial statements (iii) Accounting standards used C

C+

C

C+

(i) Scope/nature of audit performed (incl. adherence to auditing standards)

D C

(ii) Timeliness of submission of audit reports to legislature

C B

PI – 26: Scope, nature and follow-up of external audit

(iii) Evidence of follow up on audit recommendations B (C)

D+

B

C+

(i) Scope of Legislature's scrutiny A A

(ii) Extent to which the legislature's procedures are well-established and respected.

A A

PI – 27: Legislative scrutiny of the annual budget law

(iii) Adequacy of time for the legislature to provide a response to budget proposals.

A

B+

A

B+

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Indicator Dimension 2004 Assessment

2006 Assessment

(iv) Rules for in-year amendments to the budget without ex-ante approval by the Legislature.

B B

(i) Timeliness of examination of audit reports by the Legislature (for reports received within the last three years)

A B

(ii) Extent of hearings on key findings undertaken by the Legislature

C C

PI – 28: Legislative scrutiny of external audit reports

(iii) Issuance of recommended actions by the Legislature and implementation by the Executive.

B

C+

B

C+

(i) Annual deviation of actual budget support from the forecast provided by the donor agencies at least six weeks prior to the government submitting its budget proposals to the Legislature.

A A D-1: Predictability of Direct Budget Support

(ii) In-year timeliness of donor disbursements (compliance with aggregate quarterly estimates).

C

C+

A

A

(i) Completeness and timeliness of budget estimates by donors for project support

C C D-2: Financial information provided by donors for budgeting and reporting on projects and programmes

(ii) Frequency and coverage of reporting by donors on actual donor flows for project support

D

D+

D

D+

D-3: Proportion of aid that is managed by use of national procedures

Overall proportion of aid funds to central government that are managed though national procedures

D D

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Figure 1: Comparison for Areas of Governance for 1998-2007

Source: World Bank Institute report by D. Kaufmann, A. Kraay, and M. Mastruzzi entitled Mozambique Governance Indicators, Trends and Comparisons. Figure 1 above traces the evolution of the main six governance indicators since 1998, also covered by the Bank’s Country Governance profile (CGP) for Mozambique of 2005. It shows steady improvements in political stability, rule of law, and corruption control, albeit from a low base, since 1998. Government effectiveness is recovering after a sharp deterioration in the late 1990s-early 2000s. For the year 2005, Figure 2 below indicates that Mozambique performed as the Sub-Saharan Africa’s average in terms of regulatory quality, rule of law and corruption control, but outperformed it in the areas of voice and accountability, political stability and government effectiveness.

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Figure 2: Comparison with Sub-Saharan Africa (1996 - 2007)

The average for Sub-Saharan Africa is the top bar while Mozambique is the bottom bar Figure 2 suggests that Mozambique is on average much stronger than the average for Sub-Saharan Africa in the areas of voice and accountability, political stability and government effectiveness but in the same second percentile quintile. Even in these areas of relative strength, there is scope for further improvement in order to reach the third percentile quintile. Other countries in the Southern African Sub-regional grouping the SADC such as South Africa, Botswana, Mauritius and Namibia have average rankings in the third and fourth percentile quintile. The data also indicates that the areas where critical challenges remain, in particular corruption control, rule of law and regulatory quality, areas of focus of the Bank’s PRSL II. Donors such as the World Bank, DFID and the EC among others are taking up the lead to support government through studies and projects aimed at addressing the challenges.

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The government effectiveness indicator used by the World Bank Institute (WBI) is a combined measure of the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, the independence of the civil service from political pressures, and the credibility of the government’s commitment to policies. These are all areas where the PRSL II program is intended to have a positive impact. Mozambique ranks sixth (and at par with Lesotho and Tanzania) out of the 13 countries of the SADC region. The top three countries in SADC have rankings that are significantly better than Mozambique, while the bottom two countries are significantly worse. Figure 3 Comparison with SADC Countries

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Box 1: Public Financial Management Reform in Mozambique21

The most important reforms include: (i) a modern and wide-ranging legal framework for taxation; (ii) a well-designed legal framework for public finance management that contains sound budgetary rules (the SISTAFE Law); (iii) the new regulation on government procurement and bidding processes containing clear and widely known rules; (iv) laws on the State administrative bodies deconcentrated at the local level, regulating the functions and structure of such bodies; (v) laws for the creation of regulatory agencies for service providers; (vi) simplification of bureaucratic procedures; (vii) introduction of an anticorruption law in line with good international practices; and (viii) a review of the General Civil Servants' Statute. These reforms have resulted in the introduction of new instruments and institutional arrangements for public financial management. Mozambique now has the following new instruments in place: (i) a relatively well-structured mechanism for planning and budgeting, and also for coordinating donor activities around the preparation of the poverty reduction plan, PES, CFMP, and OE; (ii) an integrated information technology system to help enforce the new budgetary legislation, the e-SISTAFE and the introduction of the e-CUT; (iii) a sound system of budgetary classifications that is generally compatible with good international practices and with the PBCP; and, (iv) one-stop shops and the launch of an electronic platform to conduct administrative procedures and dissemination of government information (the e-government and the government's Internet portal). Mozambique also has the following new institutional arrangements: (i) the ATM, to strengthen tax administration; (ii) the Ministry of Public Service (Ministério da Função Publica) to strengthen inspection and promote professional conduct in the civil service; (iii) clearer relations between the country’s central bank the Bank of Mozambique (BM) and the Ministry of Finance (MF), through the transferring of the external public debt from the BM's balance sheet to government accounts, and recapitalization of the BM; and, (iv) the Poverty Observatory (recently renamed as Development Observatory) and other forums of public consultation on public policies and legislative and regulatory changes.

Box 2: E-SISTAFE The internal audit (IA) function is at present mainly performed directly by Inspecção Geral das Finanças (IGF) of the Ministry of Finance. The IGF acts at the national level with support from two regional delegations. This agency focuses on conducting property and financial controls of all State institutions. Internal audits focus on systemic issues and generally meet professional standards.Under the SISTAFE reforms, the IGF acts as the supervision body for the IA function, while line ministries need to create their own financial inspectorates. Today, IGF and only a minority of ministries have fully operational Internal Control Units of their own. IGF intervention occurs only when inspecting annual ex-post execution of those institutions. Mozambique has had more success than many African countries in defining a legal framework for PFM and then designing and implementing the systems needed to operationalize it. Since the end of 2005, the “e-SISTAFE” computerised public expenditure control and management information system has been rolled out across central and provincial government, and from 2008 has started being rolled out to districts. At present, the e-SISTAFE includes a budget execution module, which allows for the direct execution of the budget or by fund advances (indirect channel), and a budget formulation module. Additional modules relating to revenue collection, payroll and assets management will be developed in 2008-09. The positive impact of e-SISTAFE is reducing opportunities for embezzlement and theft from the public purse.

21 The legal framework for public finance management consists of four groups of laws and regulations, which focus on the following areas: i) the SISTAFE system for financial administration of the State; ii) the Administrative Court as an institution of supreme audit; iii) the framework for decentralised, autonomous financial management within the Municipalities (Autarchias); and iv) the local government framework of devolved management within provinces and districts.

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Box 3: Challenges of Decentralization Mozambique has been taking steps toward decentralization since 1997, starting with the delegation of administrative, fiscal and political powers to municipalities in urban areas. For administration and operational purposes, the country is divided into 10 provinces22 whose political and administrative heads are the provincial governors. Thereafter the government administrative structure is organised as follows: districts, administrative posts, localities and villages. All the administrator positions are political appointments. The administrative post is the lowest operational level of government. In 2003 the Law for Local State Bodies extended the decentralization program to rural areas through devolution to the district level, where 70 percent of the population lives. Implementation of the law has been gradual. Decentralization in Mozambique poses challenges, including: -Reconciling the existence of different local institutions in rural and urban (municipal) areas with different powers to eliminate confusing overlaps. -Redistributing power by bringing key decisions on spending priorities in the service delivery ministries such as health, education, and agriculture closer to the people and not leaving local authorities as just an administration implementing national plans. -Strengthening incentives within the system for downward responsiveness and accountability. -Empowering the voice of the population by creating legitimate channels, operating within official procedures, for effective citizen participation in order to ensure accountability. Beyond legislative advances, consultative councils have been implemented in all districts in Mozambique, although uneven degrees of success and institutionalization. As a matter of fact, consultative councils were established in all districts and in 95 percent of administrative posts.23 Moving beyond legal institutionalization is needed, however, to ensure that participatory social accountability mechanisms work on the ground. Alongside the Local Initiative Investment Budget, large investments are needed in the human, technical, managerial, and administrative capacity of local governments to manage the district development process and associated budgets and to boost downward responsiveness and accountability.

22 Cabo Delgado, Maputo, Niassa, Gaza, Manica, Sofala, Zambezia, Inhambane, Tete, and Nampula 23 Cited in GdM e PAP (2007: 50-1).

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Summary of lessons learnt from previous policy-based operations in Mozambique24 Some general lessons can be learned from policy-based lending and budget support to Mozambique over the last decade, as follows: 1. Combination of GBS and Project Aid. No single donor has ever provided 100 percent of its

assistance to General Budget Support (GBS). GBS ranges from a minimum of 10 percent to a maximum of 50 percent of individual members’ total aid. The reasons behind these are: (i) minimizing their risks by not shifting entirely to GBS; (ii) addressing a need for complementary support to assist with reforms in the planning and execution of the budget; (iii) addressing critical needs with the sector ministries, particularly in health and education; (iv) pushing additional funding out to the more remote and poorer provinces; and (v) strengthening civil society and the private sector.

2. Sustained Policy Dialogue. Donors that have provided GBS negotiate policy and budget issues

in unison and achieve greater impact that individually. The fact that the Mozambique government has recognized donors’ concerns and has been willing to negotiate with them has allowed policy dialogue to succeed. However, the mere provision of financial resources through budget support does not translate in itself in influence at the policy dialogue level. The current PAP structure requires sustained participation and the alternation in different roles for the Bank to have a more effective influence.

3. Internal Policy Debate. One unexpected result of GBS in Mozambique has been that

government ministries now face a stiff internal debate on their development approach. Previously, each ministry dealt directly with the donors, often outside the government’s budget. Now line ministries are compelled to articulate and defend the logic of their objectives and their approaches to the Ministry of Planning and Development and the ministry of Finance and other ministries. A healthy internal government debate can build a better overall program and promote stronger ownership among all ministries. The Bank should capitalize this gain by developing an assistance program that has a significant level of ownership and coherence across government.

4. Staff Time and Transaction Costs. Most donors find that the switch to budget support in

Mozambique has increased staff time and costs for both the donors and government at least in the planning phases. For example, donors often spend a great deal of time analyzing the macro environment, collaborating as a group, in discussions with government officials and working with outside experts on institutional reforms in public procurement, human capacity development, oversight, and corruption control. Equally important, government officials devote their time and effort to developing plans and agreements that work with individual donors’ agendas, establishing the necessary reporting, monitoring and assessment capacities, and responding to donor concerns. To the extent that donors have been able to harmonize their requirements through GBS, the host government’s workload has been reduced. Similarly, GBS has also reduced transaction costs for donors.

5. Country Ownership of the Development Process. The PAPs generally argue that GBS has

resulted in more rapid and permanent change. Once development activities have been brought into the government’s budget and planning processes, the GoM has the means to institutionalize

24 Project Completion Report for the Poverty Reduction Support Loan for fiscal years 2006 and 2007.

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its poverty reduction and development approach. As a result, government ownership has been enhanced and the country has developed its own planning and implementation abilities. At the very least, GBS has provided incentives for government ministers to work together to determine government-wide priorities, rather than competing for funding directly from the donors.

6. Technical and Management Skills. The GoM’s technical capacity has not improved very rapidly

over the years, as new entrants into the labor market have tended to opt for the private sector or the NGO community rather than government. In addition, with total university attendees at only about 12,000 nationwide, the pool of those with technical and management skills is unlikely to increase in the near future. Less than 3 percent of government employees have a university degree. In the provinces and districts, the proportion of government staff with advanced degrees is much lower. Unlike other African countries, there is no large pool of trained Mozambican expatriates living abroad that can be enticed to return and contribute to the country’s development. In fact, most workers abroad are semi-skilled and unskilled workers. Their return, due to changes abroad, has put additional strains on the country’s social system. This is situation is noteworthy because both governments and donors have recognized that the successful implementation of the country’s poverty reduction strategy depends on improving the public sector. Since 2001, the GoM has embarked on the implementation of the Global Strategy for Public Sector Reform 2000–2011 (GSPSR) with focus on service delivery, decentralization, institutional restructuring, public sector professionalism, financial management and accountability, good governance and fight against corruption. Donors have been strongly supportive of this reform and committed to provide financial and technical assistance. The Bank, through its Institutional Support Project for Public Sector Reform (ISPPSR) project is supporting public sector reform. The ISPPSR aims at (i) establishing of six One-Stop Shops, defined as public services centres which concentrate in one place the provision of several services like identification services (national identity card, passport, emigration services), tax and social security services, notary services, registration certificates (birth, marriage, property) and business licensing, and (ii) training activities set up by the Higher Institute of Public Administration (ISAP) that will train, in the first phase, 700 public servants holding managerial positions. In order to address Mozambique’s capacity constraints in a comprehensive manner and ensure the sustainability of the reforms, this ISP is closely linked to PRSL II.

7. Deconcentration and Decentralization. The strongest institutional capacity, at least in planning

and budgeting, resides in the Ministry of Finance, but this capacity may be limited to the most senior levels. Similar technical capacity, at least for planning, management and assessment does not appear to extend to the sector ministries and becomes even thinner at the provincial and municipal levels. There is also a serious concern about the central government’s ability to decentralize public finances to the provinces in a predictable and consistent manner. In addition, government processes, such as public procurement and tax collection, are in the early phases of reform.

ANNEX XI

Mozambique - Poverty Reduction Support Loan II

APPRAISAL REPORT

Year Mozam-bique Africa

Develo-ping

Countries

Develo-ped

CountriesBasic Indicators Area ( '000 Km²) 802 30 307 80 976 54 658Total Population (millions) 2007 21.4 963.7 5 448.2 1 223.0Urban Population (% of Total) 2007 36.1 39.8 43.5 74.2Population Density (per Km²) 2007 26.7 31.8 65.7 23.0GNI per Capita (US $) 2006 340 1 071 2 000 36 487Labor Force Participation - Total (%) 2005 51.6 42.3 45.6 54.6Labor Force Participation - Female (%) 2005 50.6 41.1 39.7 44.9Gender -Related Development Index Value 2005 0.373 0.486 0.694 0.911Human Develop. Index (Rank among 174 countries) 2005 172 n.a. n.a. n.a.Popul. Living Below $ 1 a Day (% of Population) 2003-05 54.1 34.3 … …

Demographic IndicatorsPopulation Growth Rate - Total (%) 2007 2.0 2.3 1.4 0.3Population Growth Rate - Urban (%) 2007 4.6 3.5 2.6 0.5Population < 15 years (%) 2007 44.4 41.0 30.2 16.7Population >= 65 years (%) 2007 3.3 3.5 5.6 16.4Dependency Ratio (%) 2007 90.4 80.1 56.0 47.7Sex Ratio (per 100 female) 2007 94.3 99.3 103.2 94.3Female Population 15-49 years (% of total population) 2007 23.8 24.2 24.5 31.4Life Expectancy at Birth - Total (years) 2007 42.1 54.2 65.4 76.5Life Expectancy at Birth - Female (years) 2007 42.4 55.3 67.2 80.2Crude Birth Rate (per 1,000) 2007 39.5 36.1 22.4 11.1Crude Death Rate (per 1,000) 2007 19.8 13.2 8.3 10.4Infant Mortality Rate (per 1,000) 2007 95.9 85.3 57.3 7.4Child Mortality Rate (per 1,000) 2007 163.7 130.2 80.8 8.9Total Fertility Rate (per woman) 2007 5.1 4.7 2.8 1.6Maternal Mortality Rate (per 100,000) 2005 520.0 723.6 450 8Women Using Contraception (%) 2003-06 16.5 29.9 61.0 75.0

Health & Nutrition IndicatorsPhysicians (per 100,000 people) 2004 2.6 39.6 78.0 287.0Nurses (per 100,000 people) 2004 19.7 120.4 98.0 782.0Births attended by Trained Health Personnel (%) 2003-06 47.7 50.4 59.0 99.0Access to Safe Water (% of Population) 2006 42.0 62.3 80.0 100.0Access to Health Services (% of Population)* 2004 39.0 61.7 80.0 100.0Access to Sanitation (% of Population) 2004 32.0 45.8 50.0 100.0Percent. of Adults (aged 15-49) Living with HIV/AIDS 2005 16.1 4.7 1.3 0.3Incidence of Tuberculosis (per 100,000) 2005 0.0 0.0 275.0 18.0Child Immunization Against Tuberculosis (%) 2006 87.0 83.7 85.0 93.0Child Immunization Against Measles (%) 2006 77.0 75.4 78.0 93.2Underweight Children (% of children under 5 years) 2003-05 23.7 28.6 27.0 0.1Daily Calorie Supply per Capita 2004 2 057 2 436 2 675 3 285Public Expenditure on Health (as % of GDP) 2004 2.7 2.4 1.8 6.3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 2006 105.0 96.4 91.0 102.3 Primary School - Female 2005 93.4 92.1 105.0 102.0 Secondary School - Total 2006 16.0 44.5 88.0 99.5 Secondary School - Female 2005 11.0 41.8 45.8 100.8Primary School Female Teaching Staff (% of Total) 2005 29.9 47.5 51.0 82.0Adult Illiteracy Rate - Total (%) 2007 47.0 33.3 26.6 1.2Adult Illiteracy Rate - Male (%) 2007 32.1 25.6 19.0 0.8Adult Illiteracy Rate - Female (%) 2007 61.4 40.8 34.2 1.6Percentage of GDP Spent on Education 2006 5.0 4.5 3.9 5.9

Environmental IndicatorsLand Use (Arable Land as % of Total Land Area) 2005-07 4.0 6.0 9.9 11.6Annual Rate of Deforestation (%) 2000-07 0.2 0.7 0.4 -0.2Annual Rate of Reforestation (%) 2000-07 4.0 10.9 … …Per Capita CO2 Emissions (metric tons) 2005-07 0.1 1.0 1.9 12.3

Sources : ADB Statistics Department Databases; World Bank: World Development Indicators; last update :UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports

Note : n.a. : Not Applicable ; … : Data Not Available;

COMPARATIVE SOCIO-ECONOMIC INDICATORS

July 2008

Infant Mortality Rate ( Per 1000 )

0

20

40

60

80

100

120

2002

2003

2004

2005

2006

2007

Mozambique Africa

GNI per capita US $

0200400600800

10001200

2001

2002

2003

2004

2005

2006

Mozambique Africa

Population Growth Rate (%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002

2003

2004

2005

2006

2007

Mozambique Africa

Life Expectancy at Birth (years)

111213141516171

2002

2003

2004

2005

2006

2007

Mozambique Africa