Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 31 028-KE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 17.3 MILLION (US$25 MILLION EQUIVALENT)

TO THE

REPUBLIC OF KENYA

FOR AN

INSTITUTIONAL REFORM AND CAPACITY BUILDING TECHNICAL ASSISTANCE PROJECT

December 27,2005

Public Sector Reform and Capacity Building Unit Country Department 5 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective: November 14,2005)

AAP AIE BMS CAS C F A A C I D A DARE DFID DPM EFMAP ERS ERSSC EU FLSTAC FMISS GFRP GITS GJLOS G O K GTZ HIPC IDA I C T IFC IFMIS IP-ERS IPPD IPR IT K A C A KHADREP KANU K C A K E N A O

Currency Unit = Kenya Shillings (KES) K E S 1 = US$0.0133

US$l.O = K E S 75.3

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS Africa Action Plan Authorizations to Incur Expenses Budget Monitoring System Country Assistance Strategy Country Financial Accountability Assessment Canadian International Development Agency Kenya Decentralized HIV/AIDS and Reproductive Health Project Department for International Development Department for Personnel Management Enhanced Financial Management Action Plan Economic Recovery Strategy Economic Recovery Strategy Support Credit European Union Financial and Legal Sector Technical Assistance Credit Financial Management Information Systems Strategy Government Financial Regulations and Procedures Government Information and Technology Service Governance, Justice, Law and Order Society Government o f Kenya German Technical Cooperation Heavily-Indebted Poor Country International Development Association Information Communication and Technology International Finance Corporation Integrated Financial Management Information System Investment Program for Economic Recovery Strategy Integrated Payroll and Personnel Database Independent Procurement Review Information Technology Kenya Anti-Corruption Authority Kenya H N / A I D S Disaster Response Project Kenya African National Union Kenya Coffee Auctions Kenya National Audit Office

.. FOR OFFICIAL USE ONLY 11

K M C KRA LA MOA MOF MTEF MTR M&E N A R C NEPAD NGO N O W P B K PE P E M PEMAAP PFM PIP PPD PPOA PRGF PS PS/AO PSC PSMTAP PSR RE3M S A SAGA SIDA SOE TOR TTL UNDP USAID

Kenya Meat Company Kenya Revenue Authority Local Authority Ministry o f Agriculture Ministry o f Finance Medium Term Expenditure Framework Mid-Term Review Monitoring and Evaluation National Alliance Rainbow Coalition New Partnership for Africa’s Development Non-governmental Organization Norwegian Agency for Development Pyrethrum Board o f Kenya Procuring Entities Public Expenditure Management Public Expenditure Management Assessment and Action Plan Public Financial Management Project Implementation Plan Public Procurement Directorate Public Procurement Oversight Authority Poverty Reduction and Growth Facil ity Permanent Secretary Permanent Secretary/Authorizing Officers Coordinating Committee Public Service Commission Public Sector Management Technical Assistance Project Public Sector Reform Results-Based Management Special Account Semi Autonomous Government Agencies Swedish International Development Agency Statement o f Expenditure Terms o f Reference Task Team Leader United Nations Development Program United States Agency for International Development

Vice President : Gobind Nankani Country Director : Col in Bruce

Task Team Leader : Sahr Kmndeh Sector Manager : Helga Muller

This document has a rest r ic ted distribution and may be used b y recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

... 111

A . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 .

B . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 .

KENYA Institutional Reform and Capacity Building Technical Assistance Project

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ............................................................. 3 Country and sector issues .................................................................................................... 3 Rationale for Bank Involvement ......................................................................................... 9 Higher level objectives to which the project contributes .................................................. 10

Lending instrument ........................................................................................................... 11

Program objective and Phases .......................................................................................... 11

Project development objective and key indicators ............................................................ 11

Project components ........................................................................................................... 11

Lessons learned and reflected in the project design .......................................................... 20 Alternatives considered and reasons for rejection ............................................................ 22

IMPLEMENTATION .................................................................................................... 23 Partnership arrangements (if applicable) .......................................................................... 23

Institutional and implementation arrangements ................................................................ 23

Monitoring and Evaluation o f Outcomeshesults .............................................................. 30

Sustainability ..................................................................................................................... 30

Critical r isks and possible controversial aspects ............................................................... 31

Credit conditions and covenants ....................................................................................... 33

Economic and financial analyses ...................................................................................... 33

Technical ........................................................................................................................... 34

Fiduciary ........................................................................................................................... 34

. . .

10 . Social ................................................................................................................................. 34

11 . Environment ...................................................................................................................... 34

12 . Safeguard policies ............................................................................................................. 34

13 . Policy Exceptions and Readiness 35

Annex 1: Country and Sector or Program Background ......................................................... 36

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 43

Annex 3: Results Framework and Monitoring ........................................................................ 44

......................................................................................

i v

Annex 4: Detailed Project Description ...................................................................................... 57

Annex 5: Project Costs ............................................................................................................... 76

Annex 6: Implementation Arrangements ................................................................................. 77

Annex 7: Financial Management and Disbursement Arrangements ..................................... 80

Annex 8: Procurement Arrangements ...................................................................................... 92

Annex 9: Economic and Financial Analysis ............................................................................. 99

Annex 10: Safeguard Policy Issues .......................................................................................... 100

Annex 11: Project Preparation and Supervision ................................................................... 101

Annex 12: Documents in the Project F i l e ............................................................................... 103

Annex 13: Statement o f Loans and Credits ............................................................................ 104

Annex 14: Country at a Glance ............................................................................................... 106

Annex 15: L e t t e r o f Development Policy ............................................................................... 107

MAP NO . IBRD 33426

KENYA

Institutional Reform and Capacity Building Technical Assistance Project

Local Foreign Total Borrower I 12.85 I 0.00 I 12.85 IDA 8.16 16.84 25 .OO Government o f Japan (PHRD Grant) 1.05 2.10 3.15

Responsible agency: Ministry o f Finance Address: P.O. B o x 30007-00100, Nairobi, Kenya Contact Persons:

Other Donors

Mr. B.S. Mwencha Head, P.F.M.R. Coordinating Unit Ministry o f Finance P.O. B o x 30007-00100, Nairobi, Kenya Tel. 254-20-252299 ext. 33080 Fax: 254-20-33080

15.60 3 1.40 47.00

Email: bmwencha@treasury.go.ke

37.66

Ms. Joyce Nyamweya Nyakeya Secretary, Public Service Reform & Development Secretariat Off ice o f the President Harambee House P.O. B o x 30050-00100, Nairobi, Kenya Tel. 254-20-21301 1 Fax: 254-20-2 13029 Emai l : jnyamweyanyakeya@treasury . go, ke

50.34 88.00

2

FY06 Annual 0.2 Cumulative 0.2

FY07 FY08 FY09 FYlO 5.6 9.5 7.4 2.2 5.8 15.3 22.8 25.0

Project implementation period: February 2006 - M a y 31,2010 Expected effectiveness date: March 1,2006

Project development objective: The development objective o f the project i s to strengthen public financial management (PFM) systems to enhance transparency, accountability, and responsiveness to public expenditure pol icy priorities as we l l as enhance public service delivery through the effective implementation o f Results Based Management (RBM). Project description: The project will help support GOK’s program to strengthen the management o f publ ic expenditure in order to improve fiscal discipline, bring resource allocations in l ine with development priorities articulated in the IP-ERS, and improve the budgeting preparation and execution, reporting and evaluation processes. Activities to be initiated are intended to make budget processes and public financial management (PFM) more transparent, accountable, and responsive to pol icy priorities. I t will a im at strengthening financial resource planning, budget preparation and implementation, strengthening financial controls, ensuring that allocation o f government resources i s consistent with pol icy priorities outlined in IP-ERS, and reducing fiduciary r isks by making procurement transparent and efficient and enhancing expenditure monitoring and audit. Activities to be undertaken wil l also include those that will enhance public service delivery through the effective implementation o f Results Based Management (RBM). Which safeguard policies are triggered, if any? None. Significant, non-standard conditions, if any, for: Board presentation: None. Credit effectiveness:

(i)

(ii)

(iii)

(iv)

The Borrower GOK has opened a Project Account and deposited the init ial amount required as their counterpart contribution to the project; The Borrower has PFM strategy and Work Plans signed and launched by the Minister o f Finance as we l l as a PSR Strategic Plan and Work Plans that have been signed by the Head o f the Public Service; The Borrower has submitted reports indicating outputs o f the completed p i lo t activities under the Leadership and Ethics Program satisfactory to the Association; and The Borrower has selected short term consultants for procurement, project accounting and project management; a l l under terms o f reference and recruitment processes that are open, transparent and satisfactory to the Association; The Borrower has finalized a Financial Management Manual and a Program Procurement Manual satisfactory to the Association; The Borrower has signed a Joint Financing Agreement with at least one Development Partner satisfactory to the Association.

(v)

(vi)

Covenants applicable to project implementation: None

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A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

Public sector management has been hampered by several governance challenges during the last two decades. This has had a negative impact on Kenya’s economic growth and development, increased the cost o f doing business in the country, discouraging private investment, and proved an obstacle to addressing widespread poverty and improving the quality o f l i f e o f i t s citizens. Key governance problems include: lack o f efficient, transparent, and accountable decision- making and management in the country’s public sector, existence o f high level corruption, weak economic and financial management and weak rule o f law, inefficient service delivery mechanisms, and weak administrative practices. Several reform initiatives to deal with these problems since the 1970s and 1980s have achieved only modest results.

The previous government under the Kenya African National Union (KANU) party, which had ruled the country since independence in 1963, made ambitious efforts in i t s last two years to improve and reform public sector governance. I t s measures included restructuring the public sector by reducing the number o f ministries from 28 to 15, implementing a staff retrenchment program combined with improved pay and benefits, reforming the legal and judicial system, and promoting greater engagement with civil society. A new Government, formed by the National Alliance Rainbow Coalition (NARC) which won the General Election and took office in December 2002, promised to enhance the public sector reform program with increased determination to address governance challenges, opening up o f democratic space and undertake key pol icy and institutional reforms to improve both the environment for private sector investment and service delivery to the people.

The new Government’s strategy to improve public sector effectiveness was outlined in i t s Poverty Reduction Strategy Paper (PRSP), titled the Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS, 2003-2007), prepared with the full participation o f non-governmental organizations, Development Partners, and other stakeholders, and was debated and approved by parliament. The Strategy centers on three inter- linked pillars: (i) strengthening economic growth; (ii) enhancing equity and reducing poverty; and (iii) improving governance. The World Bank’s Board discussed the Strategy on May 6,2004 and the International Monetary Fund’s Board discussed it on M a y 10, 2004. In response to these initial steps taken by the Government, the Bank’s Country Assistance Strategy (CAS, Report No. 29O38-KEy M a y 19, 2004) proposed a program for re-engagement o f the Bank Group with Kenya that is aligned with the IP-ERS and rooted in i t s results-based framework, from which the CAS’S own result-based framework i s drawn.

The new Government made some progress on reforms under the public sector management technical assistance project with specific reforms, including, for example: reducing backlogs in the audits o f Government accounts; taking steps to strengthen the c iv i l service wage policy, including retrenchment and abolition o f overmanned posts, and by establishing a Remuneration Board to oversee the implementation o f the pay reform pol icy approved by Cabinet. I t has established an institutional framework comprising a Cabinet Sub-Committee, a National Steering Committee on Public Sector Reforms, and a Public Sector Reform and Development Secretariat responsible for the implementation o f Results Based Management (RBM) and coordinating the implementation o f on-going reform initiatives in the public sector. As part o f i t s efforts to develop an integrated sector-wide monitoring and evaluation (M&E) system to improve the

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allocation and use o f public resources, the Government has established a Monitoring and Evaluation Department within the Ministry o f Planning and National Development (MPND). To improve management and quality o f public service delivery, performance contracts have been introduced for al l Permanent Secretaries and Accounting Officers in al l Government ministries and departments. These performance contracts are tied to the ministerial or departmental strategic plans and require that they report their performance and resource utilization in the delivery o f services to the people through parliament and other communication channels. All chief executive officers and board o f directors o f al l state-owned corporations are also expected to s i g n these performance contracts.

Specific anticorruption actions taken since 2003 include ending ‘land grabbing’ and state sponsored ‘harambees’ or fund-raising, removing 16 judges and 73 magistrates (or almost one third o f those in place), replacing al l senior c iv i l service procurement officers, and establishing the Kenya Anti-Corruption Commission (KACC) with real power to investigate. In 2003 Parliament passed The Public Officer Ethics Act (2003) requiring civ i l servants to f i l e annual declarations o f assets and liabilities, and The Anti-corruption and Economic Crimes Act (2003) which set up the KACC. The Government also launched an enquiry into a major corruption case (Goldenberg) that took place in last decade; the report i s due early in 2006. Further, it took action against those involved in corruption in the Bank-funded projects-especially the Kenya Urban Transport Infrastructure Project (KUTIP), in which both Government officials and Bank staff members were found to have been involved in corruption. The Government has also enacted key legislation aimed at improving governance and public service delivery which include: the Government Financial Management Act (2004), the Public Audit Office Act (2004).

Earlier this year, the Government’s relations with i t s key stakeholders (including development partners) became quite strained fol lowing new procurement scandals in the summer o f 2004, and the resignation o f a key senior c iv i l servant involved in anti-corruption programs in early 2005. Partly in response, the Government presented an Anti-Corruption Action Plan in the Consultative Group meeting in April 2005, covering the period April 2005-June 2006, aimed at accelerating and consolidating reforms. Although it i s not meant to represent the totality o f the Government’s action on anti-corruption, the strategy has five planks:

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0

0

0

0

Enactment o f the necessary legislation to establish a legislative platform on which to anchor the war on corruption; Vigorous enforcement o f anti-corruption laws through investigation o f offences o f corruption and economic crimes as well as recovery o f corruptly acquired property; Identification and sealing o f loopholes through institution o f effective public sector management controls; National public education aimed at stigmatizing corruption and inducing behavioral change; and Implementing macroeconomic and structural reforms to reduce the incidence and demand for corruption by scaling down the role o f the public sector and bureaucracy.

Beyond the initiatives in the Government’s anti-corruption action plan, there were others in various sectors, e.g. water, health, education, and immigration. In addition, ‘administrative actions’ were taken against senior c iv i l servants (including the Public Works Department), police and military personnel, while the K A C C launched investigations in the Immigration Department and the Nairobi and Mombassa Ci ty Councils, and steps were taken to improve significantly the

5

governance arrangements for the Constituency Development Funds administered by Members o f Parliament.

At a stakeholders meeting for the private sector, c iv i l society and development partners convened by the Government in September 2005 to review progress, there was agreement that implementation of the Action Plan was largely on schedule. For example, a landmark Procurement Bill was enacted in August 2005, establishing an autonomous Public Procurement Oversight Authority that wil l be responsible for the regulation o f procurement in the public sector, including procurement o f security related contracts-transactions which were shrouded in secrecy in the past and associated with high level graft. Subsequently, the Government requested and the World Bank agreed to second a Bank manager to help set up the new Procurement Authority and assist in finalizing appropriate Regulations which are at an advanced stage o f preparation. The secondee i s expected to take up his position early in 2006.

The Privatization Act received Presidential assent in October 2005 setting the stage for the privatization o f public assets and operations including state corporations, as part o f privatization program under a new Privatization Commission. Meanwhile, there was a four-fold increase in the professional staff o f the KACC, recruitment o f 23 magistrates and other legal staff, and the launch o f public education campaigns. By January 2006, the Attorney General's Office wil l have 126 new state attorneys significantly increasing i t s capacity. Early in 2006, the Government also expects to (i) complete the reports on the impediments to prosecutions (including the uses and abuses o f appeals to the Constitutional Court, injunctions and adjournments), (ii) adopt measures in the financial sector to address anti-money laundering; and (iii) consider new legislation on political campaign financing. The Ethics and Governance Committee o f the Judiciary wil l also complete i t s work, including proposals for dealing with ethical breaches that may not require removal from office.

Public mobilization to fight corruption i s also increasing, partly because o f the strengthening o f the K A C C and the launch o f i t s public education campaign. One measure o f this increased engagement i s that the number o f complaints received by K A C C grew from 308 in January 2005 to 608 in October 2005. During the same period the number o f investigations launched by the K A C C after reviewing these complaints also grew, from 27 to 97, while the number o f cases forwarded each quarter to the Attorney General's Office for action rose steadily, from four during the last quarter o f 2004 to 21 by the third quarter o f 2005. At present, the Government i s prosecuting 6 former Permanent Secretaries and 14 former heads o f parastatals for alleged corruption.

Meanwhile, measures were taken to improve governance o f public finances. They included enhancing the capacity o f the National Audit Office which was then able to clear the long- standing backlog of public accounts audits. In October 2005, the Government established independent audit committees in al l ministries, departments, state corporations and local authorities. This step i s part o f a new risk-based internal audit approach, supported by several donors, that involves identifying the potential for fraud in advance and building the necessary risk mitigation processes into the design o f government systems and processes. The prospects for reducing rent seeking were hrther enhanced in November 2005 through additional measures such as the liberalization o f coffee marketing (after over a decade o f pol icy debate about it), and a request to Parliament to eliminate 35 licenses previously required for setting up a business. Additional licenses wil l be eliminated in 2006 as part o f the guillotine approach that i s underway.

6

In addition, stakeholders encouraged the Government to increase political accountability for corruption and some action on this front occurred recently. Following defeat for the new Constitution in a public referendum on November 21, 2005, the President sacked his entire Cabinet. In announcing his Cabinet appointments, the President indicated that he would accord “, , , high priori ty to integrity in the public service..” and stipulated that al l new Ministers and Assistant Ministers would have to s i g n and adhere strictly to “a new Code o f Conduct and a Management Accountability Framework intended to enhance collective responsibility, ethics, accountability and results in government.” The Code requires verification o f declarations by the K A C C and address issues related to conflicts o f interest. H e also appointed a new Minister o f Justice and Constitutional Affairs, who wil l be pivotal to the continuing fight against corruption, and who had led successful and widely celebrated reforms (including governance aspects) in the water sector during 2003-2005. At the same time, he excluded a Minister whose visas had been revoked by the United Kingdom and the United States for reasons perceived to include corruption. T o further reinforce a culture o f performance and accountability, the President also said that Ministers and their leadership teams wil l be expected to report publicly o n development results achieved at the end o f the next 4-6 months.

Stakeholders at the September 2005 meeting also encouraged the Government to make greater use o f administrative actions and not simply rely o n prosecutions which can take a very long time to be completed. O n December 16, 2005, the Government annulled the recruitment o f 3,000 police officers and suspended 175 senior officers involved in the recruitment exercise, pending hr ther investigation. Mindful o f longstanding rumors o f corruption in the police force, the Government requested K A C C to monitor the process and found evidence o f bribes. In less than 24 hours, the Government took disciplinary action. Later that day, the Kenya Revenue Authority also announced that i t was suspending several senior officers that work at the Port pending investigation into why they were not achieving performance targets for customs revenues. Around the same time, the Government fired the Managing Trustee o f the National Social Security Fund following investigation by the KACC. Efforts are now underway to work with the private sector, including professional bodies, to address corruption within their own ranks, and to support evolving grassroots initiatives aimed at increasing social accountability within public and private sectors.

A number o f Development Partners have offered to provide assistance to support the Government implement various governance activities, including support to the justice and law and order sector, based on the Government demonstrating i t s strong leadership in the effort to eradicate corruption and pursue reforms. For example, the Governance, Justice, Law and Order Sector Reform Programme (GJLOS-RP), which i s supported by at least fifteen Development Partners is a Government-led initiative which lays out a five-year plan on a sector-wide, coordinated and coherent approach to reform o f public sector institutions in the legal sector to be able to execute their mandate effectively. The key outcomes o f the programme include a safe and secure environment, a fair humane and expeditious justice delivery system, and a more democratic state that respects human rights and the rule o f law.

The Government has also entered into partnership with Development Partners to plan and implement the Public Financial Management Reform Programme with the aim o f enhancing financial governance in the public sector for effective and efficient resource utilization for economic growth and poverty reduction. The United Nations Development Program (UNDP) i s

7

also supporting the government through a programme to alleviate poverty through strengthening capacity and participation o f governance institutions and c iv i l society organizations including NGO’s and Community Based Organizations on public governance. This programme aims to promote participatory development planning by involving grassroots communities and al l parties concerned in public pol icy debates to build consensus, eliminate corruption, enhance transparency and accountability, and institutionalize integrity systems and other programs and regulations that impact poverty eradication.

The UNDP i s also coordinating support from bi-lateral donors to the Public Sector Reform and Development Secretariat (PSRDS), in the Cabinet Office, Office o f the President on improving public sector management, coordination and networking. The long-term objective o f this support i s to improve public sector management for more efficient, transparent, and accountable delivery of public services. The intended outcomes o f the support are: (i) restructured Cabinet Office and rationalized functions in support o f the Presidency; ii) institutionalized RBM in public service achieving national goals and the ERS targets iii) an enabling environment for RBM to achieve national goals, and in the medium term, ERS targets, (iv) a developed longer-term public service Strategy including a national vision and “branding Kenya” (Kenya Incorporated), towards the achievement o f national priorities in the medium to long term, and (v) capacity o f Public Service Leaders to champion change in the implementation o f RBM and mainstreaming o f values and ethics in the public service vi) develop Information, Education and Communication (IEC) strategy for disseminating ‘Results to Kenyans’ and vii) resource mobilization Strategy for coordinated implementation o f the project Additionally, Kenya i s one o f the f i rs t four African countries (others are Rwanda, Ghana, and Mauritius) to be scrutinized by the African Peer Review Mechanism by volunteering to be reviewed on good governance, democratic standards and economic policy. The N e w Partnership for Africa’s Development (NEPAD) peer review i s seen as a vital part o f the African economic recovery plan and sixteen Afr ican governments already have signed up to the review mechanism, which i s to assess whether they are fol lowing NEPAD aims o f good governance, economic reform and democracy.

However, despite the government’s renewed commitment to improve governance and improve the delivery o f services to its citizenry, coupled with the support f rom the Development Partners, significant systematic challenges remain that s t i l l need to be addressed. For instance, the C iv i l service i s s t i l l not lean and service quality i s highly variable and poor in key economic sectors such as the telecommunication, ports, and energy. Issues o f i t s bloated size continue to be a significant challenge in terms o f delivering services to i t s citizenry. Pay reform continues to be a challenge because o f lack o f a pay policy.

While there i s evidence that ‘big graft’ i s more difficult because o f stringent attention to procurement, and intense media and general public security, there are indications that other problems s t i l l exist. Recently, the Government commissioned forensic audits o f three Bank- financed operations under-implementation. The audit reports found direct evidence o f fraud in the Kenya HIV/AIDS Disaster Response Project (KHADREP), significant r i sk management and control weaknesses (though little direct evidence o f fraud) in the Kenya Decentralized HIV/AIDS and Reproductive Health Project (DARE), and shortcomings in the control environment in the Public Sector Management Technical Assistance Project (PSMTAP), which do not appear to have translated into fraud. The report also notes that poor government management against fraud risk, weak oversight, low capacity (particularly in accounting staff), project supervision that focuses more on documentation rather than physical evidence of

8

implementation, and confusion over World Bank and Government requirements allow for a high possibility o f corruption. There i s also insufficient managerial accountability for overall performance and service delivery and corruption.

Poor harmonization o f donor support to Kenya had led to uncoordinated interventions. This fragmentation has been a huge drain on the capacity o f the Government and runs counter to the commitments made under the Paris Declaration on aid effectiveness. There has also been several missed opportunities for organized scaling up o f implementation (e.g. in using rapid results approaches, etc), throughout the Government. However, the approach has now been piloted in a few government ministries (health, agriculture, local government, trade and industry and water ministries) with successes. This approach i s now being mainstreamed to ensure “results” are delivered to the Kenyan people.

The Government recognizes the above weaknesses and has recently articulated a new vision and institutional framework for improving public sector performance (especially on governance) and service delivery as part o f i t s broader strategy for reinvigorating i t s programme o f growth and structural reforms for wealth creation as stated in the ERS. This approach focuses on enhancing the change management capacity o f leaders in the Public Service and their teams in delivering ‘Results for Kenyans’. I t wil l also enhance the development and promotion o f a value system and code of ethics developed from the existing legislation as wel l as best global practice as a tool to rejuvenate the service orientation and accountability for public servants.

As part o f this new initiative, the Government has recently embraced a Results-Based Management (RBM) system as a tool for helping public sector institutions to focus their work, plan strategically and demonstrate candidly the difference that each organization i s making to development. I t i s presumed that by introducing RBM, the Government seeks to improve overall programme effectiveness as wel l as accountability to i t s citizens, donors and other Development Partners. Both the public and Development Partners want to see faster development and to know what use their resources are being put into and how efficiently.

The Government has also introduced performance contracts to al l i t s senior officials including those in parastatals. The performance contracts are supposed to create incentives for public sector managers and their staff, to improve performance and accountability by undertaking to deliver specific outputs in l ine with their annual work plans, strategic plans and the ERS as wel l as Millennium Development Goals. By focusing o n results and by providing a clear picture o f what areas and outcomes the Government i s engaged in, RBM presents the opportunity o f creating a synthesized alignment between capacities and the tasks undertaken by ministries and other public organizations. It also raises the challenge o f finding the right sk i l ls mix for each public organization and the incentives necessary for enhanced performance.

The focus o f the new program wil l be on public financial management to reduce discretionary powers accorded to i t s chief executives, and improving its service delivery system and enhancing transparency in government transactions, including procurement reforms, and consequently create the environment for needed foreign investment. To help implement i t s public sector management reform program, the Government i s seeking assistance from the Bank and other Development Partners that will:

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Support demand-driven leadership capacity building that i s aligned with and directly supportive o f the performance-based management system that the Government i s rapidly putting in place, including performance contracting and components piloted earlier under the transformative leadership for RE3M pilots using the ‘rapid results’ approach.

Focus on some key ministries (that are critical for successful implementation o f the ERS, e.g., Ministry o f Finance, Ministry o f Planning and National Development, Ministry o f Trade and Industry, Ministry o f Local Government, and Ministry o f Agriculture). However, because several others are important to the achievement o f ERS goals and/or are moving ahead quickly to significantly enhance their focus on operational efficiency and results, the assistance program would init ial ly focus the support on the five ministries, but will during the mid- term review explore the need to accommodate a larger group o f ministries that satisfy agreed eligibility requirements such as leadership and results orientation.

Assist Parliament in i t s oversight role by supporting the various parliamentary committees in the area o f economic management (budget preparation, budget execution, and expenditure control), and providing technical and logistical support for effective oversight by the Public Accounts and Public Investment Committees; and

Improve the effectiveness o f donor support in these critical areas o f capacity building, governance, etc, by ensuring that they are better aligned and coordinated, especially in areas such as public financial management (PFM).

Several bilateral donors in close collaboration with International Development Association (IDA) have responded favorably with commitments to support the pooling o f funds around a single design solution including Department for International Development (DFID), Swedish International Development Agency (SIDA), and European Union (EU), along with anticipated support from Canadian International Development Agency (CIDA), and Norwegian Agency for Development ( N O W ) . Non-pooling donors that have committed to leverage support to the P F M reform program include United States Agency for International Development (USAID), German Technical Cooperation (GTZ) and UNDP. The harmonized approach to support the Government’s institutional reform and capacity development program has been conveyed to the Government in regular meetings between Government and various Donor Coordinating Mechanisms including the PFM Donor Coordination Group and in various preparation missions. The support from donors would incorporate the various commitments within the Government’s overall macroeconomic fiscal framework including i t s annual budgeting, planning, and monthly Statement o f Expenditure (S0E)-based disbursement procedures.

2. Rationale for Bank Involvement

The proposed project i s consistent with the strong emphasis on improving governance and restoring the ru le o f law articulated both in the Investment Program for Economic Recovery Strategy (IP-ERS), and the joint World Bank-IFC Country Assistance Strategy (CAS), 2004-07. Through concessional financing, the project will directly contribute to the CAS objective o f building institutional capacity for improved service delivery. The project will be l inked to other

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operations currently under preparation and wil l provide targeted support to specific Ministr ies considered critical in achieving the Government’s Economic Recovery Strategy benchmarks. I t will also complement other lending instruments for institutional reform and capacity building such as the Financial Sector Adjustment Credit (FSAC) which i s currently under preparation as well as provide technical inputs on various reforms currently being undertaken by the Government, including financial management, accounting reform, and procurement reform.

Additionally, the planned support in this project l i n k s closely with the objectives o f the recently developed World Bank Group Action Plan to support the “Challenge o f Africa’s Development”, which provides a results-oriented framework to support critical pol icy and public actions led by African countries to achieve well-defined goals, such as the Mil lennium Development Goals (MDGs). The principal means available to African countries to achieve these goals include building honest and capable states through governance reforms; raising the rate o f growth; and enabling the poor and women to participate in, and benefit from growth.

The Bank brings considerable cross-country experience in several o f the reform areas under implementation as part of this project, including financial management, procurement, enhancing change management, and strengthening institutional capacity. I t i s also leveraging its experience as a lead or strategic partner in supporting large scale capacity building programs in a number o f African countries (for example IDA’S support to Ethiopia’s Public Sector Capacity Building Program in 2004, to improve governance, accountability, and the scale, efficiency, and responsiveness o f public service delivery at the federal, regional, and local levels).

As mentioned earlier, there are firm indications that a number o f bilateral donors are currently supporting various programs to improve governance and deliver “results for Kenyans”. The Bank i s playing a catalytic role in harmonizing, and leveraging i t s support for capacity building and institutional reforms, including public financial management reforms, leadership and ethics reforms as well as mainstreaming results-based management in Government with a number o f other donors, including DFID, SIDA, EU, CIDA, GTZ, USAID, UNDP and NORAD, who participated in several o f the preparation missions. The donors, together with Government, have agreed that support for the various governance reforms mentioned inter alia would be in the form o f a harmonized approach, ini t ial ly in the area o f PFM, and have jo int ly funded a team of consultants to assist the Government in developing a log frame and an implementation plan for al l proposed P F M reforms in government. Such broad partnerships among Development Partners to align behind a country-led strategy help in sustaining a reform momentum in government.

3. Higher level objectives to which the project contributes

The proposed IRCB project wil l support the Government of Kenya’s Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS) 2003-2007, which lays out the Government’s plan to reinvigorate and sustain economic growth and poverty reduction. This plan, which was prepared with the full participation o f Parliament, non- governmental organizations, Development Partners and other stakeholders, rests on three pillars: (a) economic growth, (b) equity and poverty reduction, and (c) governance. The project aims at supporting the governance pillar which seeks to fight corruption, establish a lean, efficient, and accountable public service that concentrates financial and human resources o n the delivery o f core government services to businesses and citizens.

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PROJECT DESCRIPTION

4. Lending instrument

This will be a Technical Assistancehvestment Loan for five years, linked closely to Development Pol icy Lending.

5. Program objective and Phases

Not applicable.

6. Project development objective and key indicators

The development objective o f the project i s to strengthen public financial management (PFM) systems to enhance transparency, accountability, and responsiveness to public expenditure pol icy priorities as we l l as enhance public service delivery through the effective implementation o f Results Based Management (RBM). The Key Performance Indicators capture the emphasis on sound fiduciary arrangements in the context o f an evolving framework o f results based management and assess whether the development objectives have been achieved. These indicators are:

National budget i s aligned with explicitly stated government priorities in the IP- ERS; Budget allocation and actual expenditure disparities are reduced; Improved predictability o f Treasury’s annuaymid term allocation flows to l ine ministries; Risk based external audit reports prepared and published in a timely fashion in accordance with the Public Audit Act, 2003; Adoption o f a Risk Based Internal Audit approach and establishment o f an effective Ministerial Audit Committee; Skilled Public Accounts, Public Investment and Finance Committees o f Parliament that undertake their statutory functions meet in a timely manner to discuss and act on reports; Procurement entities adhere to the national procurement law; Accountability and capacity o f public servants are enhanced for the delivery o f public services through the introduction o f RBM, which are linked to the delivery o f specific outputshesults; Ministries accessing funds under the credit develop strategic plans and show good performance in implementing them; and External Resources Department i s strengthened and develops and adopts an aid pol icy that brings order to donor support for capacity building.

7. Project components

Component 1. Budget and Public Financial Management (US$16.65 million):

Strengthening the management o f public expenditure is central. There is an urgent need to improve fiscal discipline, bring resource allocations in l ine with development priorities

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articulated in the IP-ERS, and improve the budgeting preparation and execution, reporting and evaluation processes. The objective o f this component i s to make budget processes and public financial management (PFM) more transparent, accountable, and responsive to pol icy priorities. It will therefore aim at strengthening financial resource planning, budget preparation and implementation, strengthening financial controls, ensuring that allocation o f government resources i s consistent with pol icy priorities outlined in IF-ERS, and reducing fiduciary r i sks by making procurement transparent and efficient and enhancing expenditure monitoring and audit.

This component will have the following sub-components.

Sub-program 1.1: Strengthening budget formulation

This subcomponent supports the Government’s on-going efforts at streamlining budget formulation processes, strengthening the M T E F consultative mechanisms with stakeholders and alignment o f expenditure with ERS priorities. I t wil l also support various activities undertaken before budget formulation such as providing technical assistance to strengthen Sector Working Groups and in preparing sector reports. In the short term, budget formulation wil l be improved by building capacity o f the Budget SupplyMTEF department in the Ministry o f Finance and budget units in l ine ministries and government agencies. Specific activities will include helping line ministries prepare expenditure plans, training staff in program costing, and strengthening budget submissions by l ine ministries as wel l as helping Ministry o f Finance with development o f budget strategy paper and project appraisal system. In the medium term, the project wil l support the development o f an organic budget law which codifies existing practices in Public Financial Management. By the end of the project l i fe cycle, the means to support implementation o f the new organic budget law wil l have been developed.

Sub-program 1.2: Strengthening budget execution, accounting, and financial reporting

This subcomponent supports the Government in implementing the recommendations contained in i t s Enhanced Financial Management Action Plan (EFMAP). Several elements o f EFMAP are under implementation and others are to be implemented in the next two years. In the short term, the sub-component i s likely to include technical support to: (i) improve cash management; (ii) contain occurrence o f further expenditure arrears; (iii) improve predictability o f cash f low to spending units; (iv) improve payment systems; and (v) ensure payroll integrity. In the medium term the principles, methodology and processes would have been established for: (i) a system for financial reporting by semi-autonomous government agencies and local authorities o n budget and contingent liabilities; (ii) expenditure classification systems along the principles outlined in the international standard classifications such as the UN Classification o f the Functions o f the Government (COFOG) and the IMF’s Government Financial Statistics (GFS); and (iii) a framework for the preparation and presentation o f timely and comprehensive periodic financial management accounts and annual financial statements based on generally accepted accounting principles and professional best practices. By the end o f the project l i f e cycle, the means to support implementation o f the revised principles, methodology and processes for reporting would have been developed.

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Sub-program 1.3: Strengthening Public Financial Management through the use of I n formation Technology

The subcomponent supports the Government in achieving two objectives: (i) timely capturing o f accurate and verifiable data o f budget execution, for improved financial reporting thereby reducing the opportunities for unaccountable discretion on the part o f the executive: and (ii) providing enhanced internal controls to improve public expenditure management (including pay- ro l l management). In the short term, technical assistance will be provided to achieve “live” status of the new I F M I S in the Ministry o f Finance and one pi lot department. Activities wil l include completion o f the pi lot test phase, resolution o f the connectivity issues and data integration issues. In the medium term, alignment o f PFM and I T architectures will be achieved in tandem with preparation for further roll-out o f the system. Activities wil l include resolution o f policy differences and process issues, as wel l as development o f the required capacity and resources to support fbll roll-out o f the system. By the end o f the project l i f e cycle, full implementation o f the system would have been initiated. Activities will include finalization o f manuals and training courses, set up o f Ministries on the system, data take-on for priori ty Ministries, and establishment o f change management and user support processes.

Sub-program 1.4: Strengthening the External Audit System

The subcomponent supports the strengthening o f capacity o f the Kenya National Audit Office to become an effective institution that wil l enhance financial accountability in the public sector. In the short term, the focus wil l be on supporting ongoing initiatives to clear the substantial backlog of overdue Local Authorities audit reporting arrears, to prevent occurrence o f new audit arrears and to consider more effective and efficient audit approaches, such as risk-based auditing and performance auditing. Support wil l also be provided under this sub-component to strengthen the relationship between the Public Accounts and Public Investments Committees o f Parliament and the Kenya National Audit Office. In the medium term (i) risk-based external audits will be piloted, and if acceptable to stakeholders, full scale implementation will be planned and resourced (ii) implementation o f alternative audit approaches would have been initiated. Activities wi l l include finalization o f manuals and establishment o f training courses and change management processes. By the end o f the project cycle annual financial reporting by government ministries and departments wil l be fblly compliant with the Public Audit Ac t 2003.

Sub-program 1.5: Strengthening the Internal Audit System

The subcomponent supports design and rollout o f a risk-based audit approach to ministries and departments. In the short term, support will be provided to the Internal Audit Department to complete their pi lot risk-based audits in order to develop and document a new standard internal audit methodology and support its implementation. In the medium t e r m implementation wil l be initiated, together with the establishment o f Ministerial Audit Committees to whom internal audit, external audit and other independent oversight entities will typically present their findings to enable monitoring of implementation. By the end o f the project l i f e cycle, use o f audit results to improve internal control systems wil l be visible and the risk-based systems approach to internal audit would have been institutionalized.

Typical activities wil l include development of manuals, processes, systems and staff, wel l resourced for implementation.

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Sub-program 1.6: Strengthening the National Procurement System

Following the enactment o f the Public Procurement and Disposal Act 2005, a new Procurement Authority would be established, whose principal function i s to provide oversight o f the procurement regulations. The sub-component would provide support to this Authority and also assist to develop an effective framework and control process for the procurement o f goods, works, and services. The project wil l further assist to develop an effective procurement monitoring and tracking system. In the medium term, the project will support a sensitization program to disseminate the new procurement law and system to promote transparency and accountability in procurement. I t wil l also support training o f procurement staff on the new law, regulations and systems as wel l as provide support for the review of, and promulgation o f new regulations in accordance with the new Act. By the end o f the project cycle, implementation o f the new Act, framework and procurement systems will have been initiated.

Typical activities wil l include technical assistance, some logistical support, and intensive training to procurement oversight institutions, tender boards, and procurement staff, finalization o f procedure manuals; integration with financial processes and IFMIS; implementation training; data take-on; change management; monitoring o f results, and provision o f user support.

Sub-program 1.7: Support to key Parliamentary Committees for effective oversight of public financial management

To enable the Parliament to play i t s oversight role in the area o f economic management more effectively and to professionalize i t s interaction with the government, this subcomponent wi l l support the various parliamentary committees in the area o f economic management (budget preparation, budget execution, expenditure control and financial reporting). I t wil l provide technical and logistical support for effective oversight by the Public Accounts and Public Investment Committees. In the short term, research capacity and operational support o f the committees wil l be improved. In the medium term, their responsiveness to audit findings and follow up o f their recommendations would have improved. By the end o f the project cycle, the backlog o f reports not dealt with would have been completed and new processes would be operational.

Sub-program 1.8: Strengthening Revenue Collection and Management for the Kenya Revenue Authority

The Kenya Revenue Authority’s ongoing Reform and Modernization Programme seeks to help the Government collect a l l the taxes due and in the process free Kenya from donor dependency and make the country a truly sovereign nation. In general, KR4 has exhibited good performance in various areas, including revenue collection which has increased gradually from Kshs. 122 bi l l ion in 1995/96 to Kshs. 229 bi l l ion in the 2003/04 financial year (FY), accounting for over 93% o f total government revenue. However, the institution i s yet to operate as a fully integrated organization, which has inhibited the full potential o f gains accruing from its creation. The objective o f this sub-component i s to improve the Government’s overall fiscal objectives, including revenue collection, enhance efficiency in utilization o f resources, and improve effectiveness by adopting procedures and processes with the tax administration system, Activities wi l l focus on three main areas: (i) Domestic Taxes Department (DTD) Reform and

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Eligible capacity building interventions

Modernization Project: Technical Assistance, training and equipment in order to restructure the Domestic Tax Department (TDT) from the current tax-based structure into a unified function- based tax administration; (ii) K M Automation Project: Overhauling o f the K R A ’ s information systems through the acquisition and introduction o f a new modem integrated IT system for tax administration and supporting infrastructure for business continuity including a disaster recovery site; (iii) Training and Change Management Project,: Training and Technical Assistance to upgrade and diversify the sk i l ls base in the organization to international best practice standards to the extent o f supporting the ski l l base requirements o f the reform program.

Ineligible capacity building interventions

Component 2. Capacity Building for “Results for Kenyans”

Interventions that are eligible for CBF financing should support the operationalization and implementation o f their performance contracts and may include:

Sub-program 2.1: Capacity Building Facility (US$5.31 million):

CBF is not t o b e used for investments where the contributions to services improvements are not readily demonstrable. These include:

The primary objective of this component is to support the overall shift toward effective management o f key parts o f the economy to fulfill Government commitments under the ERS, and the related performance contracts for relevant ministries. This will include, but not be l imited to, providing capacity building support to the five key ministries (Finance, Agriculture, Planning and Development, Trade and Industry and Local Government). While the operation will continue to focus on some key ministries, it i s clear that several others are important to the achievement o f ERS goals and/or are moving ahead quickly to significantly enhance their focus on operational efficiency and results. At the mid-term review o f the project, this component wil l review the eligibility criteria to include arrangements for a larger group o f key ministries to receive assistance when they satisfy certain agreed requirements such as leadership and results orientation.

This fund wil l be demand-driven, Le., the inputs are to be specified by the targeted ministries who would demonstrate how they intend to use the funds to achieve the benchmarks. T o ensure there i s complete disclosure and transparency o f the use o f these funds, the costs and details o f the approved plans for implementation will be made available to the public in a website. Additionally, to provide for an efficient management o f the CBF, a set o f eligibility criteria and rules o f access have been established and a Technical Committee wil l be established that screens al l proposals to ensure proposed activities are consistent with ministerial objectives and support the attainment o f the benchmarks in the ERS. The Technical Committee will not only include nominated experts from the beneficiary ministries, but will also include the participation o f various stakeholders including representatives from the Kenya Private Sector Alliance (KEPSA), and other public sector governance c iv i l society bodies.

TABLE 1 : ELIGIBLE~NELIGIBLE ACTIVITIES UNDER THE CBF COMPONENT

I Investment into commercial ventures. 0 Technical support at a l l stages o f the in the

development o f the participating Departments’ strategic plans, annual work plans and The purchase o f motor vehicles.

implementing them. Civil works for general administrative

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Specific training activities within the Region.

CBF will on l y support results-oriented incremental investments. This wil l include for instance, resources required to re-engineer processes; t o put in place systems for monitoring and evaluation; and/or to foster organizational learning.

Re-tooling in participating Departments to improve bo th work ing facilities and the environment, in the context o f IRCBP’s implementation.

Support t o the rationalization o f participating Departments’ roles and functions.

Soft assets including computers and software.

Support work aimed at reinforcing results- based approach at sub-national levels, including efforts to enhance dissemination o f service contracts, and monitoring and evaluation o f service delivery by beneficiaries, c i v i l society groups and the private sector.

purposes.

General administrative expenditures.

Staff salaries.

Activit ies fbnded f r o m other sources.

Training activities outside o f the Afr ica Region.

Single proposals exceeding U S $300,000

Sub-program 2.2: Transformative Leadership and Ethics for Results Based Management (RBM) (US$2.30 million):

Given, the challenge o f undertaking comprehensive and sequenced reforms, the government and task team have identified transformative leadership, change management, and public sector values and ethics as critical elements to be addressed as part of the capacity building process for Public Sector Reform to succeed in Kenya. This component will focus o n enhancing the change management capacity o f leaders in the Public Service and their teams in delivering ‘Results for Kenyans’ I t wil l also enhance the development and promotion o f a value system and code of ethics developed from the existing legislation as wel l as best global practice as a tool to rejuvenate the service orientation and accountability for public servants. I t wil l build o n a pi lot program underway on changing the ethos and practices of the leaders to be more effective in transforming the public service in support o f the Economic Recovery Strategy, especially in leading teams to accept and implement Results Based Management as the main vehicle for driving reforms. These on-going pilots are been coordinated closely with the UNDP-led bi- lateral support to the Office of the President for improving public sector management, coordination and networking.

Transformative leadership i s necessary for the successhl installation and institutionalization of the Results Based Management (RBM) regime. Transformative leadership entails not simply directing change but managing it in a way that ensures broad ownership, legitimacy, self-directed sustenance and replication of change in al l associated systems. I t i s essential to the kind o f work culture change necessary to effect RBM; moreover the motivational aspects entailed in building up the transformative leadership capacities of supervisors and unit heads i s necessary to revisit a l l work processes in each unit towards building teams focused on results, making i t a core pursuit at every level of the bureaucracy.

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Given precipitate decline in public service ethics and professionalism in the last two decades, the Government views a revival o f an ethical environment as integral to an effective and accountable results-oriented public service. Values and ethics guide the way people think and behave and thus the noted erosion o f professionalism, team work, and leadership ethos are clear threats to achieving results in the broader reform program. Over the last year, the government has piloted a program to revamp the values orientation o f the public service and has gone a long way in establishing the necessary foundation to retrain public servants, establish curricula at government training facilities (including the Kenya Institute o f Administration) and produced a coherent Information Education and Communication (IEC) programme, including a simplified principles derived from the Public Officer Ethics Act. Further pilot initiatives have resulted in a new “Growing Our Leaders” programme in universities focused on building leadership capacity and ethics among university students, especially those in leadership positions.

There i s already broad ownership o f this component, as indicated, for example, by endorsement o f the ethics and transformative leadership work by a two-day meeting o f Permanent Secretaries lead by the Minister for Public Service and the Head of the Public Service. This meeting, the culmination o f technical work to design the program, curricula, and propagation materials, and to get approval for a work plan involving the Permanent Secretaries as principal movers o f the leadership agenda, and explicitly committed to the transformative agenda, including RBM.

Component 3. Technical Support and Capacity for Project Implementation (US$0.74 million):

The overall IRCBP wil l be managed by the recently established Public Financial Management Coordination Unit (PFMCU) at the Ministry of Finance. The Unit will serve as the coordinating body that ensures that IRCBP implementation, especially in Financial Management, complies with the pooled arrangements and agreements in the Memorandum o f Understanding between the Government of Kenya and Development Partners and the signatories to the Joint Financing Agreement, which defines the pooled-funding guidelines. The Unit wil l report directly to the Permanent Secretary - Ministry of Finance, who i s the Accounting Officer o f the project. Resources wil l be provided under this sub-component to help this Unit in accessing, and then mainstreaming, the required technical support for achieving the development objectives o f the Government’s institutional reform and capacity building program. Since the implementation of the overall program is going to be mainstreamed within Government, the Coordination Unit wil l ini t ial ly require the expertise of short-term Consultants who wil l help build the capacity o f the government officials and act as “mentors” to guide them in understanding various implementation issues such as procurement, project accounting, project management, and other cross-cutting themes such as Monitoring and Evaluation (M&E), and in developing and implementing a communication strategy.

Sub-component 2.2 (Transformative Leadership and Ethics for RBM) will be coordinated by the Secretary, Public Sector Reform and Development Secretariat, in the Cabinet Office, Off ice o f the President. The coordination of this component by the Secretariat wil l allow the immediate application o f lessons being learnt in on-going pilots and also allow a ‘whole-of-government’ approach to capacity building efforts aimed at strengthening RBM.

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The implementation process wil l be coordinated with other Development Partners contributing financially to PFM reforms through both pooled and non-pooled funding arrangements.

Linkages between IRCBP, ERSSC, STATCAP, CAS and ERS

As indicated in the previous section, the proposed project l i n k s closely with several on-going projects supported by the Bank and other Development Partners. For example, the Statistical Capacity Building Project (STATCAP) is designed to develop improved statistical information o n governance issues, as well as strengthen and harmonize the monitoring and evaluation framework and, more importantly, to mainstream governance statistics as a way to monitor and evaluate the implementation of anti-corruption measures, including with c iv i l society participation. One o f the objectives o f STATCAP i s the improvements in collections o f GFS which usually i s manual, slow and unreliable. GFS data comes out late, takes a long time to be corrected and audited, which hinders the corrective steps to be taken by both the Comptroller and Auditor General and the Public Accounts Committee. Supporting IFMIS under the IRCBP wil l complement this initiative by strengthening the production o f accurate and reliable Government Financial Statistics (GFS), especially government expenditure and appropriation in aid data.

The project's support to IFMIS will lead to timely and accurate GFS data, which wil l be useful for PER analysis, PSIA analysis, targeting and poverty work, and determining progress in meeting PEFA indicators. In addition, the quality o f data useful for IMF monitoring work would be enhanced. Additionally, the project l i n k s closely with other ongoing analytical work such as the poverty mapping work, which aims at showing the spatial distribution o f the poor in Kenya at the national, regional, district, division, location and constituency administrative levels, as well as to capture information on the quality o f service delivery. The project wil l also benefit from other non-lending services from the Wor ld Bank Institute, including customized training programs and cutting-edge empirical work on governance indicators, as well as in-depth, country-specific governance diagnostics to establish a baseline to monitor progress at the 'systemic' level. The linkages with the CAS, ERSSC and ERS are depicted in the diagram below,

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Figure 1 : Linkages between IRCBP, ERSSC, STATCAP, CAS and ERS

Economic Recovery Strategy (2003-07) Pillar 1: Economic Growth Pillar 2: Equity & Poverty reduction Pillar 3: Governance

World Bank Country Assistance Strategy

(2004-2007) Theme 1 : Strengthening Public Sector Management Theme 2: Reducing the cost o f doing business &

improving the investing climate Theme 3: Reducing vulnerability & strengthening communities Theme 4: Investing in people

Reform

Capacity Building Project (IRCBP)

Economic Recovery Strategy Support Credit

I n

Component 1 : Public Financial Manage

Component 2: Capacity Bui lding for results

Component 3: Project Management and Coordination

\I

Programs 4

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Monitor ing and Evaluation

One of the k e y objectives o f the IRCBP support i s to provide support for building capacity for monitoring and evaluation (M&E) o f the Government’s expenditure framework to ensure value for money f rom public services, and also to ensure that outcomes are delivered in return for resources provided in the budget. Specifically, the project wi l l provide technical assistance strengthen and build capacity in monitoring o f financial and other economic activities in key priority sectors outlined in the IP-ERS. Efforts wil l also be made to develop a framework for monitoring the Government’s performance in the area o f public financial management by: (a) assessing the cost effectiveness and quality o f services delivered; and (b) encouraging involvement o f the beneficiaries in the M&E process.

The project team will work closely with the staff o f the recently established Monitoring and Evaluation Department in the Ministry o f Planning, the Public Sector Reform and Development Secretariat in Off ice of the President, and the Central Bureau o f Statistics to build capacity for coordinating M&E activities and developing tools and methods for public expenditure studies being undertaken by various groups in the country. Information from these surveys wil l help reorient management to focus on outputs and results, and provide an objective for planning and formulating hture programs for public services. These surveys wil l also provide quantitative data necessary for performance indicators, which are essential to the results-based management framework. The project team wil l also work with MED to develop an institutional mechanism to ensure that monitoring o f public expenditure programs i s accompanied by systematic and timely dissemination o f the M&E information.

8. Lessons learned and reflected in the project design

The design o f this project builds on lessons learned in the implementation o f public sector reform programs in Kenya and incorporates some o f lessons learnt worldwide. The design i s also guided by the findings o f the Public Expenditure Review, the recently completed forensic audits of on-going Bank projects, as well as assessments on financial accountability and procurement.

0 The main lesson o f these reviews is that for the more challenging reforms to take root, the commitment o f upper level technical staff needs to be complemented by strong political ownership and leadership.

0 The Forensic Audits o f the four Bank projects in Kenya made several recommendations that have been incorporated in the project design, including that:

(i) Steering Committees must take active leadership roles in project governance. To ensure that the Steering Committee for this project play an active role in oversight o f the project, the Government has agreed to include non-government officials o n the committee including professional organizations, c iv i l society organizations, and also representatives o f the users o f public services. The Government officials on the Steering Committee have been restricted to only beneficiary ministries represented by the Permanent Secretaries. This restricted group o f permanent secretaries coupled with the involvement o f other stakeholders (especially service

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(ii)

(iii)

recipients) would ensure they meet regularly and provide adequate oversight and the necessary pol icy guidance to project implementation.

the project institutional arrangement in the current design now includes a Technical Advisory Committee whose composition includes professional bodies and experts that wil l fol low the implementation progress o f the project and provide advice and guidance to the Accounting Officer o f the project on effective project implementation; and

fraud-risk management must become an integral part o f all h t u r e projects. The project design has paid great attention to fraud risk by including transparency and accountability mechanisms in accessing funds under the credit as well as supporting the development o f institutional risk management policies and independent and effective ministerial risk management oversight committees. One lesson reflected in the design following the forensic audits recommendations i s the development o f a framework for the preparation and presentation o f timely and comprehensive periodic financial management accounts and annual financial statements based on generally accepted accounting principles and professional best practices.

Strong leadership i s required from the Cabinet which demonstrates political will, as wel l as Permanent Secretaries and Accounting officers, who have the primary responsibility o f spearheading public Sector Reforms. This i s particularly important during project implementation as we learned during the implementation o f the current PSM-TAP. Under PSM-TAP, there was no visible presence o f top leadership in the Government to drive the reform efforts, which consequently led to poor implementation and a failure to meet the project development outcomes.

Appropriate institutional arrangements are crucial for managing the reform process to ensure reforms are institutionalized and linked to a clearly defined strategic framework. The current project has benefited from the lessons learned in the institutional arrangements o f previous public sector projects in the country and elsewhere.

A long-term strategic approach to technical assistance, which i s not donor driven, i s needed to achieve results. The current project i s designed to support the needs o f a l l key ministries involved in the implementation o f the IP-ERS, as we l l as strengthen financial management systems in government. The design o f the current project has discarded the use o f the traditional Project Implementation Units (PIU) staffed by Consultants rather than government officials. The implementation o f this project will be mainstreamed within the day-to-day operations o f the government, and the project coordination unit will be staffed by c iv i l servants (hired through a competitive market process) to ensure that the capacity built for project management, procurement, accounting, etc. are retained within the government.

Based on extensive experience across a wide range o f institutional settings, the Bank has identified several lessons o f good practice that has been incorporated in the design o f public sector reform programs, including support for a broad range o f mechanisms that promote public sector reform, and emphasis o n “good-fit” over best practice rather than a one-size f i t s al l reform proposal. The current project has been designed to address the needed reforms

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within the current political economy o f the local context by seeking to improve public financial management, enhance change management capacity o f leaders in the public service for deliver “results for Kenyans”, as well as promote a value system and code o f ethics within government.

Greater harmonization and alignment of operational policies, procedures, and practices between development agencies with the Government’s medium-term planning, budgeting, and disbursement procedures can help enhance the effectiveness o f support to developing countries. The current project has been designed to effectively integrate ongoing support o f other Development Partners, in particular, the Development Partners contributing to the public financial management reform program in both pooled and non-pooled arrangements, as well as the UNDP-coordinated bi-lateral donor support to the office o f the President to improve public sector management.

From the pilots undertaken in leadership and ethics as well as from lessons from global practice, i t i s clear that both leadership capacity and inculcating values and ethics require a deliberate and dedicated effort that includes training, peer to peer activities, and institutional support as we l l as conscious modeling by peers and supervisors. Such efforts also work best when integrated and reinforced in an actual work environment.

9. Alternatives considered and reasons for rejection

Broad versus Narrow Focus

The project could address a broader agenda which would have built o n the previous Public Sector Management Technical Assistance Project that addressed c iv i l service management; public service wage bil l management, functional reviews and the development o f strategic plans for al l ministries, performance management, etc. This was originally envisaged but’was rejected during the Project Concept Review because i t was recognized that the new project should be focused and designed to provide support to activities related to the Government’s Economic Recovery Strategy rather than build on the PSM-TAP project which had achieved only moderate results.

Lending Instrument

The Country Team considered both an Adaptable Program Lending (APL) program and a traditional Technical Assistance Credit. While acknowledging the usefulness o f APL as an instrument in public sector reforms efforts, i t was agreed that the proposed five-year technical assistance (TA) was more appropriate for the current Kenyan political and economic context, because it i s linked closely to a budget support operation that i s currently under preparation. The project focuses on key systems and capacity building that are needed to improve accountability and transparency in the public service.

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B. IMPLEMENTATION

1. Partnership arrangements (if applicable)

A number o f Development Partners are keenly interested and/or are already involved in the P F M sector. The Swedish Agency for International Development (SIDA) i s providing support to the Government in the areas o f public financial management as well as chairing the donor group on financial management; The European Union (EU) i s also providing support for financial management; the United Kingdom’s Department for International Development (DFID) have also been providing support to the government not only on financial management but for other broader governance issues as well including anti-corruption. The United Nations Development Program (UNDP) i s coordinating bi-lateral support to the Government to improve public sector management and networking, including intensive training in results based management as an organizing principle o f the public sector reform agenda.

There i s a donor coordination group and several coordination meetings have been held with representatives o f SIDA, EU, DFID, NORAD, USAID, UNDP and others. The main purpose o f the donor meetings i s to ensure that al l support from Development Partners are done in a coordinated manner and within a common framework. The setting up o f a PFM Coordinating Unit at the Ministry o f Finance wil l further serve as a platform to strengthen coordination o f a l l donor support in the area o f PFM reforms.

The proposed project has been designed to allow other developing partners to align behind the Government’s program in financial ’ management in both pooled and non-pooled financial arrangements that complement the development objectives being supported by the Bank.

2. Institutional and implementation arrangements

The project will, as much as possible, rely on mainstream Government financial management systems. I t wil l also build on existing systems rel ied upon during implementation o f the preceding IDA-financed project, PSMTAP with modifications to take account o f (i) Development Partners pooled funding and shared reporting arrangements; (ii) institutionalization of an effective independent internal audit and risk management function, including an audit committee; and (iii) arrangements for external auditors’ assessment and increased reliance o n the work o f internal audit.

The project execution agency w i l l be the Ministry of Finance.

Steering Committee: This committee wil l be chaired by the Permanent Secretary, Ministry of Finance and wil l include al l the Permanent Secretaries o f the beneficiary Ministries (Local Government, Planning and National Development, Agriculture, Trade and Industry, and Finance), including the Secretary Public Sector Reform and Development in the Office o f the President. This Committee wil l also include nominated non-government members from c iv i l society including professional bodies. The committee will oversee the implementation o f a l l reform programs/initiatives including Results Based Management and the Capacity Building Facility, and wil l provide overall pol icy guidance as we l l as assume risk-management responsibilities o f the project.

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Permanent Secretary, Ministry of Finance

The PS/MoF will be the Accounting Officer for the project. As such, h e wil l assume the responsibilities and obligations set out in Chapter 5 o f the Government Financial Regulations and Procedures (GFRP) o f the Government o f Kenya, and wil l be accountable to Parliament.

PFM Technical Advisory Committee

This committee wil l be appointed by the PS, Finance, who i s the Accounting Officer o f the project, drawn from relevant people involved in PFM implementation within and outside o f government to provide advice to on broader financial management issues in government and more importantly on effective project implementation.

Technical Committee for Capacity Building Facility

This committee wil l review al l proposals submitted for accessing the Capacity Building Facility and provide recommendations to the National Steering Committee who wil l approve the use o f the finds. This committee wil l draw from expert support familiar with the eligibility criteria o f the finds. The Permanent Secretaries o f the five beneficiary ministries wil l each nominate one technical person to be on the committee, and wil l also include representatives o f the private sector such as the relevant sector Chairs o f the Kenya Private Sector Association (KEPSA), and other c iv i l society organizations.

Transformative Leadership and Results Based Management (RBM) Review Committee

This committee wil l be chaired by the Secretary, Public Sector Reform and Development, and wil l comprise o f the Permanent Secretaries o f the five ministries (Local Government, Planning and National Development, Agriculture, Trade and Industry, and Finance) being fast tracked in the leadership and capacity building program. This committee wil l provide leadership in the implementation o f RBM and wil l also advice on broader leadership, ethics, and more importantly, on effective project implementation.

Public Financial Management Coordination Unit (PFMCU)

The Permanent Secretary, MoF, wil l be supported by a small team o f c iv i l servants who will be in the P F M C U in the Ministry o f Finance. Since the implementation o f the overall program is going to be mainstreamed within Government, the Coordination Unit will ini t ial ly require the expertise o f short-term Consultants who will help build the capacity o f the government officials and act as “mentors” to guide them in understanding various implementation issues such as procurement, project accounting, project management, and other cross-cutting themes such as Monitoring and Evaluation (M&E), and in developing and implementing a communication strategy. The Unit wil l in a competitive process identify government officials who wil l assume responsibilities for program management, project accounting, procurement, monitoring and evaluation, and for information, education, and communication (IEC).

25

Coordinators

Coordinators in each o f the implementing ministries, departments or agencies wil l be responsible for managing the resources provided to produce the outputs required for the project to achieve i t s objectives.

26

Institutional Arrangements

The following depicts the institutional set up for the coordination o f the program described above (details are in Annex 6):

Table 2. Committees, Composition and Functions

1. Steering Committee

2. Technical Committee Capacity Bui ld ing Faci l i ty

3. P F M Technical Advisory Committee

4. T r a n s f o m t i v e Leadership and Results Based Management (RBM) Review Committee

5. P F M Coordinating 1 unit

Composition

PS, Finance (Chair); PS Local Government, Planning and National Development, Secretary Public Service Reform and Development, Local Government, Agriculture and nominated non-government members f rom c i v i l society including professional bodies. Technical persons nominated by the Permanent Secretaries o f the f ive beneficiary min is t r ies; additional members wil l include representatives o f the private sector such as the relevant sector Chairs o f the Kenya Private Sector Association (KEPSA), and other c i v i l society organizations.

T o be appointed by the PS, Finance, members will be technically proficient individuals or members o f entities involved in PFM implementation and related technical activities within and outside o f government.

Chaired by the Secretary, Public Sector Reform and Development; the committee wil l comprise o f the Permanent Secretaries o f the f ive ministries (Local Government, Planning and National Development, Agriculture, Trade and Industry, and Finance) being fast tracked in the leadership and capacity building program; and representatives f r o m DPM, PSC, and KACA. Coordinator; Project Manager, Financial Management Consultant, Procurement Officer; M&E Consultant; IEC consultant

Functions

Responsible for the overall development and coordination o f the public sector re form agenda and provide overall po l icy guidance. Provide oversight o f effective implementation

Review a l l proposals submitted for accessing the Capacity Building Faci l i ty and provide recommendations o n funding.

Advice the PS o n broad P F M issues, including pol icy and technical concerns pertinent to the P F M reform agenda

Provide leadership in the implementation o f RBM and advice o n broader leadership, ethics, and project implementation.

Provide day-to-day management o f the project including M&E activities.

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b Steering Committee

Figure 2: Institutional Arrangements

P F M Technical Advisory Permanent Secretary, Committee Ministry o f Finance

b

t 1 PFM Coordinating Unit

2.1 Project Management

Effective project management i s essential to assure the achievement o f project inputs, outputs and impact, as well as providing financial accountability with due diligence, and to conduct transparent procurement procedures in the award o f contracts. The institutional arrangements for managing the project and for ensuring the sustainability o f results build upon experience gained from previous projects and from earlier stages o f reform as indicated earlier from lessons learned during the implementation o f PSMTAP. The key executing agencies have been fully involved in the design o f the current reform program and will participate in execution and management through ministerial and departmental committees and via component-specific secretariats. Project management wil l be coordinated by the recently established Public Financial Management Coordination Unit reporting to the Permanent Secretary, Ministry o f Finance.

2.2 Procurement

Procurement under the project wil l be carried out under two (2) components: (a) Public Financial Management (PFM); and (b) Capacity Building for Results for Kenyans (CBRK).

PFM Component. The fol lowing institutions wil l be responsible for procurement implementation under the P F M component:

0 Departments within the Ministry o f Finance:

(i) Internal Audit Department (ii) Budget Supply Department (iii) Public Procurement Department (until such a time when the minister shall by

notice in the gazette bring the Public Procurement and Disposal Act into operation)

(iv) E-government (v) Accountant General (vi) Government Information and Technical Services (GITS)

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0 Semi-autonomous Agencies:

(i) Kenya National Audit Office (ii) Kenya Revenue Authority (iii) PPOA (after the Procurement law has been promulgated and PPOA has been

created and thus will take over the PPD responsibilities.

0 Autonomous Agencies

(i) Parliament

Funding for the procurement o f goods and services under the PFM component will be financed joint ly by G O K and a number o f Development Partners through a pooling arrangement.

Capacity Building for ‘Results for Kenyans’ Component: Procurement under this component wil l be managed by the Public Service Reform Secretariat in the Office o f the Cabinet Secretariat . Coordination o f the procurement activities under PFM component wil l be managed by the Head o f the PFMR Coordinating Unit at the Ministry o f Finance. Coordination o f procurement activities under the C B R K component wil l be managed by the Secretary, Public Service Reform & Development Secretariat at the Cabinet Office, Office o f the President. The respective Implementation Departments and Units wi l l be responsible for, but not limited to, the fol lowing aspects o f the procurement activities and processes o f their respective components and sub- components:

(0 (ii)

Preparation o f annual work plans and procurement plans; Development o f Terms o f Reference (TOR), short-lists, and requests for proposals including technical specifications for goods and contracts; Setting up a good procurement filing system and maintaining procurement documentation; and Preparation o f plans for annual training programs that set out the objective o f the training, areas o f training, and the number o f trainees, cost estimates, timing and venue (e.g. local or overseas) for each training activity.

(iii)

(iv)

The Implementation Departments and Units wil l submit their work plans and procurement documentation to the PCU, which wil l play a central role in:

(i)

(ii)

Consolidating the annual plans o f a l l components and sub-components o f the project into annual plans o f the entire project; Vetting procurement documents prepared by the Implementing Departments and Units, and providing technical advice (when necessary) to procurement staff o f implementing Departments and Units; Advertising contracts (where appropriate) and disclosure o f contract awards; Participating in the evaluation o f bids and proposals submitted by invited suppliers and consultants; Preparing no objection letters for the PS, M o F for onward transmittal to the Bank for approval;

(iii) (iv)

(v)

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(vi)

(vii)

Advising the PS, M o F on matters pertaining to the implementation o f the project; and Maintaining a good procurement record-keeping and disclosure system.

The major r isks for the implementation o f the Program are the numerous ministrieddepartments involved in implementation and the low capacity at al l levels. In order to mitigate these risks and based on the results of the assessment, a short-term procurement consultant will be recruited to strengthen the capacities o f the various procuring entities through mentoring and intensive training as part o f their “mentorship”.

2.3 Financial Management

Implementation and institutional arrangements

The project will, as much as possible, rely on mainstream Government financial management systems. I t wil l also build on existing systems relied upon during implementation o f the preceding IDA-financed project, PSMTAP with modifications to take account o f (i) Development Partners pooled funding and shared reporting arrangements; (ii) institutionalization of an effective independent internal audit and risk management function, including an audit committee; and (iii) arrangements for external auditors’ assessment and increased reliance o n the work o f internal audit.

Fiduciary

The project’s financial management risk i s assessed as being moderate provided that the following proposed critical actions are implemented as provided in the financial management action plan:

(9

(ii)

(iii)

(iv)

An effective internal audit function i s established by the Government Internal Auditor General and the Program Steering Committee composes an audit committee to which this function will report directly;

Recruitment, mandate and functioning o f the Financial Management Coordinator are completed. Specific responsibilities will include (a) preparation o f consolidated Financial Monitoring Reports including fund accountability, project progress, procurement progress and projected periodic cash f low requirements; (b) follow-up o f implementation o f audit findings and related risk management recommendations on behalf o f the Program Steering Committee; (c) donor coordination; and (d) providing technical advice to the Program Steering Committee;

Inefficiencies in the f low o f funds and accountability are eliminated through adoption o f simplified accounting procedures and elimination o f bureaucratic payment approval processes; and

Development Partners participating in the pooled funding arrangement enter a memorandum o f understanding (MOU) that spells out, among other matters, agreed procedures to be adopted under the program including (a) financial

30

management and disbursement, (b) interim and annual reporting, (c) annual audit and (d) joint program support missions.

3. Monitoring and Evaluation o f Outcomes/results

The complex nature o f expenditure accountability and institutional reform requires particularly strong monitoring and evaluation. For this reason, Monitoring and Evaluation wil l be essential in determining the effectiveness o f the project. Subsequently, M&E has been designed as an integral part o f the implementation process o f the project. M&E plans wil l be developed for each sub-component. Key indicators have been developed to measure progress in the attainment o f the development objectives o f the project as indicated in the Results Framework (Annex 3). For the PFM component, annual assessments wil l be undertaken using the performance indicator set developed by the Public Expenditure and Financial Accountability (PEFA) Secretariat in June 2005.

The PFM Coordinating Unit in coordination with the newly established Monitoring and Evaluation Department in the Ministry o f Planning, the Public Sector Reform and Development Secretariat wil l develop a framework for regular reporting to the Government and the World Bank on input and output targets and progress. Outcome indicators wil l also be monitored on a semi-annual basis both by the Government Team, the Development Partners and the World Bank during implementation support missions.

An M&E short-term consultant will be recruited to help develop a framework for monitoring and evaluating the project. The framework wil l lay the basis o f monitoring the expected inputs, outputs and outcomes and wil l regularly assess the efficacy o f project management systems, particularly regarding the collection o f data, compilation o f analysis and the development of conclusions and recommendations. The consultant in coordination with the Coordination Unit wil l assist sub-component headdmanagers in establishing reporting schedules, identifying existing data sets, and drawing conclusions from studies and analysis.

Annual reviews will be undertaken. In addition, a Mid-Term Review (MTR) wil l be undertaken in June 2008 and an independent evaluation to be linked to annual Peer Reviews wil l be undertaken by the Bank in 2006-08 as indicated in the CAS.

4. Sustainability

The sustainability of the IRCBP depends on the fol lowing factors, which were identified during project preparation. These factors are:

0 I t i s supporting the government’s program which i s already under implementation and has support at the highest political level. The project was designed to take account o f the Government’s framework o f public financial management, PER recommendations, the Public Expenditure Management Assessment and Act ion Plan (PEMAAP), Country Financial Accountability Assessment (CFAA), the Enhanced Financial Management Action Plan (EFMAP) diagnostics and the Results-Based Management (RBM) approach as the vehicle that i s driving Public Sector Reforms. This wil l encourage government ownership o f the project.

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Risks

TO ProJect Objectives Poli t ical leaders will have weak incentives to improve accountability and transparency, wh ich can lead to delays in implementation.

0 A key factor for the sustainability o f the project i s a continuous coordination among key Government agencies and Development Partners, and appropriate public disclosure that frames expectations, promotes accountability o f a l l parties and facilitate monitoring and evaluation. The coordination mechanism that was built during the project preparation needs to b e sustained. Consequently, the Government has set up a PFM coordinating unit to serve as a rallying point for the coordination o f Donor support in the area o f PFM. Subsequently, the Donor Working Group on P F M wil l be involved in reviewing quarterly reports on the progress o f the project.

Risk Rating

with

&litigation

H

0 The project addresses cross-cutting issues that impact various sectors and institutions. The existence o f the PSRD Secretariat in the Office o f the President responsible for coordinating the Transformative Leadership and Ethics program for Results Based Management, capacity building work o f the Results Units in al l the key ministries wil l be crucial for the proposed reforms.

I F M I S may overwhelm the

0 Regular reviews: Joint Annual Reviews and other regular participatory reviews (involving al l stakeholders) and Development Partners will be used to promote institutional change and transparency.

S

5. Critical risks and possible controversial aspects

implementing agencies and slow down other expenditure management reforms N e w I F M I S and associated guidelines are not sufficiently used in the public sector environment

Future Governments or senior c i v i l

S

H

I

To component Results

Capacity (managerial, administrative, technical) t o implement the comprehensive

H

Risk Rlitigatioii RIeasiires

~

The project i s being l inked closely to the ERS. Because the latter i s the Government’s strategy, th is brings pol i t ical support and guarantees that the envisaged reforms remain at the forefront o f the pol i t ical and development po l i cy dialogue and debate.

Build into the re fo rm project a substantial amount o f training, coaching and technical assistance; set timelines/schedules for the implementation process.

Government and the Bank have focused o n realistic targets and phasing o f implementation. Additionally, the pool ing o f resources with other donors who provide omortunist ic technical assistance wil l share t h i s r isk Continuing extensive stakeholder participation during the roll-out o f I F M I S and continuous adjustment o f system design and guidelines, strict enforcement o f n e w rules and guidelines after I F M I S implementation. Provide sufficient technical assistance to ensure installation and rol l-out i s done effectively. Component managers responsible for the project are

32

Risks

T o Project Objectives

servants wil l not b e as committed to improving expenditure accountability. The Capacity Building Faci l i ty may be captured and end up been used to hnd activities that m a y not relate to the ERS and other priorit ies f rom relevant Ministries.

Polit ical collapse o f the coalit ion government and weak commitment o f leaders, as we l l as frequent changes at the level o f PSs may affect the transformative leadership and ethics drive. Demand-driven Capacity Building - - Facil ity may be complex and takes time to access and manage such a funds Faulty Procurement procedures

Risks o f trying to promote stronger donor alignment and harmonization within a SWAP framework Risks o f not having a traditional P I U

Misuse o f and failure to account for project funds

~

Ineffective audit functions

Delayed funds f l ow

Ineffective program oversight and risk management functions

Risk Rating

with

Mi tigsr tion

S

H

S

H

S

H

S

S

S

S

Risk Mitigation Measures

technical-level c i v i l servants; thereby a two-level Commitment to the project i s designed to maintain uromess regardless o f uol i t ical chanee. Design a set o f el igibi l i ty criteria, ru les o f access and the establishment o f a strong Steering and technical committee that screens a l l proposals to ensure proposed activities are consistent with ministerial objectives and support the attainment o f Result-based management approach and related performance contracts Broaden the scope o f people involved beyond cabinet members and PSs to include other senior c i v i l servants and heads o f departments. Current p i l o t underway wou ld also provide goino go guidance and lessons for replication, including risk mit igation . Provide technical support t o manage the fund with a transparent process and strong oversight that wil l also help with preparing proposals for the ministries to access

Contracting out procurement support such as reviews o f technical evaluations. Insist o n publication o f contract award information to uromote transuarencv. M o r e regular meetings among donors participating in the SWAP as we l l as annual j o in t reviews and a common M & E framework Tra in more government officials o n project management, accounting and procurement procedures. 0 Inst i tut ion o f independent and effective internal audit

and risk management function. Consolidation o f fund accountability fol low-up responsibility under FMC.

0 Inst i tut ion o f a risk based approach by internal audit and employ international best practices. Inst i tut ion o f a Risk Management function to be vested in the Program Steering Committee. CAG assessment and reliance o n internal audit function. Streamlining o f quarterly FMR reporting arrangements. Removal o f unnecessary bureaucratic approvals in Special Account fimd remittances.

0 Inst i tut ion o f a Risk Management function to be vested in the Program Steering Committee.

0 Inst i tut ion o f a r isk based approach by internal audit and employ international best practices. CAG assessment and reliance o n internal audit function.

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6. Credit conditions and covenants

1. Effectiveness Conditions

The Borrower, GOK, has opened a Project Account and deposited the initial amount required as their counterpart contribution to the project;

The Borrower has PFM strategy and Work Plans signed and launched by the Minister o f Finance as well as a PSR Strategic Plan and Work Plans that have been signed by the Head o f the Public Service;

The Borrower has submitted reports indicating outputs o f the completed pi lot activities under the Leadership and Ethics Program satisfactory to the Association;

The Borrower has selected short term consultants for procurement, project accounting and project management; al l under terms o f reference and recruitment processes that are open, transparent and satisfactory to the Association;

The Borrower has finalized a Financial Management Manual and a Program Procurement Manual satisfactory to the Association; and

The Borrower has signed a Joint Financing Agreement with at least one Development Partner satisfactory to the Association.

Other Conditions

(i) establish the Public Financial Management Coordination Unit in the Ministry o f Finance with the overall coordination o f the program;

(ii) establish a Steering Committee ;

(iii) set up a Capacity Building Facility Technical Committee;

(iv) set up a Transformative Leadership and Results Based Management Review Committee; and

(v) set up a PFM Technical Advisory Committee

APPRAISAL SUMMARY

7. Economic and financial analyses

The project i s expected to have a positive fiscal impact. The introduction and deployment o f the IFMIS and related sub-systems Integrated Payroll and Personnel Database (IPPD) wil l significantly improve management and control o f national and foreign financial resources. Consequently, these interventions would result in more efficient use o f public resources and save funds, although the implementation o f IFMIS could also create recurrent and replacement costs.

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The project w o u l d also increase transparency and accountability o f government operations and thus, ultimately contribute to effectively control government expenditures and to provide more and better public services.

8. Technical

The proposed project design, in particular the design o f the IFMIS, organizations and procedures corresponds to financial management, Information Technology (IT) and public sector standards developed in similar projects al l over the world. The IFMIS design, which i s based on a modular IT architecture, i s open for the development o f responsibilities to other institutional levels o f government and i s able to cater for the needs o f a l l levels o f governments in the area o f economic management. Focus wil l therefore be given to the building o f capacity to manage the IFMIS at al l the levels.

The PFM component will significantly improve management and control o f national and foreign financial resources. Consequently, these interventions would result in better utilization o f public resources.

9. Fiduciary

The project’s financial management risk i s assessed as being moderate provided that the following proposed critical actions are implemented as provided in the financial management action plan mentioned earlier

10. Social

N o t applicable.

11. Environment

Not applicable

12. Safeguard policies

~~

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OPBP/GP 4.01) [I [XI Natural Habitats (OPBP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, beihg revised as OP 4.10) [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OPBP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[I

[I

’ By supporting the proposedproject, the Bank does not intend to prejudice the f ina l determination of the parties’ claims on the disputed areas

35

13. Policy Exceptions and Readiness

The project i s not seeking any pol icy exception.

36

Annex 1: Country and Sector or Program Background

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Public sector management has been hampered by several governance challenges during the last two decades. This has had a negative impact on Kenya’s economic growth and development, increased the cost o f doing business in the country, discouraging private investment, and proved an obstacle to addressing widespread poverty and improving the quality o f l i f e o f i t s citizens. Key governance problems include: lack o f efficient, transparent, and accountable decision- making and management in the country’s public sector, existence o f high level corruption, weak economic and financial management and weak ru le o f law, inefficient service delivery mechanisms, and weak administrative practices. Several reform initiatives to deal with these problems since the 1970s and 1980s have achieved only modest results.

The previous government under the Kenya African National Union (KANU) party, which had ruled the country since independence in 1963, made ambitious efforts in i t s last two years to improve and reform public sector governance. I t s measures included restructuring the public sector by reducing the number o f ministries from 28 to 15, implementing a staff retrenchment program combined with improved pay and benefits, reforming the legal and judicial system, and promoting greater engagement with c iv i l society. A new Government, formed by the National Alliance Rainbow Coalition (NARC) which won the General Election and took office in December 2002, promised to enhance the public sector reform program with increased determination to address governance challenges, opening up o f democratic space and undertake key policy and institutional reforms to improve both the environment for private sector investment and service delivery to the people.

The new Government’s strategy to improve public sector effectiveness was outlined in i t s Poverty Reduction Strategy Paper (PRSP), titled the Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS, 2003-2007), prepared with the full participation o f non-governmental organizations, Development Partners, and other stakeholders, and was debated and approved by parliament. The Strategy centers o n three inter- linked pillars: (i) strengthening economic growth; (ii) enhancing equity and reducing poverty; and (iii) improving governance. The World Bank’s Board discussed the Strategy on M a y 6,2004 and the International Monetary Fund’s Board discussed it on M a y 10, 2004. In response to these init ial steps taken by the Government, the Bank’s Country Assistance Strategy (CAS, Report No. 29038-KE, M a y 19, 2004) proposed a program for re-engagement o f the Bank Group with Kenya that i s aligned with the IP-ERS and rooted in its results-based framework, from which the CAS’S own result-based framework i s drawn.

The new Government made some progress on reforms under the public sector management technical assistance project with specific reforms, including, for example: reducing backlogs in the audits o f Government accounts; taking steps to strengthen the c i v i l service wage policy, including retrenchment and abolition o f overmanned posts, and by establishing a Remuneration Board to oversee the implementation o f the pay reform pol icy approved by Cabinet. I t has established an institutional framework comprising a Cabinet Sub-committee, a National Steering Committee on Public Sector Reforms, and a Public Sector Reform and Development Secretariat responsible for the implementation o f Results Based Management (RBM) and coordinating the

37

implementation of on-going reform initiatives in the public sector. As part o f i t s efforts to develop an integrated sector-wide monitoring and evaluation (M&E) system to improve the allocation and use o f public resources, the Government has established a Monitoring and Evaluation Department within the Ministry o f Planning and National Development (MPND). To improve management and quality o f public service delivery, performance contracts have been introduced for a l l Permanent Secretaries and Accounting Officers in al l Government ministries and departments. These performance contracts are tied to the ministerial or departmental strategic plans and require that they report their performance and resource utilization in the delivery o f services to the people through parliament and other communication channels. All ch ief executive officers and board o f directors o f al l state-owned corporations are also expected to s i g n these performance contracts.

Specific anticorruption actions taken since 2003 include ending ‘land grabbing’ and state sponsored ‘harambees’ or fund-raising, removing 16 judges and 73 magistrates (or almost one third of those in place), replacing al l senior c iv i l service procurement officers, and establishing the Kenya Anti-Corruption Commission (KACC) with real power to investigate. In 2003 Parliament passed The Public Officer Ethics Act (2003) requiring c iv i l servants to f i le annual declarations o f assets and liabilities, and The Anti-corruption and Economic Crimes Act (2003) which set up the KACC. The Government also launched an enquiry into a major corruption case (Goldenberg) that took place in last decade; the report i s due early in 2006. Further, it took action against those involved in corruption in the Bank-hnded projects-especially the Kenya Urban Transport Infrastructure Project (KUTIP), in which both Government officials and Bank staff members were found to have been involved in corruption. The Government has also enacted key legislation aimed at improving governance and public service delivery which include: the Government Financial Management Act (2004), the Public Audit Office Act (2004).

Earlier this year, the Government’s relations with its key stakeholders (including development partners) became quite strained following new procurement scandals in the summer o f 2004, and the resignation o f a key senior c iv i l servant involved in anti-corruption programs in early 2005. Partly in response, the Government presented an Anti-Corruption Action Plan in the Consultative Group meeting in April 2005, covering the period April 2005-June 2006, aimed at accelerating and consolidating reforms. Although i t i s not meant to represent the totality o f the Government’s action on anti-corruption, the strategy has five planks:

Enactment o f the necessary legislation to establish a legislative platform o n which to anchor the war on corruption; Vigorous enforcement o f anti-corruption laws through investigation o f offences o f corruption and economic crimes as wel l as recovery o f corruptly acquired property; Identification and sealing o f loopholes through institution o f effective public sector management controls; National public education aimed at stigmatizing corruption and inducing behavioral change; and ‘

Implementing macroeconomic and structural reforms to reduce the incidence and demand for corruption by scaling down the role o f the public sector and bureaucracy.

Beyond the initiatives in the Government’s anti-corruption action plan, there were others in various sectors, e.g. water, health, education, and immigration. In addition, ‘administrative

38

actions' were taken against senior c iv i l servants (including the Public Works Department), police and mil i tary personnel, while the K A C C launched investigations in the Immigration Department and the Nairobi and Mombassa City Councils, and steps were taken to improve significantly the governance arrangements for the Constituency Development Funds administered by Members o f Parliament.

At a stakeholders meeting for the private sector, c iv i l society and development partners convened by the Government in September 2005 to review progress, there was agreement that implementation of the Action Plan was largely on schedule. For example, a landmark Procurement Bill was enacted in August 2005, establishing an autonomous Public Procurement Oversight Authority that wil l be responsible for the regulation o f procurement in the public sector, including procurement o f security related contracts-transactions which were shrouded in secrecy in the past and associated with high level graft. Subsequently, the Government requested and the World Bank agreed to second a Bank manager to help set up the new Procurement Authority and assist in finalizing appropriate Regulations which are at an advanced stage o f preparation. The secondee i s expected to take up his position early in 2006.

The Privatization Act received Presidential assent in October 2005 setting the stage for the privatization o f public assets and operations including state corporations, as part o f privatization program under a new Privatization Commission. Meanwhile, there was a four-fold increase in the professional staff o f the KACC, recruitment of 23 magistrates and other legal staff, and the launch o f public education campaigns. By January 2006, the Attorney General's Off ice wil l have 126 new state attorneys significantly increasing i t s capacity. Early in 2006, the Government also expects to (i) complete the reports on the impediments to prosecutions (including the uses and abuses o f appeals to the Constitutional Court, injunctions and adjournments), (ii) adopt measures in the financial sector to address anti-money laundering; and (iii) consider new legislation on political campaign financing. The Ethics and Governance Committee of the Judiciary wil l also complete i t s work, including proposals for dealing with ethical breaches that may not require removal from office.

Public mobilization to fight corruption i s also increasing, partly because o f the strengthening o f the K A C C and the launch o f i t s public education campaign. One measure o f this increased engagement is that the number o f complaints received by K A C C grew from 308 in January 2005 to 608 in October 2005. During the same period the number o f investigations launched by the K A C C after reviewing these complaints also grew, from 27 to 97, while the number o f cases forwarded each quarter to the Attorney General's Office for action rose steadily, from four during the last quarter of 2004 to 21 by the third quarter o f 2005. At present, the Government i s prosecuting 6 former Permanent Secretaries and 14 former heads o f parastatals for alleged corruption.

Meanwhile, measures were taken to improve governance o f public finances. They included enhancing the capacity of the National Audit Office which was then able to clear the long- standing backlog of public accounts audits. In October 2005, the Government established independent audit committees in al l ministries, departments, state corporations and local authorities. This step i s part of a new risk-based internal audit approach, supported by several donors, that involves identifying the potential for fraud in advance and building the necessary risk mitigation processes into the design of government systems and processes. The prospects for reducing rent seeking were further enhanced in November 2005 through additional measures

39

such as the liberalization o f coffee marketing (after over a decade o f pol icy debate about it), and a request to Parliament to eliminate 35 licenses previously required for setting up a business. Additional licenses wil l be eliminated in 2006 as part o f the guillotine approach that i s underway.

In addition, stakeholders encouraged the Government to increase political accountability for corruption and some action on this front occurred recently. Fol lowing defeat for the new Constitution in a public referendum on November 21, 2005, the President sacked his entire Cabinet. In announcing h is Cabinet appointments, the President indicated that he would accord “. . , high pr ior i ty to integrity in the public service..” and stipulated that al l new Ministers and Assistant Ministers would have to s ign and adhere strictly to “a new Code o f Conduct and a Management Accountability Framework intended to enhance collective responsibility, ethics, accountability and results in government.” The Code requires verification o f declarations by the K A C C and address issues related to conflicts o f interest. H e also appointed a new Minister o f Justice and Constitutional Affairs, who wil l be pivotal to the continuing fight against corruption, and who had led successful and widely celebrated reforms (including governance aspects) in the water sector during 2003-2005. At the same time, he excluded a Minister whose visas had been revoked by the United Kingdom and the United States for reasons perceived to include corruption. To further reinforce a culture o f performance and accountability, the President also said that Ministers and their leadership teams wil l be expected to report publ icly on development results achieved at the end o f the next 4-6 months.

Stakeholders at the September 2005 meeting also encouraged the Government to make greater use o f administrative actions and not simply rely on prosecutions which can take a very long time to be completed. On December 16, 2005, the Government annulled the recruitment of 3,000 police officers and suspended 175 senior officers involved in the recruitment exercise, pending fbrther investigation. Mindful o f longstanding rumors o f corruption in the police force, the Government requested K A C C to monitor the process and found evidence o f bribes. In less than 24 hours, the Government took disciplinary action. Later that day, the Kenya Revenue Authority also announced that i t was suspending several senior officers that work at the Port pending investigation into why they were not achieving performance targets for customs revenues. Around the same time, the Government fired the Managing Trustee o f the National Social Security Fund following investigation by the KACC. Efforts are now underway to work with the private sector, including professional bodies, to address corruption within their own ranks, and to support evolving grassroots initiatives aimed at increasing social accountability within public and private sectors.

A number o f Development Partners have offered to provide assistance to support the Government implement various governance activities, including support to the justice and law and order sector, based o n the Government demonstrating its strong leadership in the effort to eradicate corruption and pursue reforms. For example, the Governance, Justice, Law and Order Sector Reform Programme (GJLOS-RP), which i s supported by at least fifteen Development Partners is a Government-led initiative which lays out a five-year plan o n a sector-wide, coordinated and coherent approach to reform o f public sector institutions in the legal sector to be able to execute their mandate effectively. The key outcomes o f the programme include a safe and secure environment, a fair humane and expeditious justice delivery system, and a more democratic state that respects human rights and the rule o f law.

40

The Government has also entered into partnership with Development Partners to plan and implement the Public Financial Management Reform Programme with the aim o f enhancing financial governance in the public sector for effective and efficient resource utilization for economic growth and poverty reduction. The United Nations Development Program (UNDP) i s also supporting the government through a programme to alleviate poverty through strengthening capacity and participation o f governance institutions and c iv i l society organizations including NGO’s and Community Based Organizations on public governance. This programme aims to promote participatory development planning by involving grassroots communities and al l parties concerned in public policy debates to build consensus, eliminate corruption, enhance transparency and accountability, and institutionalize integrity systems and other programs and regulations that impact poverty eradication.

The UNDP is also coordinating support from bi-lateral donors to the Public Sector Reform and Development Secretariat (PSRDS), in the Cabinet Office, Office o f the President on improving public sector management, coordination and networking. The long-term objective o f this support i s to improve public sector management for more efficient, transparent, and accountable delivery of public services. The intended outcomes o f the support are: (i) restructured Cabinet Office and rationalized functions in support o f the Presidency; ii) institutionalized RBM in public service achieving national goals and the ERS targets iii) an enabling environment for RBM to achieve national goals, and in the medium term, ERS targets, (iv) a developed longer-term public service Strategy including a national vision and “branding Kenya” (Kenya Incorporated), towards the achievement o f national priorities in the medium to long term, and (v) capacity o f Public Service Leaders to champion change in the implementation o f RBM and mainstreaming o f values and ethics in the public service vi) develop Information, Education and Communication (IEC) strategy for disseminating ‘Results to Kenyans’ and vii) resource mobilization Strategy for coordinated implementation o f the project Additionally, Kenya i s one o f the f i rs t four Afr ican countries (others are Rwanda, Ghana, and Mauritius) to be scrutinized by the Afr ican Peer Review Mechanism by volunteering to be reviewed on good governance, democratic standards and economic policy. The New Partnership for Africa’s Development (NEPAD) peer review i s seen as a vital part o f the African economic recovery plan and sixteen Afr ican governments already have signed up to the review mechanism, which i s to assess whether they are fol lowing NEPAD aims o f good governance, economic reform and democracy.

However, despite the government’s renewed commitment to improve governance and improve the delivery o f services to i t s citizenry, coupled with the support from the Development Partners, significant systematic challenges remain that s t i l l need to be addressed. For instance, the C iv i l service i s s t i l l not lean and service quality i s highly variable and poor in key economic sectors such as the telecommunication, ports, and energy. Issues o f its bloated size continue to be a significant challenge in terms o f delivering services to i t s citizenry. Pay reform continues to be a challenge because o f lack o f a pay policy.

W h i l e there i s evidence that ‘big graft’ is more dif f icult because o f stringent attention to procurement, and intense media and general public security, there are indications that other problems s t i l l exist. Recently, the Government commissioned forensic audits o f three Bank- financed operations under-implementation. The audit reports found direct evidence o f fraud in the Kenya HIV/AIDS Disaster Response Project (KHADREP), significant r i s k management and control weaknesses (though little direct evidence o f fraud) in the Kenya Decentralized HIV/AIDS and Reproductive Health Project (DARE), and shortcomings in the control

41

environment in the Public Sector Management Technical Assistance Project (PSMTAP), which do not appear to have translated into fraud. The report also notes that poor government management against fraud risk, weak oversight, l ow capacity (particularly in accounting staff), project supervision that focuses more on documentation rather than physical evidence o f implementation, and confusion over World Bank and Government requirements allow for a high possibility o f corruption. There i s also insufficient managerial accountability for overall performance and service delivery and corruption.

Poor harmonization o f donor support to Kenya had led to uncoordinated interventions. This fragmentation has been a huge drain on the capacity o f the Government and runs counter to the commitments made under the Paris Declaration on aid effectiveness. There has also been several missed opportunities for organized scaling up o f implementation (e.g. in using rapid results approaches, etc), throughout the Government. However, the approach has now been piloted in a few government ministries (health, agriculture, local government, trade and industry and water ministries) with successes. This approach i s now being mainstreamed to ensure “results” are delivered to the Kenyan people.

The Government recognizes the above weaknesses and has recently articulated a new vision and institutional framework for improving public sector performance (especially on governance) and service delivery as part o f i t s broader strategy for reinvigorating i t s programme o f growth and structural reforms for wealth creation as stated in the ERS. This approach focuses o n enhancing the change management capacity o f leaders in the Public Service and their teams in delivering ‘Results for Kenyans’. I t wil l also enhance the development and promotion o f a value system and code of ethics developed from the existing legislation as well as best global practice as a tool to rejuvenate the service orientation and accountability for public servants.

As part o f this new initiative, the Government has recently embraced a Results-Based Management (RBM) system as a tool for helping public sector institutions to focus their work, plan strategically and demonstrate candidly the difference that each organization i s making to development. I t i s presumed that by introducing RBM, the Government seeks to improve overall programme effectiveness as well as accountability to its citizens, donors and other Development Partners. Both the public and Development Partners want to see faster development and to know what use their resources are being put into and how efficiently.

The Government has also introduced performance contracts to al l i t s senior officials including those in parastatals. The performance contracts are supposed to create incentives for public sector managers and their staff, to improve performance and accountability by undertaking to deliver specific outputs in l ine with their annual work plans, strategic plans and the ERS as wel l as Millennium Development Goals. By focusing o n results and by providing a clear picture of what areas and outcomes the Government i s engaged in, RBM presents the opportunity o f creating a synthesized alignment between capacities and the tasks undertaken by ministries and other public organizations. It also raises the challenge o f finding the right skills mix for each public organization and the incentives necessary for enhanced performance.

The focus o f the new program wil l be on public financial management to reduce discretionary powers accorded to i t s chief executives, and improving its service delivery system and enhancing transparency in government transactions, including procurement reforms, and consequently create the environment for needed foreign investment. To help implement i t s public sector

42

management reform program, the Government i s seeking assistance from the Bank and other Development Partners that will:

Support demand-driven leadership capacity building that i s aligned with and directly supportive o f the performance-based management system that the Government i s rapidly putting in place, including performance contracting and components piloted earlier under the transformative leadership for RBM pilots using the ‘rapid results’ approach.

Focus on some key ministries (that are critical for successful implementation o f the ERS, e.g., Ministry o f Finance, Ministry o f Planning and National Development, Ministry o f Trade and Industry, Ministry o f Local Government, and Ministry o f Agriculture). However, because several others are important to the achievement o f ERS goals andor are moving ahead quickly to significantly enhance their focus on operational efficiency and results, the assistance program would initially focus the support on the five ministries, but wil l during the mid- term review explore the need to accommodate a larger group o f ministries that satisfy agreed eligibility requirements such as leadership and results orientation,

Assist Parliament in its oversight role by supporting the various parliamentary committees in the area o f economic management (budget preparation, budget execution, and expenditure control), and providing technical and logistical support for effective oversight by the Public Accounts and Public Investment Committees; and

Improve the effectiveness o f donor support in these critical areas o f capacity building, governance, etc, by ensuring that they are better aligned and coordinated, especially in areas such as public financial management (PFM).

Several bilateral donors in close collaboration with International Development Association (IDA) have responded favorably with commitments to support the pooling o f funds around a single design solution including Department for International Development (DFID), Swedish International Development Agency (SIDA), and European Un ion (EU), along with anticipated support from Canadian International Development Agency (CIDA), and Norwegian Agency for Development ( N O W ) . Non-pooling donors that have committed to leverage support to the PFM reform program include United States Agency for International Development (US AID), German Technical Cooperation (GTZ) and UNDP. The harmonized approach to support the Government’s institutional reform and capacity development program has been conveyed to the Government in regular meetings between Government and various Donor Coordinating Mechanisms including the PFM Donor Coordination Group and in various preparation missions. The support from donors would incorporate the various commitments within the Government’s overall macroeconomic fiscal framework including i t s annual budgeting, planning, and monthly Statement o f Expenditure (S0E)-based disbursement procedures.

43

Sector issues addressed

Civ i l Service Reform Legal Reform

Distance Learning

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

Bank financed Projects Latest Latest PSRIP PSRDO rating rating

Public Sector Management Technical Assistance S S Financial and Legal Sec TA S S

Development Learning Center LIL S S

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Sector Issues Donor Involvement Legal Sector Reform Public Financial

DFID, SIDA, EU, CIDA, NORWAY, U S A I D EU, DFID, SIDA, Norway, USAID, GTZ

Management Public Service Reform Parliament

Reform Area Macroeconomic planning and framework

DFID, SIDA, EU, UNDP, Netherlands, CIDA CIDA, USAID, WBI

Budgeting

~

Revenue - taxes, customs, excise

Procurement and stores

Audit - internal and external

IFMIS (Accounting and reporting; Payment and cash management)

PI EC Ongoing - Support to IMF seconded staff No further support beyond t h i s Ongoing -Support to PER 50,000 euro available

Ongoing - Y2K project with KRA to be closed. 200,000 euro

Ongoing - Independent Procurement Review 400,000 euro Ongoing -Clearing L A audit backlog. Audit o f Advanced Budget support. 700,000 euro

4 Stocktaking SIDA

ongoing - PFM Reform Plan

planned - PFM Reform Plan

Ongoing - IFMIS Stage 1 SEK 22 million Planned -1FMIS Stage 2 SEK 50-80 Million

GTZ

ongoing - Support to PER and Fiscal Reporting planned-Tracking surveys and Budget preparation 200,000 euro

DFID

Ongoing - PEMIPER 400,000 UK f

Ongoing - Support to KRA Change management ICT 300,000 UK E

Ongoing - hnding of consultant (TA)

44

To ensure med ium te rm planning and budgeting are synchronized.

T o ensure improved control over and reporting o f expenditure and in the use o f publ ic h d s

Annex 3: Results Framework and Monitoring

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Results Framework PDO

Strengthen public f inancial management (PFM) systems to enhance transparency, accountability and responsiveness to pol icy priorities and support capacity building in key ministries involved in the implementation o f the Economic Recovery Strategy.

Intermediate Results One per Component

Component 1: Public Financial M a Subprogram 1.1 Strengthening budget formulation

Subprogram 1.2 Strengthening budget execution, accounting and financial reporting

Outcome Indicators

1. National budget i s aligned with explicit ly stated government priorities in the IP-ERS

2. Budget allocation and actual expenditure disparities reduced.

3. Predictability o f annual /m id term cash allocation flows to l i n e ministries improved by Treasury. 4. External audit reports prepared and published in a t imely fashion in accordance with the Public Audit A c t 2003.

5. Adoption o f a Risk Based Internal Audit approach and establishment o f effective Ministerial Audit Committees.

6. Skilled Public Accounts and Public Investments committees o f parliament in undertaking their statutory functions, submitting reports o n an annual basis and eliminate backlog within the second year o f project implementation.

7. Skil led finance Committee in undertaking i t s statutory functions complies with the budget cycle.

8. Accountabil ity and capacity o f publ ic servants enhanced for the delivery o f publ ic service

Results Indicators for Each ComDonent

igement Reform Within year deviations o f actual expenditure f r o m printed estimates reduced by 30% by 2009 1. Payment arrears reduced to n o

more than average monthly expenditure o f Government

2. Financial reporting by semi- autonomous government

Use of Outcome Information The purpose i s to measure iggregate improvement in tax idministration and budgetary xocedures; and improve ransparency and accountability in :overnment fiscal management.

Provide basis to h o l d government accountable

Parliament i s able to provide oversight role over the executive vis- &vis public f inancial management

Provides data o n pre-audits to determine whether there i s value for money in the use o f government funds

T o determine whether the ministries/ departments and their leadership are able deliver efficient services.

Use o f Results Monitoring

45

External Audit System

Subprogram 1.4 Strengthening the Internal Audit System

Subprogram 1.5 Strengthening the National Procurement System

Subprogram 1.6 Support t o key Parliamentary Committees for effective oversight o f publ ic financial management

Subprogram 1.7 Strengthening Revenue Collection and Management for the Kenya National Revenue Agency

Component 2: Capacity Building fo Subprogram 2.1: Capacity Building Facil ity

Outcome Indicators agencies and local authorities o n budget and contingent l iabil i t ies

statements in accordance with acceptable accounting standards are produced through the I F M I S

I F M I S i s operational in the MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development.

statements are produced through the IFMIS. IPPD i s rol led out to MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development. An IT strategy i s developed and owned by government. Annual audits are executed in a timely effective and efficient fashion.

2. Compliance with Public Audit Ac t reporting requirements achieved

1. MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development have we l l established internal audit u n i t s

2. Management in the above ministries/departments implements recommendations o f internal audit units.

3. Timely and reliable financial

1.

2. Timely and reliable financial

3 .

4.

1.

Public Procurement entities have achieved full capacity to comply with procurement procedures.

Quality and use o f reports o f recommendations o f Parliamentary Committees improved

1. timeliness o f production o f statistics

2. Cost o f collection to b e maintained below 2% o f printed estimates

Results

Use of Outcome Information

Effective and reliable IT support for PFM requirements and processes.

Provides basis to h o l d government agencies accountable

T o improve effectiveness and efficiency o f internal control systems.

1. Enhance transparency and efficiency in the use o f publ ic resources T o institute controls in public procurement

2.

T o ensure that parliament exercises i t s accountability responsibilities.

T o provide data for better cash management at the treasury.

The targeted ministries use the I T o determine whether the ministries Capacity Building Faci l i ty t o I and departments are capable o f support Rapid Result Ac t i on Plans. I supporting the achievements o f the

46

coordination.

PDO

Subprog ram 2.2: Transformative Leadership and Ethics for RBM

Change Management Capacity Enhanced

Code o f Values and Ethics Adopted

Rapid Results Approach Adopted

Component 3: Pro ject Managemen Effective coordination of the components o f the project we l l established

Outcome Indicators

' Results units established to r o l l out RBM in the focus ministries Leaders in the Public Service and senior ministry staff trained in RBM and change management; Clarity and documentation o f roles and responsibilities o f leaders in the Public Service established; accountability for results clarified. Senior staff i s more effective in instituting and sustaining reform and modeling behavior consistent with Code o f values and Ethics.

Code o f Ethics developed inline with the guide for values and Ethics in RBM and adopted within each focus m i n i s t r y 75% o f regular staff and 100% o f management staff and 100% o f a l l new staff exposed and evaluated o n behavior consistent with Code o f Values and Ethics Within two years public perception o f publ ic servants ethical & service orientation behavior changed positively as measured by pre- and post- implementation survey.

1. Rapid Results methodologies are adopted in the implementation o f projects within each focus ministries and project staff trained. 75% o f projects identi fy lOOday targets that can use RRI in their

2.

Use of Outcome Information policy goals o f the ERS. To ensure greater efficiency and sustainability o f reforms adopted through innovative and effective leadership within IRCB focus Ministries

Enhance leadership, and self- management and staff management for results and sustaining self- directed reform; Enhance accountability, and a results culture through conscious decision- making

To ensure more efficient and accountable and citizen-service oriented actions by public servants

To ensure that short term targeted results lead towards the achievement o f the overal l goals in the ministries.

RRA institutionalized as a too l and process o f re fo rm to energize and improvements in service delivery

47

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PDO Imdementation o f moiect activities complies with Worid Bank Financial Management and Procurement Guidelines

Outcome Indicators Annual work plan and procurement plan are produced by November of the preceding year (2005 onwards).

Financial management o f the project funds i s complaint with IDA FM Guidelines.

Procurement practice under the project i s complaint with IDA Procurement Guidelines

Use of Outcome Information

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51

Annex 4: Detailed Project Description

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

52

Component 1. Public Financial Management (US$16.65 million):

Among the many areas o f public sector improvement, strengthening the management o f public expenditure i s central. There i s urgent need to improve fiscal discipline, bring resource allocation in l ine with development priorities articulated in the IP-ERS, by improving the budgeting preparation and execution processes.

The objective o f this component i s to make budget processes and public financial management (PFM) more transparent, accountable, and responsive to policy priorities. I t wil l therefore aim at strengthening financial resource planning, budget preparation and implementation, strengthening financial controls, ensuring that allocation o f government resources is consistent with pol icy priorities outlined in IP-ERS, and reducing fiduciary risks by making procurement transparent and efficient and enhancing expenditure monitoring and audit. It i s also aimed at an efficient generation and management o f revenue. This component wil l have the following sub- components.

Sub-program 1.1: Strengthening budget formulation

Status: The budget i s not aligned to government pol icy objectives and ERS priorities. Budgets are also not realistic due to inadequate attention during formulation o f macro-fiscal assumptions and program costings.

Objective: This subcomponent supports the Government’s on-going efforts at streamlining budget formulation processes, strengthening the MTEF consultative mechanisms with stakeholders and alignment o f expenditure with ERS priorities. I t wil l also support various activities undertaken before budget formulation such as providing technical assistance to strengthen Sector Working Groups and in preparing sector reports.

Proposed activities:

In the short term, budget formulation will be improved by building capacity o f the Budget SupplyMTEF department in the Ministry o f Finance and budget units in l ine ministries and government agencies. Specific activities wil l include helping l ine ministries prepare expenditure plans, training staff in program costing, and strengthening budget submissions by l ine ministries as well as helping Ministry o f Finance with development o f budget strategy paper and project app rai s a1 s ys t em . Ministries wil l be encouraged to incorporate the IP-ERS core indicators and annual targets in al l ministerial strategic planning and annual reporting documents. Many ministries have not yet organized their work programs on an objective-led basis with appropriately identified inputs and outputs linked to outcomes. The M&E department will work with the l ine ministr ies to ensure that the final versions o f the strategic plans and annual work plans for 2005/06 are suitably constructed to permit outcome-based monitoring and evaluation. This wil l help to eliminate inconsistencies between the new sector strategic plans and the IP-ERS. Annual reporting systems

53

wil l be reviewed and amended to ensure an adequate reporting framework that supports the evaluation o f service delivery Performance.

The proposed project wil l also be used to implement the following recommendations, which aim at strengthening the PER process and i t s elements in 2004-05:

The terms o f reference for Ministerial PERs (MPERs) should have both generic elements and customized elements. Examples o f generic elements include (a) analysis o f updated and reconciled expenditure data at the sub-vote level, explaining any significant changes in expenditure trends; (b) reporting on performance indicators; (c) identifying pol icy changes, new programs and projects, and their expenditure implications in the medium term and for the next budget year; and (d) reporting on the functional reviews and identifying the scope for savings over the medium term. The customized elements would be specific to each ministry and would be agreed upon between the PER Secretariat and the ministry at the beginning o f the process in September o f every year. Ways should be found to merge MTEF submissions with MPERs.

The calendar o f the PER process should be completely harmonized with the annual budget and MTEF. The PER Report should be prepared in end- March or early April so that there can be a good discussion o f i t s findings among al l stakeholders.

Action on PER recommendations should be monitored through the Steering Committee. Short- and medium-term action plans could be developed.

Jointly with l ine ministries, the Budget Monitoring Div is ion should develop a historical database o n expenditures by sub-vote. This wil l allow consistent analysis o f expenditures, notwithstanding several reorganizations o f ministries. Line ministries should use the same data for their own analysis in MPERs.

In the medium term, the project wi l l support the development o f an organic budget law which codifies existing practices in Public Financial Management. By the end o f the project l i fe cycle, the means to support implementation o f the new organic budget law would have been developed.

Activities wil l include training, development o f information systems and databases, provision o f technical support to help embed the budget structure into the Chart o f Accounts and subsequent reports produced from the financial systems. I t wil l further support streamlining the functioning of the planning units in the line ministries and Sector Working Groups through linking o f ministerial strategic plans and annual budgeting process.

Specific attention wil l be given to key building blocks for evaluation. Good quality independent evaluations o f government programs can provide information needed to improve the effectiveness and efficiency o f government operations. The M&E department i s taking steps to develop capacity for evaluation of government programs. I t has recently entered into a contract with the Institute of Development Studies at the University o f Nairobi to jo int ly perform

54

evaluations o f government programs. This activity i s expected to familiarize the M&E department with the key issues and methodologies o f evaluation, and, ultimately, to the establishment o f capacity within the department to lead evaluations o f government programs.

Expected resultsAndicator: Budget allocations consistent with the ERS priorities; budgets wil l be based on more realistic expectations; budgets more embedded in medium term fiscal framework; budget allocations wil l be closely aligned with explicitly stated priorities; and budget formulation process wil l be more contestable and involve al l stakeholders in a transparent manner.

Sub-program 1.2: Strengthening budget execution, accounting and jZn uncial reporting

Status: The government i s implementing the Enhanced Financial Management Action Plan (EFMAP) that draws upon PEMAAP and C F A A diagnostics. EFMAP addresses the following weaknesses in the domain o f public financial management. Some o f these are:

(i) there i s weak cash management due to the presence o f multiple bank accounts used for government transactions and unpredictability o f the quantum amount o f weekly cash releases from the Ministry o f Finance;

(ii) the existing accounting system cannot produce complete, accurate and reliable financial statements.

Objective: This subcomponent supports the Government in implementing the recommendations contained in i t s EFMAP.

Proposed activities:

In the short term the sub-component i s l ikely to include technical support to: (i) improve cash management; (ii) contain occurrence o f further expenditure arrears; (iii) improve predictability o f cash f low to spending units; (iii) improve and streamline payment systems; and (iv) ensure payroll integrity. Regarding expenditure arrears, the Government has already made the settling old expenditure arrears (from before June 2003) a priority, there i s also an urgent need to implement an action plan that wil l prevent new arrears from accumulating. Such an action plan would include, among other things, (i) announcing a transparent pol icy for clearing accumulated arrears and formulating rules and regulations that will prevent accumulation o f f resh arrears, (ii) reviewing contract administration procedures, (iii) establishing a project implementation and monitoring system, (iv) instituting procurement laws and regulations, and (v) establishing a system for managing pending bills.

In the medium term, the principles, methodology and processes would have been established for: (i) a system for financial reporting by semi-autonomous government agencies and local authorities on budget and contingent liabilities; (ii) expenditure classification systems along the principles outlined in the international standard classifications such as the UN Classification o f the Functions o f the Government (COFOG) and the IMF’s Government Financial Statistics (GFS); and (iii) a framework for the preparation and presentation o f timely and comprehensive

55

periodic financial management accounts and annual financial statements based on generally accepted accounting principles and professional best practices.

By the end of the project life cycle, the means to support implementation o f the revised principles, methodology and processes for reporting would have been developed.

Expected resultshndicators: Payment arrears are reduced to no more than average monthly expenditure o f Government. Financial reporting by semi-autonomous government agencies and local authorities on budget and contingent liabilities are implemented. Timely and reliable financial statements in accordance with acceptable accounting standards are produced through the IFMIS.

Sub-program 1.3: Information Technology

Strengthening Public Financial Management through the use of

Status: From 1997-2000, the Government undertook a series o f diagnostic reviews that resulted in the production o f detailed task force reports elaborating the issues and problems o f finance and accounting in the Government o f Kenya (GOK) and the production o f a Comprehensive Project Framework (CPF) for reform o f Public Financial Management. Concurrently, a Financial Management Information Systems Strategy (FMISS) was developed. From the second quarter o f 2000, G O K began the implementation o f a program o f output-based activities designed to result in improved financial management, accounting, accountability and internal audit o f funds.

The program encompassed systemic (including an IFMIS), procedural, human resource, and legislative reforms in the areas o f planning, budgeting, financial management, accounting, internal auditing and financial reporting. A new Financial Administration Bill has been prepared and i s before Parliament, a new chart o f accounts has been developed and a financial management system i s currently under development: Given the complexity and scale o f the activities, i t was expected that this phase would involve a number o f stages. The f i rs t stage was originally expected to end in 2003 but due to internal resistance and delays in procurement, i t was extended to June 2005. Currently, pi lot testing is ongoing in the Ministries o f Finance and Planning and National Development. The pilot testing phase involves parallel running o f the existing manuaVIT based accounting system.

IFMIS rollout to other ministries and departments i s delayed due to lack o f infrastructure, hardware, overall I C T policy, and lack o f direction. I C T plans are poorly conceptualized, documented and not based on any comprehensive I C T strategy.

An Integrated Payroll and Personnel Database System (IPPD) project has been ongoing in the DPM. However linkages between the two systems are weak. This clearly poses a problem given the considerable overlap in the issues that both projects address (ICT, Data Centre, WAN, staffing, sk i l ls development etc) and the fact that the IFMIS system depends o n information from the IPPS for production o f comprehensive financial information.

Objectives: The subcomponent supports the Government in achieving two objectives: (i) timely capturing o f accurate and verifiable data o f budget execution, for improved financial reporting

56

.reducing the opportunities for unaccountable discretion on the part o f the executive: and (ii) providing enhanced internal controls to improve pubic expenditure management (including pay- ro l l management).

Proposed Activities:

IFMIS features to strengthen the P F M system wil l include:

(9 (ii)

Public sector budgeting integrated with the core accounting system; Improved and automated controls to ensure the accuracy and reliability o f information in f i les and reports and to prevent or discourage fraud; Automated reconciliation o f bank accounts; Timely integration o f payroll data to the IFMIS to ensure availability o f up to date expenditure within GOK; and Improved P F M capacity o f staff.

(iii) (iv)

(v)

In the short term, technical assistance will be provided to achieve “live” status o f the new IFMIS in the Ministry o f Finance and one pi lot department. Activities will include completion o f the pi lot test phase, resolution o f the connectivity issues and data integration issues.

In the medium term, alignment o f PFM and IT architectures will be achieved in tandem with preparation for further roll-out o f the system. Activities wil l include resolution o f strategy and pol icy differences and process issues, as well as development o f the required capacity ‘and resources to support full roll-out o f the system. This strategy would cover (i) the development o f the technology specifications to be used across Government - hardware, interface between various systems, and communication networks to be used, and (ii) the development o f a global strategy for maintaining and upgrading the IT systems. The strategy wil l require that the technology used i s simple, breeds greatest familiarity with potential users, allows for interface between the various components or sub-systems.

By the end o f the project l i fe cycle, full implementation o f the system would have been initiated. Activities wil l include finalization o f manuals and training courses, set up o f Ministries on the system, data take-on for priority Ministr ies and establishment o f change management and user support processes.

Expected results/indicators: (i) IFMIS i s operational in the MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development. (ii) Timely and reliable financial statements are produced through the IFMIS. (iii) IPPD i s rolled out to MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development. (iv) An IT strategy i s developed and owned by govemment.

Sub-program 1.4: Strengthening the External Audit System

Status: The Public Sector Management Technical Assistance Project provided support to the National Audit Office since 2001. Through the support, over 60 staff members acquired professional accounting and auditing skil ls. As a result, the performance o f the external audit

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function has improved, especially as regards the audit o f central ministries. However, local authorities have not prepared accounts for auditing for many years and the audit o f Semi Autonomous Agencies (SAGAS) i s delayed by non-submission o f accounts and operational difficulties. Despite the improvements recorded, techniques for auditing need to be improved. Forensic auditing, performance auditing, and computer assisted auditing techniques are not used in most auditing assignments.

Objective: The objective here i s to strengthen the capacity o f the National Audit Office to become an effective institution that wil l enhance financial accountability in the public sector.

Proposed activities:

In the short term, the focus wil l be on supporting ongoing initiatives to clear the substantial backlog o f overdue Local Authorities audit reporting arrears, to prevent to occurrence o f new audit arrears and to consider more effective and efficient audit approaches, such as risk-based auditing and performance auditing. Support wil l also be provided under this subcomponent to strengthen the relationship between the Office o f the Public Accounts Committee o f Parliament and the Kenya National Audit Office.

In the medium term, risk-based external audits wil l be piloted, and if acceptable to stake holders full scale implementation wil l be planned and resourced.

By the end o f the project l i f e cycle, full implementation o f alternative audit approaches would have been initiated. Activities will include finalization o f manuals and training courses and establishment o f change management processes.

Expected results/indicators: (i) Annual audits are executed in a timely, effective and efficient fashion and (ii) Compliance with Public Audit Ac t reporting requirements achieved.

Sub-program 1.5: Strengthening the Internal Audit System

Status: The Internal Audit Department has developed a new a draft manual for internal auditing. Internal auditing improved over the years resulting in changes from traditional pre-audit procedures to risk-based systems and compliance reviews. Roll-out is, however, hindered by ineffectiveness o f Ministerial Audit Committees that are expected to oversee the action on audit findings and recommendations. Improvements have been recorded in central ministries but this i s not the case in some departments and local authorities.

Objective: The objective of this subcomponent is to continue to support the rollout o f a risk- based systems audit approach to al l ministries, departments and local authorities. Support wil l be provided to the Internal Audit Department to develop and document an updated standardized internal audit methodology in l ine with best practice for use by audit staff; institutionalize the risk-based approach in order to prioritize and plan the internal audit work load. I t will also support the institutionalization o f Ministerial Audit Committees to whom internal audit wil l typically report and the development o f internal r isk management processes. Support will also be directed towards effective monitoring o f the implementation o f audit recommendations.

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Proposed activities:

In the short term, support wi l l be provided to the Internal Audit Department to complete i t s pi lot risk-based audits in order to develop and document a new standard internal audit methodology and plan and prepare for i t s implementation. Staff training wil l be initiated, audit processes and systems will be reviewed and aligned and core competencies to implement the revised audit approach wil l be established.

In the medium term, implementation wil l be initiated, together with the establishment o f Ministerial Risk Management Committees, to whom internal audit, external audit and other independent oversight entities will typically provide their findings for implementation.

By the end o f the project l i f e cycle, the use o f audit results to improve internal control systems wil l be visible and the risk-based systems approach to internal audit would have been institutionalized.

Expected results/Indicators: MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development have well established internal audit units. Management in the above ministrieddepartments implements recommendations o f internal audit units.

Sub-program 1.6: Strengthening the National Procurement System

Status: Public procurement reforms started as far back as 1978 but progress has been very slow. Some o f the challenges in the reform o f the procurement reform process are; lack o f a strong public procurement reforms implementation team, lack o f adequate and competent staff in the Public Procurement Directorate, lack o f effective monitoring and evaluation system for the public procurement system, poor staffing in the public procurement units in the procuring entities, a weak legal framework for procurement and poor enforcement o f rules and regulations. Procurement i s not transparent enough and delays in awarding contracts and in making payments create opportunities for corruption.

Fol lowing the passage o f the Public Procurement and Disposal Bill 2005, a new Procurement Authority would be established, whose principal hnc t i on i s to provide oversight o f the procurement regulations. The sub-component would provide support to this Authority as wel l as to the establishment o f an effective framework and control process for the procurement o f goods, works, and services, and establish an effective monitoring and tracking system. In the short term, measures to implement the new Procurement Bill wil l be designed and resourced. In the medium term, the project wil l finance a sensitization program to disseminate the new procurement law and system to promote transparency and accountability in procurement, and training o f procurement staff o n the new law, regulations and systems. By the end o f the project cycle, implementation o f the new Bill, framework and procurement systems will have been initiated.

Objective: The objectives o f this subcomponent are to streamline the procurement o f goods, works and services and establish an effective monitoring and tracking system.

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Proposed activities: The project wil l support the implementation o f a new legal and regulatory framework for procurement. Specifically, this subcomponent wil l provide technical assistance, logistical support (office equipment), and intensive training to the Public Procurement Oversight Authority and other public procurement entities based on a training needs assessment. I t will also support the implementation o f capacity building and training programs for staff o f public procurement entities, the Appeals Board and anti-corruption institutions, as well as support the implementation o f a strategy for Information, Education and Communication (IEC) for the public procurement system.

Expected results/indicator: Annual Procurement audits indicate 30% o f compliance with procurement regulations.

Sub-program 1.7: Support to key Parliamentary Committees for effective oversight of public j h a n cia1 management

Status: The Parliament has important control and oversight functions. The Finance Committee, among others, i s responsible for the oversight and examination o f the annual estimates o f revenue and expenditure, and the Public Accounts Committee’s main function i s to examine the report o f audited accounts submitted to Parliament by the Auditor General. Other scrutiny functions are also assigned to other parliamentary committees dealing with specific sectors. The efficiency o f parliamentary oversight has been constrained by various factors, key among them being the grossly inadequate capacity and professionalism o f the Finance and Public Accounts Committee.

Objective: The objective o f this component would be two-fold: (i) to professionalize Parliament’s interaction with the government; and ii) to improve the legislative scrutiny o f audit reports.

Proposed activities: With regard to (i) capacity building at both the individual leve l (Member o f Parliament and parliamentary staff) and institutional level are envisaged. Specialized training in macro-economic and financial management, with a particular focus on budget process (budget preparation, budget execution, and expenditure control) would boost the skills o f Members and staff, whi le support to an independent parliamentary budget office would ensure that Parliament has access to independent budget information and analyses. Together, such capacity building wil l result in Members o f the key parliamentary committees (Finance and Public Accounts) being able to understand key budget issues and information and able to interact with Treasury officials on a more equal footing.

With regard to (ii), the capacity o f the Public Accounts Committee to review audit reports and monitor necessary corrective actions wil l be enhanced. This will also involve specialized training for both the Members of, and the parliamentary staff supporting, that Committee. At the same time, i t i s envisaged that Members wil l also benefit from the analyses o f the budget office, and that technical and logistical support wil l be given to strengthen the relationship between the Public Accounts Committee and the Office o f the Controller and Auditor General.

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Expected results/indicator: Improvements in parliamentary oversight o f the budget process (both ex-ante and ex-poste) wi l l be measurable by:

0

0

0

Number and quality o f MP statements on economichudget affairs P A C recommendations on improvements to government financial operations Parliamentary follow-up to PAC recommendations, determining if and how government responded to PAC recommendations

Sub-program 1.8: Support to Kenya Revenue Authority for enhancing revenue collection and administration.

Statushackground: The Kenya Revenue Authority (KRA) was established in 1995 as a semi- autonomous government agency responsible for revenue administration. The main objective for its establishment was to provide operational autonomy in revenue administration and enable i t s evolution into a modern, flexible and integrated revenue collection agency. The ongoing Reform and Modernization Programme seeks to help the Government collect a l l the taxes due and in the process free Kenya from donor dependency and make the country a truly sovereign nation. In general, KRA has exhibited good performance in various areas, including revenue collection which has increased gradually from Kshs. 122 bi l l ion in 1995/96 to Kshs. 229 bi l l ion in the 2003/04 financial year (FY), accounting for over 93% o f total government revenue.

However, KRA i s yet to operate as a h l ly integrated organization, which has inhibited the hll potential o f gains accruing from i t s creation. Specifically, the lack o f integration o f the various tax units (Income tax, VAT, Customs) and/or jo int initiatives has impeded the creation o f common practices/procedures/culture across KRA and inhibited the timely and efficient exchange o f information. A great number o f business procedures remain manual, cumbersome and susceptible to manipulation and abuse.

Aware o f the situation, KRA has already committed i t s e l f to an ambitious “Revenue Administration Reform & Modernization Program 2004/05-2007/08 ”, which incorporates al l o f the most important reforms in its current three-year corporate plan. Unfortunately, progress on implementation has been slow and critical activities have been under-resourced and inadequately coordinated. Urgent attention i s now required to assist the KRA hnd and implement this sound, effective and sustainable reform and modernization program, which wi l l al low it to make an important contribution to the achievement o f Kenya’s overall development goals.

Objective: The objective of this component i s to support the implementation o f the KRA Modernization and Reform Program 2004/05-2007/08, which wil l transform it into a modem and fully integrated revenue administration agency.

Proposed activities: Activities will focus o n three main areas: (i) Domestic Taxes Department (DTD) Reform and Modernization Project; Technical Assistance, training and equipment in order to restructure the Domestic Tax Department (TDT) from the current tax-based structure into a unified hnction-based tax administration; (ii) KRA Automation Project: overhauling o f their information systems, through the acquisition and introduction o f a new modem integrated IT system for tax administration and supporting infrastructure for business continuity including a

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disaster recovery site; (iii) Training and Change Management Project: Training and Technical Assistance to upgrade and diversify the skill base in the organization to international best practice standards to the extent o f supporting the skill base requirements o f the reform program.

Expected resultshdicators: Improvements in the efficiency and efficacy o f revenue collection and administration wil l be measured by:

(i)

(ii)

(iii) (iv) (v) (vi)

Improved tax compliance by 5% per annum (assuming an overall compliance level o f 60%). Enhanced revenue collection by an additional Kshs. 15 b i l l ion per annum on account o f improved compliance Maintenance o f cost o f collection at below 2% o f printed estimates. Number o f KRA functions fully integrated. Number o f IT business solutions successfully implemented. Quality and timeliness o f production o f statistics.

Component 2. Capacity Building for Results

Subprogram 2.1 : Capacity Building Facility (US$5.31 million):

Status: O n March 12, 2004, G O K published the IP-ERS which is a results based program o f priori ty actions designed to meet the ERS. The Bank i s responding by preparing various programs to support the Government fulfill their commitments under the ERS, and the related performance contracts for relevant ministries. The various programs will identify issues that affect some sectors and the benchmarks that government needs to attain to meet their ERS goals. Some of the indicative issues and their corresponding benchmarks are listed under the expected results section below. The issues identified are handled by five ministries (Finance, Agriculture, Planning and Development, Trade and Industries and Local Government). However, capacities in the above ministries are weak. I t i s also expected the other ministries wil l benefit from the fund upon satisfactory meeting o f agreed conditions.

Objective: The primary objective o f this component i s to support the overall shi f t toward effective management o f key parts o f the economy to fulfill their commitments under the ERS, and their related performance contracts. This wil l include, but not be l imited to, providing capacity building support to the five key ministries (Finance, Agriculture, Planning and Development, Trade and Industry and Local Government). W h i l e the operation wil l continue to focus on some key ministries, i t i s clear that several others are important to the achievement o f ERS goals and/or are moving ahead quickly to significantly enhance their focus on operational efficiency and results. This component will therefore include arrangement for a larger group o f key ministries to receive assistance when they satisfy certain agreed requirements such as leadership and results orientation.

Proposed activities: This fund will be demand-driven, Le. the inputs will be specified by the key ministries who would develop capacity building sub-projects to demonstrate how they intend to use the funds to achieve the benchmarks o f the ERS and/or implement their strategic plans under the performance contracts.

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All the participating ministries are expected to meet the following conditions:

(i)

(ii)

(iii) (iv)

(v)

The development o f a strategic plan that i s oriented towards achieving the ERS benchmarks;

The development o f a well-costed capacity building sub-projects and an implementatiodprocurement plan;

The development o f an assets register;

Preparation o f a capacity building report for the previous year (applicable for the second year); and

Timely submission o f an annual financial statement.

In addition, a set of broad eligibility criteria and rules o f access (developed by the Government) wil l be used to determine the quantum of funds to be allocated to the ministries each year for supporting their capacity building sub-projects. ,

ELIGIBLE~NELIGIBLE ACTIVITIES UNDER THE CBF COMPONENT

Eligible capacity building interventions

Interventions that are eligible for CBF financing should support the operationalization and implementation o f their performance contracts and may include:

Technical support at a l l stages o f the in the development o f the participating Departments’ strategic plans, annual work plans and implementing them.

Specific training activities within the Region.

CBF will on ly support results-oriented incremental investments. This will include for instance, resources required to re-engineer processes; t o put in place systems for monitoring and evaluation; a n d o r to foster organizational learning.

Re-tooling in participating Departments to improve bo th working facilities and the environment, in the context o f IRCBP’s implementation.

Support t o the rationalization o f participating Departments’ roles and functions.

Soft assets including computers and software.

Support work aimed at reinforcing results- based approach at sub-national levels, including efforts to enhance dissemination o f service contracts, and monitoring and evaluation o f service delivery by beneficiaries, c i v i l society

Ineligible capacity building interventions

CBF i s no t t o be used for investments where the contributions to services improvements are not readily demonstrable. These include:

Investment into commercial ventures.

The purchase o f motor vehicles.

Civil works for general administrative purposes.

General administrative expenditures.

Staff salaries.

Activit ies funded from other sources.

Training activities outside o f the Afr ica Region.

Single proposal exceeding US$300,000

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Eligible capacity building interventions

groups and the private sector.

Ineligible capacity building interventions

Expected resultshdicators: The benchmarks (stated in the following table) for each ministry are met.

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1 d

Responsible Ministry viinistry o f jinance

Indicative areas o f engagen Issues

Strengthen budget process, monitoring, Medium Term Expenditure Framework (MTEF), and capacity o f MOF.

Poor governance and management of cooperatives.

Improve the enabling environment for agricultural growth

Implement Private Sector Reforms

There are serious impediments to business enny (for both unincorporated and incorporated businesses) and transaction costs are high.

Excessive and outdated licensing regime. the cost o f doing business in Kenya

Systematic Monitoring of Economic Indicators

External audit o f local authorities brought up to date.

nt for IRCB support to benchmarks in ERSL Benchmarks in ERSSC

For the 2005/06 budget, the authorities have prepared, and cabinet has approved, a Budget Strategy document (MTEF) by March 2005 that lays down budget priorities and ceilings by vote to IDA’S satisfaction. The Budget Strategy document forms the basis for the 2005106 line item budget.

The 2006/07-2008/09 MTEF i s consistent with the ERS priorities and findings of the annual PER and annual ERS review. The government implements improvements in the regulatory and legal framework for the coffee sector, which allow for increased private sector investment and higher returns to the smallholder farmer, including regulatory function

Continue to implement recommendations o f the Strategy for Revitalizing Agriculture, including:

Irrigation Board reforms to reduce public role in rice m i l l s , develop irrigation policy and build capacity o f producers and private sector to manage irrigation assets

The cabinet has approved the privatization strategy and privatization bill has been published for presentation to the National AssernbIy

The government completes a thorough review o f business entry procedures for both unincorporated and incorporated firms, with a v iew to streamlining and minimizing registration requirements, including a thorough review o f Kenya’s Companies Act.

The Government takes a radical approach to overhauling the licensing regime, by establishing a legal framework and a Task Force to review the license inventory, developing a p lan for a phased review, and reviewing 50 licenses as first phase o f p lan whereby licenses no longer serving u s e f i l purpose are eliminatec An annual ERS progress report i s prepared that proposes appropriate changes to the ERS while taking into account the recommendations o f the JSA o f the ERS prepared by the Bank-Fund staff.

A new accounting and reporting framework i s approved for central government, FAs, SAGAS, and Las; Recommendations of the audit are implemented.

Ministry o f 4griculture

Ministry o f Finance (Investment Secretary’s Office)

Ministry o f Trade and Industry

Ministry o f Planning and National Development

Ministry o f Local Government

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Subprogram 2.2: Transformative Leadership and Ethics for Results Based Management (US$2.30 million):

Status: Kenya faces the challenge o f undertaking comprehensive and sequenced reforms within a very fluid coalition government crafted from very diverse constituent parties and partners. Moreover, there i s need to recover clarity o f roles and enhance leadership capacity within the executive, where, over time, a number o f constitutional and legal requirements governing Cabinet and higher C iv i l Servant roles have been neglected with dire consequences on delivery o f service, staff performance and accountability. To focus on service delivery, the Government has embarked o n an agenda to transform the Public Service from being a process oriented organization to one focused on results. The Results Based Management (RBM) approach i s the vehicle through which these reforms wil l be achieved.

Objective: The objective o f this component i s to enhance the Government’s ability to deliver on the public sector reform objectives set out in the broader program. This component wil l focus on enhancing the change management capacity o f leaders in the Public Service and their teams. It wil l also enhance the development and promotion o f a value system and code of ethics developed from existing legislation as well as best global practice as a tool to rejuvenate the service orientation and accountability o f public servants. I t wil l build on a pi lot program o f activities on changing the ethos and practices of the leaders to be more effective in transforming the public service in support of the Economic Recovery Strategy, especially in leading teams to accept and implement Results Based Management as the main vehicle for driving reforms.

Proposed Activities: Specifically, four types o f activities are envisaged to support the focus ministries in enhancing change management capabilities and resuscitating an ethical orientation in public management as a complement to institutional reforms.

Analytical Work to Generate Global Best Practices and Comparative Lessons: This set o f activities will provide Government with global knowledge to implement good practices in the content, pace and sequence o f programming to support the leadership and ethics component across Government. This research and analysis wil l provide a rigorous and constantly updated knowledge base for the program to integrate the best lessons in this relatively new field in pol icy practice and academic research and in which new knowledge and experiences are constantly emerging from comparable reform programs across the world.

(ii) Implementation of Leadership and Ethics capacity building in the Five Focus Ministries: Through various instruments (see below), this component wil l inculcate and propagate anew values and ethical principles based o n the Public Officer Ethics Act (2003) as well as provide training and support to enable public servants to model transformative leadership principles in the reform effort and in regular service to the public and to adopt ethical frames in decision-making. The following are some o f the instruments that wil l be used to achieve this goal:

Analytical work to support a better understanding o f the specific environment o f reform in each ministry or management unit and to

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(iii)

establish a baseline and support planning, implementation and monitoring o f progress. Such analysis would also support specific technical methodologies (e.g. 360-degree feedback) for leadership training;

0 Workshops, RetreatsAIialogues for leaders in each ministry focused on intensive peer-to-peer learning; experiential learning; and technical knowledge workshops to enhance the political leadership necessary for the reforms to succeed. Workshops/dialogues wil l also include globally recognized faculty and practitioners on transformative leadership, ethics and values in public sector management;

Coaching/Twinning for selected leaders in the focus ministries and management units to establish peer-coaching or other close advisory relationship between reform leaders at various levels (ministers, permanent secretaries, agency heads) to have a ready network o f technical, process, and professional support. Coaches wil l be technically-savvy persons leading change in similar environments in other countries could provide guidance and support for leading change;

0 Technical support for specific re-engineering processes beyond leadership and ethics, such as technical assistance in the adoption and implementation o f Results-Based Management, Rapid Results methodologies, stakeholder analysis, etc.

Implementation of Leadership and Ethics capacity building in critical Government institutions with across-the-board functions, including in training, leadership and oversight:

Workshops and RetreatslDialogues for leaders in government focusing on a) Cabinet ministers and Assistant Ministers, and b) Permanent Secretaries and Accounting Officers in al l ministries focused on intensive peer-to-peer learning; experiential learning; and technical knowledge workshops to enhance the political leadership necessary for the reforms to succeed. Workshops/dialogues will also utilize globally recognized faculty and practitioners o n transformative leadership, ethics and values in public sector management.

0 A related sub-component wil l be building up technical and human resource capacity at Kenya Institute o f Administration, the principal govemment training institutions for the specific tasks o f government (e.g. induction courses for new administrators at a l l levels). The capacity building wil l focus o n mainstreaming public sector ethics in the Institute’s regular curricula, establishing a leadership resource center for c iv i l servants, and re-training through coaching and mentorship support o f the Institute’s trainers to be able to replicate and propagate the new interventions so they become a regular offering at the Institute.

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(iv) Monitoring and Evaluation: Apart from regular and typical monitoring and evaluation o f the activities and results, this sub-component wil l provide technical assistance to strengthen and build capacity in monitoring o f leadership and ethics capacity building work and their impact on broader reform and performance. The project team wil l work closely with other agencies tasked with monitoring and evaluation as wel l as M&E departments o f the focus ministries to build capacity for coordinating M&E activities and developing tools and methods for effective continuous evaluation o f leadership and value and ethics capacity and execution. The project team wil l also ensure that monitoring o f programs includes systematic and timely dissemination o f the M&E information.

Expected Results: The following result/outcomes are expected from the implementation o f this component:

0 A reinforced respect for shared values and ethics in Public Service; this should be modeled by leaders in the Executive and be invigorated throughout al l levels and arenas o f government;

0 A transformed team oriented and cohesive Public Service, motivated by corporate discipline, and an alignment to a shared vision and strategic direction;

0 Enhanced and high performance standards in the delivery o f timely and cost effective services, as a result o f the implementation o f the Results Based Management (RBM) approach; and

0 A clarity on the roles, relationships, responsibilities, and accountabilities o f leaders as in the Public Service in change management, especially in the focus ministries but with expected spillover effects.

Component 3. Project Management and Coordination (US$0.74 million):

Status: The Ministry o f Finance established a PFM coordinating unit in February 2005 to coordinate the PFM reform. However, the unit lacks the expertise in fiduciary issues. The task o f coordinating project activities requires a strong monitoring and evaluation system to collect and analyze data that would be used to assess progress in the reform areas. A reform o f this nature also requires systematic information, education and communication to al l stakeholders to understand the rational for the reforms and progress been made. This, therefore, requires the recruitment o f short-term consultants to perform both M&E and I E C work o n an as-needed basis.

Objective: The objective o f this component i s to provide an effective and efficient coordinating body and process that ensures that ensures that IRCBP implementation, especially in Financial Management, complies with the Sector Wide Approach Financial Management Guidelines. Resources wil l be provided under this sub-component to help this Unit in accessing, and then mainstreaming, the required technical support for achieving the development objectives o f the Government’s public sector management improvement program. The Unit i s expected to require

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expertise in addressing cross-cutting themes such as Monitoring and Evaluation (M&E), and in developing and implementing a communication strategy.

Proposed activities: The component wil l provide h d s for technical assistance and equipment contract short-term consultants for the effective coordination and monitoring o f project activities. These include:

Coordinating the preparation o f annual work plans o f al l the implementing agencies;

Coordinating the preparation, monitoring and reporting on the execution o f the procurement plan o f the Project for the procurement o f goods, works and services consistent with the provisions o f the Development Credit Agreement and the Procurement Guidelines o f the world Bank;

Ensuring that implementation o f project activities i s in compliance with the Project Implementation Manual;

Managing the project Special Account in compliance with financial covenants o f the project and the World Bank Financial Management Guidelines;

Managing Government Counterpart Project Account in compliance with the Project Implementation Manual;

Providing logistical and any other support to both international and local consultants recruited under the project;

Coordinating and commissioning M&E activities under the project; and

Preparation o f a Quarterly Project Progress Report for the Government and the World Bank Task Team Leader o f the Project.

In addition to the above, this component will work closely with the staff o f the recently established Monitoring and Evaluation Department in the Ministry o f Planning, the Public Sector Reform and Development Secretariat in Office o f the President, and the Central Bureau o f Statistics to build capacity for coordinating M&E activities and developing tools and methods for public expenditure studies being undertaken by various groups in the country. The expected output here i s the information from these surveys will help reorient management to focus on outputs and results, and provide an objective for planning and formulating hture programs for public services. Additionally, these surveys will also provide quantitative data necessary for performance indicators, which are essential to the results-based management framework. The project team wil l also work with MED to develop an institutional mechanism to ensure that monitoring o f pubic expenditure programs i s accompanied by systematic and timely dissemination o f the M&E information.

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I t wil l also provide support to the newly created Public Sector Reform and Development Unit within the Office of the President to implement a system o f performance management geared towards delivering “Results for Kenyans”. The introduction o f performance contracts for public sector managers and their staff are supposed to create incentives to improve performance and accountability by undertaking to deliver specific outputs in l ine with their annual work plans, strategic plans and the ERS as wel l as Millennium Development Goals.

Expected results : (i) Timely production o f annual work plans and procurement plans;

(ii) Annual audited project accounts are complaint with the IDA FM Guidelines; and

(iii) Procurement practices under the project consistent with IDA Procurement Guidelines.

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Project Cost By Component and/or Activity

1. Public Financial Management 2. Capacity Building for Results

a. Capacity Building Facility b. Transformative Leadership and Ethics for RBM

3. Project Coordination & Management Total Project Costs

Contingency Total Financing Required

Annex 5: Project Costs

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Local US$

(in million) 3.54 3.90 3.01 0.89 0.23 7.67 0.42 8.09

Foreign US$

(in million) 12.05 3.56 2.30 1.26 0.47

16.08 0.83

16.91

Total US%

(in million) 15.59 7.46 5.31 2.15 0.70

23.75 1.25

25.00

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Annex 6: Implementation Arrangements

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

The project execution agency will be the Ministry o f Finance.

Steering Committee: This committee will be chaired by the Permanent Secretary, Ministry o f Finance and will include al l the Permanent Secretaries o f the beneficiary Min is t r ies (Local Government, Planning and National Development, Agriculture, Trade and Industry, and Finance), including the Secretary Public Sector Reform and Development in the Office o f the President. This Committee wil l also include nominated non-government members from c iv i l society including professional bodies. The committee wil l oversee the implementation o f al l reform programshnitiatives including Results Based Management and the Capacity Building Facility, and will provide overall pol icy guidance as well as assume risk-management responsibilities o f the project.

Permanent Secretary, Ministry of Finance:

The PS/MoF wil l be the Accounting Officer for the project. As such, he wi l l assume the responsibilities and obligations set out in Chapter 5 o f the Government Financial Regulations and Procedures (GFRP) of the Government o f Kenya, and will be accountable to Parliament. H e wil l be responsible for the project achieving the objectives set forth in the logical framework. H e wil l issue al l Authorizations to Incur Expenses (AIEs) to other Government Min is t r ies or departments and wil l thereby assume the responsibilities set out in Paragraph 5.7.3 o f the GFRP. H e wil l submit al l requests for no objection to the Bank. H e will have overall responsibility for al l project financial, procurement and progress reporting, and wil l bring to the attention o f the Bank in his reports any issues that might prevent any component o f the project from delivering i t s planned outputs on time and within budget.

PFM Technical Advisory Committee:

This committee wil l be appointed by the PS, Finance, who i s the Accounting Officer o f the project, drawn from relevant people involved in PFM implementation within and outside o f government to provide advice on broader financial management issues in government and more importantly on effective project implementation.

Technical Committee for Capacity Building Facility:

This committee wil l review al l proposals submitted for accessing the Capacity Building Facility and provide recommendations to the National Steering Committee who will approve the use o f the finds. This committee wil l draw from expert support familiar with the eligibility criteria o f the finds as well as the agreed benchmarks in the ERS. The Permanent Secretaries o f the five beneficiary ministries wil l each nominate one technical person to be on the committee, and will also include representatives of the private sector such as the relevant sector Chairs o f the Kenya Private Sector Alliance (KEPSA), and other public sector governance c iv i l society organizations.

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Transformative Leadership and Results Based Management (RBM) Review Committee:

This committee will be chaired by the Secretary, public sector reform and development, and wil l comprise o f the Permanent Secretaries o f the five ministries (Local Government, Planning and National Development, Agriculture, Trade and Industry, and Finance) being fast tracked in the leadership and capacity building program. This committee will provide leadership in the implementation of RBM and wil l also advice on broader leadership, ethics, and more importantly, on effective project implementation.

Public Financial Management Coordination Unit (PFMCU):

The PS, MoF, will be supported by a small team o f civil servants who will be in the PFMCU in the Ministry o f Finance. Since the implementation o f the overall program i s going to be mainstreamed within Government, the Coordination Unit wil l ini t ial ly require the expertise o f short-term Consultants who will help build the capacity o f the government officials and act as “mentors” to guide them in understanding various implementation issues such as procurement, project accounting, project management, and other cross-cutting themes such as Monitoring and Evaluation (M&E), and in developing and implementing a communication strategy. The Unit will in a competitive process identify government officials who wil l assume responsibilities for program management, project accounting, procurement, monitoring and evaluation, and for information, education, and communication (IEC). The unit will help the PS MoF to meet his responsibilities as the Accounting Officer o f the project, and wil l assist the component managers in the implementation agencies with procurement, financial management, reporting, and communications about the project. The role of the Coordinating Unit i s to catalyze, monitor and evaluate the reform process, to integrate the various donor activities, and to publish progress reports on a regular basis. Consequently, they wil l contract out al l needed consultancy assignments. At the level o f ministries, departments, and agencies, the heads would be responsible for the integration o f the different components into government operations.

Coordinators:

Coordinators in each of the implementing ministries, departments or agencies wil l be responsible for managing the resources provided to produce the outputs required for the project to achieve i t s objectives. These resources are defined in the logical framework and the project implementation plan. Each implementing agency wil l appoint the necessary staff to support the Coordinators.

Each component o f the project would be implemented according to terms and conditions acceptable by the Bank. These would generally provide the basis for time-bound action plans. Training and capacity building activities will be carried out according to agreed timetables either with government training institutions or through contracts awarded through competitive bidding. A detailed implementation plan wil l be agreed upon between the Government and the Bank before project effectiveness. The implementation plan wil l be regularly updated and discussed with the Bank during project implementation.

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The implementation process wil l be coordinated with other Development Partners contributing to P F M reform.

Institutional Arrangements for Managing the CBF.

Objective: The objective of this component i s to provide capacity building support to the five key ministries that are critical to the achievement o f the prior actions identified in the ERS.

Finance

. National Steering Committee Reviews recommendations and approvesidisapprove funding of proposals

Technical Committee evaluates and appraise proposals and make recommendations to the PS/AOSC

Proposals are prepared by the

participating ministr ies and

forwarded

Government Development and Industry

74

Annex 7: Financial Management and Disbursement Arrangements

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

A. FINANCIAL MANAGEMENT ARRANGEMENTS

FINANCIAL MANAGEMENT ASSESSMENT SUMMARY

1. The purpose o f the project’s financial management assessment i s to determine whether the financial management system i s capable o f producing timely, understandable, relevant, and reliable financial information that would allow the Bank, other donors and Government to plan and implement the project, monitor compliance with agreed procedures, and appraise progress towards its objectives. The assessment aimed at determining the project’s readiness to adopt report-based disbursement, the preferred method o f disbursement under pooled financing arrangements.

2. The project will, as much as possible, re ly on mainstream Government financial management systems. I t wil l also build on systems rel ied upon during implementation o f the preceding IDA - financed project, Public Sector Management Technical Assistance Project (PSM-TAP). A brief o f the findings following financial management assessment i s as follows:

(i) Risk management and internal control arrangements - A number o f significant fund accountability weaknesses observed in previous Bank funded projects are attributed to the absence o f an effective risk management function. The fol lowing institutional arrangements are proposed:

0 Internal audit function - An internal audit function responsible for oversight o f the activities o f project accounting and internal control functions i s required. The function will also conduct independent institutional r i s k assessments on an ongoing basis, monitoring compliance with laid down policies and procedures, and reviewing and recommending enhancement o f accounting and internal controls. T o ensure effectiveness, i t i s proposed that this function be carried out by the Government Internal Auditor General whose office i s being supported by the project and other donor initiatives to adopt an effective risk-based audit approach.

0 Audit committee - The Program Steering Committee wil l be expected to compose a risk management function to which auditors will report. Responsibilities o f this committee wil l include (i) monitoring overall project implementation progress and ensuring timely resolution o f emerging issues; (ii) reviewing quarterly Financial Monitoring Reports; (iii) reviewing reports o f Internal Auditors, External Auditors, Development Partners and other independent reviewers and monitoring t imely implementation o f recommendations; (iv) overseeing the enforcement o f effective project risk management function; (v) monitoring the performance o f k e y project staff against approved performance contracts; and (vi) ensuring compliance with corporate governance best practices.

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(iii) F u n ding arrangements arrangement comprising

- The project proposes a diversity o f funds f low pooled and non-pooled funding arrangements for IDA

funded activities and parallel financing by some Development Partners for selected program activities. This arrangement poses management challenges regarding the retention o f a sufficiently coherent yet simple project.

3. Fundsflow and accountability arrangements - W h i l e i t i s intended that reliance be placed, as far as possible, on mainstream Government funds f low arrangements, there are a number o f critical weaknesses that must be addressed before such arrangements are considered acceptable under proposed funding arrangements. These comprise:

(0

(ii)

(iii)

Simplification of accounting processes - Unnecessarily long fund remittance and payment processes should be reviewed. Program management should conduct internal reviews and assessments o f payment processing procedures with a view to improving efficiency, effective control and timeliness. K e y considerations in the process wil l include (i) adoption o f simplified accountability guidelines and procedures for implementing entities; (ii) realigning the role o f technical oversight functions from involvement in routine transaction processing to conducting independent reviews; (ii) developing effective accountability follow-up processes by consolidating the responsibility under a Program Coordinating Unit, and (iii) development o f benchmark transaction processing timelines to be adopted and monitored.

Operation of Special Accounts - Bureaucratic delays in the remittance o f project funds from Special Accounts through CBK, M o F and ultimately to respective Project Accounts should be reviewed and unnecessary approval processes eliminated.

Accountability arrangements - It i s proposed that non M o F based activities are budgeted centrally under MoF. This calls for effective coordination and collation o f funds f low and accountability information so that negative effects o f inter- ministeriavinter-institutional bureaucracies are minimized.

4. Quarterly financial monitoring reporting - Financial Monitoring Reports (FMR) have been identified as the preferred basis o f funding disbursement under proposed funding arrangements. A number o f difficulties are envisaged in rol l ing out this funding mechanism:

(i) Collation of monthly accountabilities - Given the large number o f implementing and reporting entities, i t i s critical that the capacity o f respective units to prepare comprehensive, yet simplified and standardized monthly statements o f expenditure and fund balances i s developed as soon as possible. Under this arrangement, i t i s expected that the Program Coordinating Unit collates and submits implementing entities’ financial accountability and project implementation progress information o n a timely basis.

76

(ii) FMR preparation capacity - Program management’s capacity to prepare and submit quarterly FMRs i s assessed as weak. I t i s recommended that a sufficiently large pool o f competent personnel be developed ahead o f credit effectiveness.

5 , Financial management manual - The project’s accounting and internal control procedures will b e documented in a Financial Management Manual. The manual wil l incorporate MoF financial management guidelines tailored to project-specific requirements. The manual i s expected to take account o f proposals in this assessment, notably the role o f internal audit, responsibilities o f the Program Coordinating Unit and risk management oversight responsibilities o f the Program Steering Committee. The manual should also include guidelines for financial operations o f respective implementing entities. I t will be subject to review and approval by the IDA and other Development Partners participating in the pooled funding arrangements ahead o f credit effectiveness.

6. Institutional and staffing arrangements - The Program Coordinating Unit wil l be responsible for the overall financial management o f the project. Project activities wil l as far as possible, be based on existing institutional arrangements, including implementing entities’ accounting and reporting systems. Matters requiring attention in order to ensure the establishment o f reliable accounting and internal control systems include:

(9

(ii)

(iii)

Appointment o f a Financial Management Coordinator - Owing to (i) the diversity o f implementing entities; (ii) the need for timely follow-up o f fund accountabilities; and (iii) the requirement to collate large volumes o f financial information for preparation o f quarterly FMRs; it i s recommended that the project establishes a Financial Management Coordinating (FMC) role at the coordinating unit.

F M C terms o f reference - It is proposed that the mandate and functioning o f the F M C be clearly set out in mutually agreed terms o f reference. Specific responsibilities wi l l include (i) preparation o f consolidated Financial Monitoring Reports including fund accountability, project progress, procurement progress and projected periodic cash f low requirements; (ii) follow-up o f implementation o f audit findings and related risk management recommendations o n behalf o f the Program Steering Committee; (iii) donor coordination; and (iv) providing technical advice to the Program Steering Committee.

Financial management staffing - There i s need to enhance the technical capacity o f the project’s proposed financial management staff, particularly the filling o f vacant positions and training o f key staff in financial monitoring reporting.

7. Annual financial reporting and independent audit arrangements - Under Kenyan legislation, the responsibility to audit al l Government funds and activities i s vested in the Kenya National Audit Office, which i s mandated to subcontract such services in the event o f capacity or other constraints. Due consideration wil l be taken o f the KNAO capacity and commitment to ensuring compliance with Government and Development Partners’ requirements for timely

77

auditing and reporting. There has been significant improvement in the office’s ability to ensure timely auditing and reporting o f donor-funded projects’ financial statements. The C A G i s agreeable to placing reliance on the work o f internal audit, subject to the effectiveness o f proposed independent internal oversight arrangements.

8. Joint Financing Agreement - Development Partners participating in the pooled funding arrangement will enter a Joint Financial Agreement (JFA) that spells out, among other matters, agreed procedures to be adopted under the project including (i) institutional arrangements, (ii) procurement, (iii) financial management and disbursement, (iv) interim and annual reporting, (v) annual audit and (vi) joint consultation, information, monitoring and evaluation arrangements. The draft JFA was agreed by Development Partners during project appraisal.

9. Financial management action plan - The outcome o f this review i s included in a financial management improvement plan comprising actions to be completed prior to credit effectiveness and ongoing actions to be followed up during project implementation.

COUNTRY ISSUES

10. The current Government that came into office in December 2002 has made a commitment to strengthen the financial management and control environment in order to achieve economy, efficiency and effectiveness in the use o f public funds. With the support o f a number o f donor assisted initiatives, including the PSM-TAP, Government i s seeking to rapidly enhance the financial accountability framework, particularly through strengthening legislation related to public financial management and the audit o f public funds.

11. The most recent piece o f diagnostic work that provides an up to date critical assessment o f issues that may impact on this operation at country level i s an ongoing Country Integrated Fiduciary Assessment (CIFA). A new Country Assistance Strategy (CAS) was effected in M a y 2004. Both these works have reviewed government’s performance since the last Country Financial Accountability Assessment (in 2001) and CAS (in 1998). A recurring theme i s that pol icy changes agreed under past and ongoing projects have not been implemented consistently. Project implementation has generally been slowed down by constraints in the f low o f resources and limited absorptive capacity arising from bureaucratic processes in Government.

12. The 2004 Country Portfolio Performance Review (CPPR) highlights Government’s commitment to improving portfolio performance, particularly in the last three years, and agreement was reached o n several key issues, some o f which have been applied in the design o f this operation. These include actions to improve audit compliance, closer monitoring o f project performance by M o F and improvements in the f low o f project resources.

13. More recently, a forensic audit o f selected projects in IDA’S portfol io highlighted significant fund accountability and risk management weaknesses in Government systems, The report notes that poor Government management against fraud risk, weak oversight, l o w capacity (particularly in accounting staff), project supervision that focuses more o n documentation rather than physical evidence o f implementation, and conhsion over Wor ld Bank and Government requirements allow for a high possibility o f corruption. There i s also insufficient managerial

78

accountability for overall performance, service delivery and corruption, and the Government could make greater use o f administrative sanctions. Issues raised in this report are core subject matters underlying the project’s objectives.

FINANCIAL MANAGEMENT SYSTEMS

14. Internal controls andfinancial management guidelines - The project’s internal controls are based on Government’s established accounting and internal control systems and documented in financial operations manual and guidelines. A project specific manual will be developed and subject to review by the IDA FMS prior to project effectiveness.

15. Planning and budgeting - Budgeting for the program has been undertaken centrally by M o F in consultation and with extensive detailed input by the respective implementing entities. The budget is based on the Government Medium Term Expenditure Framework (MTEF). Proposed periodic reporting guidelines require periodic activity, cash f low and procurement projection, analysis and review on an ongoing basis, included in quarterly FMRs that wil l form the basis o f requests for reimbursement o f funds.

16. Books of accounts and list of accounting codes - The project’s accounting records will be maintained o n respective implementing entities’ accounting systems. The codes relating to the project wil l be integrated in Government’s existing Chart o f Accounts that matches the classification o f financial statements.

AUDIT ARRANGEMENTS

17. Internal audit - There are ongoing initiatives at the Government Internal Auditor General’s department to realign the functioning o f internal audit along best practice guidelines issued by the international Institute o f Internal Auditors, including implementation o f systems compliance and risk based approach. The effectiveness o f internal audit i s expected to be complemented by the institution o f Ministerial Audit Committees that will support the demand for internal audit services and follow-up o f internal audit findings. I t i s recommended that a risk management oversight function to be vested in the Program Steering Committee be established as soon as possible, ahead o f credit effectiveness.

18. External audit - Under Kenyan legislation, the responsibility to audit a l l Government funds and activities i s vested in the Kenya National Audit Office, which i s mandated to subcontract such services in the event o f capacity or other constraints. There have been significant improvements in the office’s ability to ensure t imely auditing and reporting. The office i s considered to be sufficiently independent, applied internationally acceptable auditing guidelines and therefore, acceptable to IDA.

REPORTING AND MONITORING

19. Financial monitoring reports - The form and content o f periodic financial monitoring reports were developed and agreed ahead o f project negotiation. Primary contents o f quarterly FMRs should comprise (i) Financial Reports, including a statement o f sources and uses o f funds

79

Risk Misuse o f and failure to account for project funds

Ineffective audit functions

by funding source, a statement o f uses o f funds by project activity/component; and fund balance statements supported by bank statements (ii) Physical progress (output monitoring) report and (iii) a procurement plan and progress report. FMRs will cover al l project activities, including Government counterpart funding, resources provided by partners not participating in the S WAp arrangement and non-cash contributions wherever reasonably quantifiable.

Rating Mitigating arrangements S Institution o f independent and effective internal

Consolidation o f fund accountability follow-up audit and risk management function.

responsibility under FMC.

S Institution o f a risk based approach by internal audit and employ international best practices. Institution o f a Risk Management function to be vested in the Program Steering Committee.

0 C A G assessment and reliance on internal audit function.

20. As FMRs will form the basis o f periodic funding disbursements by Development Partners, they will include a detailed report o f projected cash requirements for each ensuing 6 months period supported by (i) a procurement progress report and related cash f low projection and (ii) a fund balance statement supported by bank balance certificates and reconciliation statements.

21. Annual financial statements - The program’s financial statements shall be prepared in accordance with International Public Sector Accounting Standards (which inter alia includes the application o f the cash basis of recognition o f transactions). Indicative formats o f financial statements wil l be agreed during negotiations.

22. IDA funding agreements require the submission o f audited financial statements, taking into consideration the 2003 Audit Policy Guidelines o f the Wor ld Bank, within six months after the year-end. Similar agreement with Development Partners will be included in the JFA.

IMPLEMENTATION SUPPORT PLAN

23. Joint implementation support missions by Development Partners wil l be conducted at least every six months. The mission’s objectives wil l include that o f ensuring that strong financial management systems are maintained for the project throughout i t s l i fe. In addition, Statement o f Expenditure reviews wil l be carried out regularly to ensure that expenditures incurred by the project remain eligible.

B. OVERALL RISK ASSESSMENT SUMMARY OF PROJECT-SPECIFIC R I S K S AND PROPOSED MITIGATING ARRANGEMENTS

24. The summary o f project-specific risks and proposed mitigating arrangements i s as

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Type of Risk

Inherent Risk 1. Corruption

2. Poor governance

3 , Weak Judiciary

4. Weak Management

~

De layed funds f l o w

Risk Rating

S

S

S

M

Inef fect ive p rog ram oversight and r i s k management functions

Overall Inherent Risk

S

S

0 Streamlining o f quarterly FMR report ing

0 Remova l o f unnecessary bureaucratic approvals in arrangements.

Special Account fund remittances.

-

2. FundsFlow

S

- -

capacity o f various implementing entities The 2004 CPPR action plan i s monitored o n a quarterly basis

S

capacity

3. Staffing

4. Accounting Policies and Procedures

5. Internal Audit

6. External Audit

0 Inst i tu t ion o f a R i s k Management funct ion to b e vested in the Program Steering Commit tee.

0 Inst i tu t ion o f a r i s k based approach by in ternal audi t and emp loy internat ional best practices.

0 CAG assessment and rel iance on internal audit function.

M

M

S

M

There are ongoing initiatives to improve the technical capacity o f various implementing entities The project’s FM manual will be modified to take account o f lessons learnt under PSM-TAP Significant strengthening o f the function i s included in pr ior actions The capacity of the National Audit Office has improved simif icant lv and i s being: monitored

OVERALL RISK ASSESSMENT:

:nt and summary o f m i t i ga t i ng measures i s as fo l lows: Risk Mitigating Measures

Government and sector-specific anti-corruption action plan to be considered and monitored. Government and sector-specific anti corruption action plan to be considered and monitored. Government has prepared a governance action plan that has been considered andis being monitored. Appropriately qualified and competent management staff to be employed at the Program Coordinating Unit.

Proposed deployment and training o f competent financial management staff at remective imdementine entities.

Control Risk I I 1. Implementing Entities M I There are ongoing initiatives to improve the technical

, Y Y

7. Reporting and I M I A report based disbursement mechanism i s proposed under

81

Monitor ing 8. Information Systems

Overall Control Risk

this operation Existing systems are assessed as sufficiently capable o f accounting for project activities

M

M

26. The project financial management risk i s assessed as being moderate provided that the financial management arrangements are properly implemented and the financial management action plan satisfactorily addressed.

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Proposed Funding Arrangements ~

Pooled funding with funds remitted through the pooled account and commingled in the Exchequer and Project Accounts.

Non-pooled funding with funds remitted through a Special Account through the Exchequer Account to a Project Account.

Parallel financing o f selected activities though respective Special Accounts and non- commingled Project Accounts.

C. FINANCIAL MANAGEMENT ACTION PLAN

1.

2.

1. Actions required prior to negotiations: Action 0 N o actions required

Development Partner IDA and Development Partners

IDA

2. Actions required prior to credit effectiveness: Action 0 Financial Management Manual prepared, reviewed and agreed 0 Recruitment o f FM Consultant completed for the Program Coordinating Unit 0 Quarterly financial monitoring reporting arrangements in place

3.

3. Actions required following credit effectiveness: Action

Non-pooling Development Partners

0 Project independent audit arrangements completed 0 FM capacity o f implementing entities improved

D. DISBURSEMENT ARRANGEMENTS

27. pooled funding arrangements for IDA funded activities and parallel financing by some Development Partners for selected program activities. Expenditures related to components A and C wil l be financed from the pooled account and those relating to B and C (Public Financial Management Related Expenditures) wil l be financed from one Special Account afier which funds will be transferred to the pooled account, and those relating to B and C (Public Financial Management Related Expenses pending the operationalization o f the Pooled Account and Public Service Reform Secretariat Related Expenditures) wil l be financed from another Special Account, These are summarized as follows:

The project proposes a diversity o f funds f low arrangement comprising pooled and non-

Component Public Financial Management

Capacity Building Facility and Project Coordination Unit Public Financial Management

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Government

Building arrangements.

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POOLED FUNDS

28. Requests for disbursement by Development Partners for activities to be financed from pooled funds wil l be made on the basis o f approved work plans cash f low projections for eligible expenditures (report-based disbursements). Development Partners wil l disburse Init ial Deposits in agreed proportions from the proceeds o f respective Credits into respective Special Accounts to expedite project implementation. The total Initial Deposit shall be determined o n the basis o f projected cash flow requirements for the initial 6 months o f program operation. Advances will be transferred to a commingled Project Account through the Government Exchequer Account in l ine with normal practice. Funds in the Project Account, to be managed by the Program Coordinating Unit will be used by the borrower to find eligible program expenditures, based on approved work plans. Such funds may be expended directly or transferred to respective implementing entities’ Operating Accounts.

29. Subsequent replenishment o f respective Special Accounts to be made in agreed proportions shall be on the basis o f projected cash requirements for the ensuing 6 months period supported by work plans and cash f low forecasts and taking account o f reported fund balances as presented in FMRs.

SPECIAL ACCOUNT FOR NON-POOLED EXPENDITURES

30. Disbursements would be made in accordance with traditional disbursement procedures and not report-based disbursements. Should the Country request the use o f report-based disbursements in the future, the Association would consider their request. 31. Replenishment o f funds to the Special Account will be made upon evidence o f satisfactory utilization o f the advance, reflected in SOEs and/or on full documentation for payments above SOE thresholds. Replenishment applications would be required to be submitted regularly.

Direct payment

32. The direct payment method, involving direct payments to suppliers for works, goods and services may be made upon the borrower’s request. Payments may also be made to a commercial bank for expenditures against pre-agreed special commitments. Respective Development Partners’ Disbursement Letters will stipulate the minimum application value for direct payment and special commitment procedures. This method o f accessing funds will, however, be l imited to large expenditures whose thresholds will be provided in respective funding agreements. Expenditures under this arrangement wil l be included in quarterly FMRs.

REMEDIES

33. If ineligible expenditures are found to have been made from Special Accounts, the borrower wil l be obligated to refund the same. Such refund would be in direct proportion to respective partners’ contributions in the case o f pooled financing, as provided in the JFA. If Special Accounts remain inactive for more than six months, Development Partners may reduce the amount advanced.

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34. Development Partners will have the right, as to b e ref lected in respective funding agreements, to suspend disbursement o f the funds if significant terms o f funding agreements, inc lud ing repor t ing requirements, are not compl ied with.

DISBURSEMENT SCHEDULE

Category

Subprograms

Capacity Building Subprojects under Part B o f the Project

Goods under Part B.2 o f the Project

Consultants Services & Training under Part B.2 o f the Project

Operating Costs Unallocated

Amount o f the Credit Allocated

(Expressed in SDR Equivalent

11,030,000

3,700,000

450,000

1,200,000

20,000 900,000

% o f Expenditures

to be Financed 90% o f Eligible Expenditures and thereafter such % o f Eligible Expenditures as the Association shall determine from time to time

90% o f amounts disbursed

100% o f foreign expenditures and 94% o f local expenditures

100% o f foreign expenditures and 94% o f local expenditures

90% for FY2006l2007

Total 17,300,000

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Annex 8: Procurement Arrangements

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IE3RD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers'' dated M a y 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement activities wil l be carried out as follows:

0 Procurement procedures for goods and services under the PFM component. Procurement o f goods and services wil l be carried out in accordance with the procedures agreed among the Development Partners participating in the pooled funding and as set out in the Program Procurement Manual. I C B contracts wil l be awarded in accordance with IDA Procurement Guidelines. Consultancy services that may require inputs from consultants with international experience will be procured in accordance with IDA Consultants Selection Guidelines. Procurement o f goods and services whose contract values are below the I C B threshold wil l fol low the government's procurement procedures. Whenever there i s conflict between the procedures in the Program Procurement Manual and the government procurement rules, the procedures in the Program Procurement Manual shall prevail.

0 Procurement procedures for goods and services under the CBLE component. Procurement of I C B contracts for goods and services will fol low IDA Procurement Guidelines. Consultancy services where the shortlist i s to be selected through a Request for Expressions o f Interest (REI) advertised internationally wil l be procured in accordance with IDA Consultants Selection Guidelines. Other goods and services and consultancy services wil l be procured in accordance with the government's procurement procedures agreed between government and IDA and prescribed in the Program Procurement Manual.

Procurement of Works: Works procured under this project would include rehabilitation of offices. The procurement will be done using Standard Bidding Documents (SBD) for al l I C B and National SBD as outlined in the Program Procurement Manual and which are consistent with IDA guidelines.

Procurement of Goods: Goods procured under this project would include information systems and related goods, vehicles and various office equipment. The procurement wil l be done using

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the Bank’s SBD for al l I C B and National SBD as outlined in the Program Procurement Manual and which are consistent with IDA guidelines.

Procurement o f consulting services:

Selection of Consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

Particular Methods of Procurement of Consultants’ Services

1. Quality- and Cost-based Selection. Except as otherwise provided in Part B o f this Section, consultants’ services shall be procured under contracts awarded on the basis o f Quality- and Cost-based Selection. For purposes o f paragraph 2.7 o f the Consultant Guidelines, the short l i s t o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may comprise entirely national consultants.

2. Other Procedures:

Selection under a Fixed Budget. Services for assignments which the Association agrees meet the requirements o f paragraph 3.5 o f the Consultant Guidelines may be procured under contracts awarded on the basis o f a Fixed Budget in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Consultant Guidelines.

Least-cost Selection. Services for assignments which the Association agrees meet the requirements o f paragraph 3.6 o f the Consultant Guidelines may be procured under contracts awarded on the basis o f Least-cost Selection in accordance with the provisions o f paragraphs 3.1 and 3.6 o f the Consultant Guidelines.

Selection Based on Consultants ’ Qualijkations. Services estimated to cost less than US$lOO,OOO equivalent per contract may be procured under contracts awarded in accordance with the provisions o f paragraphs 3.1, 3.7 and 3.8 o f the Consultant Guidelines.

Single Source Selection. Services for tasks in circumstances which meet the requirements o f paragraph 3.10 o f the Consultant Guidelines for Single Source Selection, may, with the Association’s prior agreement, be procured in accordance with the provisions o f paragraphs 3.9 through 3.13 o f the Consultant Guidelines.

Individual Consultants. Services for assignments that meet the requirements set forth in the f i rst sentence o f paragraph 5.1 o f the Consultant Guidelines may be procured under contracts awarded to individual consultants in accordance with the provisions o f paragraphs 5.2 through 5.3 o f the Consultant Guidelines. Under the

88

circumstances described in paragraph 5.4 o f the Consultant Guidelines, such contracts may be awarded to individual consultants on a sole-source basis.

Operating Costs: Operating costs to be financed by the Program would be procured using the implementing agencies administrative procedures which are found to be acceptable.

The procurement procedures and Standard Bidding Documents (SBDs) to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Program Procurement Manual.

B. Assessment of the agency’s capacity to implement procurement

With the exception of the Public Service Reform Secretariat, none o f the other procurement units of the other implementing agencies have staff with adequate experience in IDA procurement procedures since the latter have not implemented IDA-supported operations before. The procurement capacity assessment has identified the following procurement r isks:

0 Because o f the multitude o f implementing agencies with weak capacity in executing international procurement procedures, delay in procurement implementation may slow down project implementation.

0 Due to weak capacity, the ability o f these units to adhere to the timeline prescribed in the procurement plans may be jeopardized.

The recommended mitigation actions are the following:

0 Recruitment o f a short-term procurement consultant who would provide procurement advice and on the j ob training to procurement staff o f the relevant implementing agencies. In addition, the consultant will help the implementing agencies to carry out the full range o f procurement activities, from the stage o f procurement planning, tender document preparation (with basic technical input provided by the Client), inviting tenders, evaluating tenders, preparing contract agreements and amendments to be signed by the Client, inspection o f goods and ensuring that payment i s received by the suppliers/contractors/consultants and assistance in dispute resolution with suppliers.

0 Building the capacity o f the implementing units through formal training.

The overall project risk for procurement i s high.

C. Procurement Plan

The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower, the Project Team and the relevant Development Partners o n October 13, 2005 and i s available at Ministry o f Finance, Nairobi, Kenya. I t will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement

89

Description

with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Domestic Proc Expected

Opening cost Pref. Method Bid

D. Frequency o f Procurement Supervision

04. Procure 8 vehicles for use by f ie ld teams 05, Computers & related equipment for ministries,

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended semi-annual supervision missions to visit the field to carry out post review o f procurement actions.

0.22 N ICB 13-Oct-06 0.47 ICB 13-Oct-06

E. the first 18 months o f the program

Details o f the Procurement Arrangements Involving International Competition for

1. Goods, Works, and Non Consulting Services

(i) L i s t o f contract packages to be procured following ICB:

Debt Management

03. Migra t ion f r o m CS-DRMS 7.2 to 2000+ I 0.92 I N 1 ICB I 13-Aug-06 Payroll & Pensions

90

Description

prov/districts

Domestic Proc Expected

Opening cost Pref. Method Bid

N

03. Establish offices for PPOA I 0.39 05. Institutional capacity dev o f PPOA - Equipment I 0.79

Internal Audit

0 1. Conduct specialized capacity enhancements to staff in f ie ld o f CATTs, value for money &forensic audits, etc 0 1. Development o f library & IT infrastructure including acquisition o f server & IT networking 04. Acquisition o f enabling RBAA software & training o n use

External Audit

N ICB 13-Sep-06 N I C B 13-Oct-06

1 3-NOV-06

0.13

0 1. Procure equipment & vehicles Project Coordination & Management

0.66 N ICB 13-Oct-06

02. Provision o f office space, equipment & furniture 06. Establishment o f IT systems for PFM-CU

(ii) ICB contracts estimated to cost above US$lOO,OOO per contract and al l direct contracting will be subject to prior review by the Bank.

0.22 I N ICB 13-Oct-06 0.13 I I C B 1 3-NOV-06

2. Consulting Services

(i) L i s t o f consulting assignments with short-list o f international f i rms .

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ministries/depts review 17. Employee/infonnation data 18. IPPD documentation

0.20 QCBS Yes 2-Oct-06 0.09 QCBS Yes 2-NOV-06 0.13 QCBS Yes 2-Dec-06

0 1. Systems development 0.66 02. Systems support 0.22

QCBS Yes 7 -Mar -0 7 QCBS Yes 6-Apr-07

0 1, Develop programs for clearance o f LA backlog audit 0.66 QCBS Yes 13-Mar-06

legislation 06. Establish monitoring system for aid

0.1 1 QCBS Yes 13-Mar-06

0 1. Undertake study on requirements for transfer from manual & fragmented systems to

02. Prepare ICT strategy for PFM & present to Cabinet for approval 0.20 QCBS

ICT based systems 0.33 QCBS Yes 5-Oct-06

Yes 5-Dec-06

92

Description 0 1, Recruit, train & review scheme o f service

Est. Cost Expected US$ Selection Prior Proposal

million Method Review Submission 0.33 QCBS Yes 2-Dec-06

To enhance the research capacity I 0 1, Undertake needs assessment for research I

0 1, Develop a system program for expansion & strengthening o f existing infrastructure 1.97 QCBS Yes 2-Jan-07

(b) Consultancy services estimated to cost above U S $ l O O , O O O equivalent per contract and al l single source selection o f consultants ( f i rms) wil l be subject to prior review by the IDA.

I staff

(c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than U S $ l O O , O O O equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

0.11 QCBS Yes I 2-Aug-06

The thresholds for Procurement methods and prior review are shown below:

01. Review systems for implementing, monitoring & reporting o f recommendations

Table 8.1 - Thresholds for Procurement Methods and Pria

0.13 QCBS Yes 2-Oct-06

Services

- Review

<100,000 <50,000

~~. ~.

Contracts Subject f Prior Review'

>= 100,000 f i r m s Below 100,000, f i r m s >= 50,000 individuals <5 0,000, individuals All values

N C B

UN Shopping Direct Contracting QCBS QCBS/LCS/SFB/SBCQ Indiv idual Indiv idual Single-Source Selection

All contracts I First contract for each Executing Agency None None All Contracts All contracts None All contracts None All contracts

ICB: International Competitive Bidding NCB: National Competitive Bidding LIB: Limited International Bidding

SBCQ: Selection based on Consultants' Qualifications

QCBS: QualificationsiCost Based Selection LCs: Least Cost Selection UN: Procurement by a UN Agency

SFB: Selection under Fixed Budget

93

Annex 9: Economic and Financial Analysis KENYA: Institutional Reform and Capacity Building Technical Assistance Project

NOT APPLICABLE

94

Annex 10: Safeguard Policy Issues KENYA: Institutional Reform and Capacity Building Technical Assistance Project

This is a category “C” project and there are, therefore, no safeguard policies that wil l be triggered by this project.

95

Annex 11: Project Preparation and Supervision KENYA: Institutional Reform and Capacity Building Technical Assistance Project

~

Planned Actual PCN review November 2004 November 30,2004 Initial PID to PIC November 2004 November 2004 Init ial ISDS to PIC November 2004 November 2004 Appraisal October 2005 October 2005 Negotiations November 2005 November 8-10,2005 BoardRVP approval January 2005 Planned date o f effectiveness Planned date o f mid-term review Planned closing date

March 2006 June 2008 November 20 10

Key institutions responsible for preparation o f the project: 0 Ministry o f Finance 0

0 National Audit Office 0 Kenya Revenue Authority 0

Ministry Planning and National Development

Public Sector Reform Secretariat (in the Office o f the Cabinet)

Bank staff and consultants who worked on the project included:

Name Sahr Kpundeh

H a n y Garnett Smile Kwawukume Reynaldo P. Castro Frederick Stapenhurst

Stephen Ndegwa

Daryoush Kianpour

Lucas Ojiambo Manuel D e la Rocha Gert V a n der Linde

Nightingale Rukuba- Ngiaza Dahir Warsame

Moses Wasike

Hyacinth B rown Nel ia Dinkin

Title Senior Public Sector Specialist Consultant Public Sector Specialist Consultant Senior Public Sector Specialist Senior Public Sector Specialist Senior Information Officer Senior Economist Consultant Lead Financial Management Specialist Senior Legal Counsel

Senior Procurement Specialist Senior Financial Management Specialist Senior Finance Officer Program Assistant

Specialization Public Administration and Political Governance Public Administration Public Administration Project Management/Operations Parliament

Polit ical Governance

Information Technology

Economics Tax Administration Financial Management

Legal Issues

Procurement

Financial Management

Disbursement Issues Project processing

Unit AFTPR

AFTPR AFTPR AFTPR WBIPR

PRMPS

AFTQKL

AFTP2 AFTP2 AFTFM

LEGAF

AFTPC

AFTFM

L O A G 2 I AFTPR

96

Bank funds expended to date on project preparation:

(i) Bank resources: US$160,000 ( i i ) Trust funds: Not applicable (iii) Total: US$160,000

Estimated annual supervision cost: US$120,000

97

Annex 12: Documents in the Project Fi le

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Country Assistance Strategy (2004 - 2007) Investment Program For ERS For Wealth and Employment Creation (2003-2007 PEMAAP E F M A P Strengthening Government Finance & Accounting Functions - GOK, Ministry of Finance 18-Month Work Plan and Procurement Plan, GOK, Ministry o f Finance Program Procurement Manual, GOK, Ministry o f Finance Procurement Assessment, IDA Financial Management Assessment, IDA Draft Memorandum o f Understanding Draft Joint Financing Agreement Capacity Building Facility - Operations Manual, PSRDS, October 2005 Transformative Leadership & Ethics for Results-Based Management (RBM) - Program Work, October 2005 Transformative Leadership & Ethics for Results-Based Management (RBM) - 18- Month Procurement Plans for Goods and Consultants, October 2005

98

Project F Y Purpose ID

Annex 13: Statement o f Loans and Credits KENYA: Institutional Reform and Capacity Building Technical Assistance Project

Difference between expected and actual

disbursements Original Amount in US$ Millions

IBRD I D A SF GEF Cancel. Undisb. Orig. Frm. Rev'd

PO83250 2005 PO83131 2005

r I 0.00 18.00 0.00 0.00 0.00 16.68 -0.11 -0.63 KE-Financial & Legal Sec TA (FY05) KE-Energy Sec Recovery Prj (FY05) 0.00 80.00 0.00 0.00 0.00 75.30 10.15 0.00 7,- nrv .I, T 7 F T... F ___. - lr-..L " 7 ,

PO72981 PO85007

I 0.00 I 0.00 I 0.00 I 4.10 I 0.00 I 3.70 1 -0.20 I 0.00 I u - w c r w 1\c mi ccuaya ~ v i g m i WL 7nn5 I (FVn5) , , - --I I I I I

2005 I KE-MSME Competitiv (FY05) I 0.00 I 22.00 I 0.00 I 0.00 I 0.00 I 19.18 I 4.32 1 0.00 I 2 1 ... . . . - . I I I I I I I

PO82396 PO78209

I 0.00 I 40.00 I 0.00 I 0.00 I 0.00 I 33.10 I 10.55 I 0.00 I m - A p c u i r u r a i rroaucriwty rrj 3 f i n A I fDVnA\ LVVT I I I I I I I I I 2004 I KE-Dev Learning Centre LIL (FY04) I 0.00 I 2.70 I 0.00 I 0.00 I 0.00 I 2.17 1 0.71 I 0.00

I 77- .,.:--!-: 77,- 0. P , _ _ _ A n . r P T T I I I I I I I I

PO82615 PO78058 PO82378

I 0.00 1 15.00 1 0.00 I 0.00 I 0.00 1 12.34 1 5.69 1 0.00 I u- iwiruui vv t i OL ~ w g III~L W L DIL

LVVT ."-, I

2003 KE-Arid Lands 2 SIL (FY03) 0.00 60.00 0.00 0.00 0.00 40.07 1 1.22 0.00 2003 KE-Free Primary Edu Supt (FY03) 0.00 50.00 0.00 0.00 0.00 5.35 I 2.59 0.00

T I T - r\ ̂ ^^_ c De.---,4 Ul+L P. I

I 0.00 I 207.00 I 0.00 I 0.00 I 0.00 I 190.05 I 33.28 I 0.00 I m-Nor tnem Lomaor imspn ~ I L 3nnA I f P V n A \

PO66486 PO70718

PnAcIP71

2001 ... . . ~ ~ ~

2001 Regional Trade Fac. Proj. -Kenya I 0.00 I 25.00 I 0.00 I 0.00 I 0.00 1 14.33 1 12.39 I 0.00 7.1.. F..- "ll I I I I I I I I

1007 IFV07)

I 0.00 I 50.00 I 0.00 I 0.00 I 0.00 I 29.50 I 24.80 1 26.10 1 I --ucGc'III r\cp,vu 11,111 Lz

HTV/AIDS fFYO1)

Committed

IFC

Disbursed

IFC

I 0.00 I 0.00 I 0.00 I 11.48 I 0.00 I 1.68 I 1.71 1 1.71 I MKB vicruna cnv XL

KENYA STATEMENT OF IFC's

Held and Disbursed Portfolio I n Millions of U S Dollars

99

r I I Approvals Pending Commitment I

100

Annex 14: Country at a Glance

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

POVERTY and SOCIAL

2004 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1998-04

Population (%) Labor force (%)

Most recent estimate (latest Year available, 1998-04)

Poverty (% of population below national povefty line) Urban population (% of total POPulafion) Life expectancy at birth (years) infant mortality (per 1.000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% of population age 75+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984

GDP (US$ billions) 6.2 Gross capital formatlon/GDP 17.3 Exports of goods and serviceSIGDP 26.2 Gross domestic savings/GDP 15.9 Gross national savlngs/GDP 13.5

Current account balance/GDP Interest paymentsiGDP Total debffGDP Total debt service/exports Present value of debt/GDP Present value of debffexports

-7.6 2.5

55.7 34.3

1984-94 1994-04 (average annual growth) GDP 3.6 1.6 GDP per capita 0.5 -0.6 Exports of goods and sewices 7.9 1.9

Kenya

32.4 460 14.9

2.0 2.5

40 45 79 20 62 74 92 95 90

1994

7.1 16.4 37.0 19.6 16.2

-0.2 4.1

99.7 33.0

2003

1.8 0.0 8.0

Sub- Saharan

Africa

719 600 432

2.2 1 .o

37 46

101

58 65 95

102 88

2003

14.4 12.9 25.9

7.7 10.8

-2.1 0.7

47.9 14.9 37.1

141.9

2004

2.1 0.4 6.1

Low- Income

2,338 510

1,184

1.8 2.1

31 58 79 44 75 61 94

101 88

2004

15.6 12.5 25.1 4.2 5.1

-7.4 0.4

44.9 9.0

2004-08

3.2 1.7 8.9

Life expectancy

7

GNI Gross per primaq capita enrollment

Access to improved water source

Kenya Low-income group -

iconomlc ratios.

Trade

Domestic Capital savings formation

Indebtedness

- Kenya Low-income group

STRUCTURE of the ECONOMY 1984 '994 2003 2004

33.9 33.3 15.8 15.7 I% of GDP) Agriculture Industry 18.9 17.2 19.6 19.7

Manufacturing 11.9 10.7 13.6 13.7 Serf ices 47.2 49.4 64.7 64.5

Household final consumption expenditure 66.7 65.2 74.4 78.5 General gov't final consumption expenditure 17.4 15.2 17.9 17.3 Imports of goods and services 27.6 33.9 31.0 33.4

(average annual growth) Agriculture Industry

Serfices Manufacturing

1984-94 1994-04 2003 2004 1 Growth of exports and Imports (%) i 2.0 1.3 1.5 2.4 3.7 1.3 1.6 3.3 4.4 1.3 1.4 3.5 4.5 2.2 1.9 2.4

20

10

0

Household final consumption expenditure 3.8 0.9 2.3

Gross capital formation 0.5 0.9 3.0 8.4 -Exports *Imports Imports of goods and serfices 7.6 2.1 7.9 17.6

Note: 2004 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its incomegroup average. If data are missing, the diamond will

General gov't final consumption expenditure 5.6 4.2 2.0

be incomulete.

101

Annex 15: Letter of Development Policy

KENYA: Institutional Reform and Capacity Building Technical Assistance Project

FROM : M,INISTRY0 F FINRNCE FRX NO. : 219365 Jan. 02 2005 09:SPM P2

REPUBlIC OF KENYA MINISTRY OF FINANCE

Telegraphic Addross: 22921

Fax No. 330426 When replying please quote

FINANCE-NAIROBI

Ref: 22.71/01 1/‘M1l(50I

THE TREASURY P.O. Bax 30007 NAIROBI.

Date: 24‘h October 2005

Dr. Paul Wolfowitz President The World Bank Group 1818 H Street, NOW. Washington DC 20433 - USA

KENYA- INSTITUTIONAL REFORM AND CAPACITY BUILDING (IRCB) LETTER OF DEVELgPMENT POLICY

1. As you may be aware, when the NARC Government came to power on the eve of 2003, it inherited a country with a legacy of steady economic decline, rising incidence of poverty and serious economic and politlcal governance problems. There was little, if any, concern for efficiency, value for money, transparency and accountabillty in the management of the country‘s public resources. Corruption was institutlonalized and observance of the rule of law was done on a selective basis, which largely contributed to the deterioration in the environment for private sector development. The public sector reform initiatives launched and implemented in the previous two decades were too modest and lacked the commitment necessary to halt the deteriorating governance, and economic and poverty trends.

2. The new Government launched in 2003 its blue print development strategy the “Economic Recovery Strategy for Wealth and Employment Creation (ERS)”, The preparation of the ERS was a national and non-partisan initiative that ensured wide participation by key stakeholders including: Parliament, civll society organizations, other NGOs, and development partners. This participatory process reflected the commltment of the Government to collaborate with a wide cross-section of Kenyans on ways to reverse the economic decline experienced during the last 15 years of the previous regime. Therefore, the Strategy reflects our shared national commitment to (i) put Kenya on a rising and high economic growth path; and (11) reverse the rising trend in the incidence of poverty.

102

FROM : MINISTRYB F FIWNCE FAX NO. : 219365 Jan. 02 2005 09:54PM P3 1 '

3. In early 2004, again in a widoly participatory process, thc Govornmont identified the ERS medium term strategic interventlons and priorities, which are reflected in the Investment Programme of the ERS (IP-ERS). The ERS spells out a comprehensive and results-driven programme of government priorities designed to achieve reduction in poverty, the principal goal of our social-economic policy. The economic programme as articulatod in the ERS is anchored on three key pillars, notably: (i) providing a conducive envlronment for economic growth underpinned by a stable macroeconomic framework; (ii) enhancing equity and reducing poverty; and (iii) improving governance.

4. The ERS accords top priority to combating corruption. The programme also specifies a range of interventions to enhance public sector capacity and performance for efficiency, effectiveness, accountability, transparency and Integrity in the management of public resources, and delivery of services, In the pursuit of improved governance, the ERS places emphasis on improving access and quality of basic services to the poor, and creating a more enabling environment for business and private sector activities, These strategies complement the overarching national goal, namely: to achieve rapid pro-poor economic growth.

Laying foundation for good governance

5. In order to lay the foundation for good governance and to send a clear signal on our commitmentto fight corruption and restore the rule of law, the new Government immediately commenced implementation of bold reforms In the judiciary and the police force. Most of the corrupt elements in these two institutions have since either been sacked or retired. Another important initiative of the Government that will ultimately have a major impact on improving the integrity and accountability of public officers in the future is the judicial enquiry into the infamous 'Goldenberg Affair.' While the Government is awaiting the recommendations of the enquiry for further action, the enquiry has publicly exposed corruption and weakness In public accountability that underlay the massive looting of public resources and the attendant economic crisls of theearly 1990s.

6, The Government has also taken a number of Institutional measures intended to help to root out corruption on a sustainable basis, These measures include:- (a) enactment of the Economic Crimes Act (2003), which provides for the establishment of the Kenya Anti-Comption Commission; (b) creating a new Ministry of Justice and Constitutional Affairs with clear mandate to formulate and Implement policies to foster constitutional governance; and (c) enactment of the Public Officer Code of Ethics Act (2003), which requires all public officials (including the President) and employees, as well as their families to declare their assets. Steps are being taken to make these declaratlons publlc, Other planned measures, which will complement and sustain the gains made in the areas of justice, rule of law, and publlc safety and security are now reflected in a comprehensive programme of Governance, Justice, Law and Order Sector (GJLOS) reform, which is supported by seventeen development partners.

103

FROM : !INISTRY0 F FINQNCE FAX NO. : 219365 Jan. 02 2005 09:55PM ?4

7. Further, the Government has made noteworthy progress in strengthening the institutional framework for tho management of public funds, including the enactment of a new legislatlori for public financQ management and public procurement. Toward the same end, the budgeting process has been improved to facilitate, through the a medium term expenditure framework (MTEF), a better alignment of the allocation of resources In line with the Government's key priorities as spelt out in the ERS. To improve use of public resources, the Government has embarked on the development of an integrated sector-wide monitoring and evaluation system. Public sector management and accountability have improved as reflected in the clearing of the backlog of audits of government accounts, and the installation of the Integrated Financial Management Information System (IFMIS) in eleven ministries, with plans to roll it out to the remaining line ministries during fiscal year 2005/06.

8. Over the past two years, significant progress has been achieved in strengthening reforms in publlc service performance, efficiency and accountability, under the on-golng public service reform programme. These reforms include; aligning public sector pay policy in line with the results of a comprehensive job evaluation exercise; and streamlining the payroll management through retrenchment and cleaning of the payroll to remove "ghost' workers. The Government has also established a quasi-autonomous Public Service Remuneration Review Board and Introduced performance contracts for top public service executives, beginning with the chief executive officers of statpowned public enterprises and agencies.

9. Improving performance in the delivery of service by public servants contlnues to be one of the Governments main objectives. In the Economic Recovery Strategy for Wealth and Employment Creation, the Government stated its commitment to accelerate Public Service Reform in order to create a leaner, efficient, motivated and more productive Public Service that concentrates on the delivery of core government services, One of the key elements targeted for introduction was "developing, introducing and institutionalizing performance based management practices in the Public Service". To this end, the Government launched recently the Results-Based Management (RBM) as the vehlcle through which it would deliver efficient, effective and ethical 'Resulk for Kenyans'.

I O . The RBM Approach is intended to enable the Government to realize its objective of delivering 'Results for Kenyans'. This objective will be achieved by transfwmlng public service management from one that is a passive and inward looking bureaucracy to one that is proactive, outward-looking, ethical and results-oriented. The publlc servants in this context will be expected to seek to satisfy their customers and in a manner that assures taxpayers valuefor-money. This approach encompasses dynamic and mutually supportive reforms to human and Onanclal resources management, and planning and performance. It also entails support for the development of leadership, values and ethics In the public service.

11, Cognizant of the need to ensure effective and sustained leadership and coordination of the above reform initiatives, the Government has established an

104

FROM : MINISTRY8 F FINANCE FAX NO. : 219365 Jan. 02 2005 09:56PM P5

claboratc institutional framework comprising: a Cabinot Sub-Committee, a National Steering Committee on Public Sector Reforms, and a Public Sector Reforms Secretariat responsible for coordinating the implementation of on-going reform initiatives in the public sector. The Government has also established a Monitoring and Evaluation (M&E) Department in the Ministry of Planning and National Development (MPND) that will operate the M&E system, with a focus on ensuring that: (i) budgetary resources are allocated in line with ERS priorities; and (ti) more importantly, the ERS benchmarks and results are on track.

12. Notwithstanding the achievements enumerated above, the Government is fully aware that much more needs to be done to improve Kenya's record on governance. However, we expect to make further progress in fighting corruptlon with the operationalization later this year of the newly enacted public procurement Act.

Major challenges in public sector reform

13. So far, achlevements in the reform of public service management remain uneven and with major gaps. Public service reform is far from delivering a lean, efficient and effective public sector as envisaged in the ERS. Downsizing of the public service as planned has been held back by a.court Injunction that has lasted for more than a year. Commitments by the previous Government to excessively raise salaries of teachers, and pressure to recruit more teachers and health workers in support of the free primary education and primary health care programmes, will continue to put pressure on the wage bill. An effective and comprehensive strategy for public service reform, consistent with the targets in the ERS, is not yet in place and needs to be developed as a matter of priority.

14. The Government recognizes that unless the weaknesses in public sector management systems are addressed, they will continue to accentuate poor management and accountability, waste and corruption in the use of public resources. To achieve the targeted improvements and reforms planned for the systems of budgeting, accounting and treasury management and audit of public funds, will take some years, Furthermore, the capacity for operating and maintaining these systems, especially the iCT aspects, will have to be developed, Moreover, the functioning of these systems will, to a significant degree, depend on progress towards creating a culture of high performance, accountability, transparency and integrity in the public service, which will take considerable and sustained efforts to realize.

15: To implement and sustain the reform programmes in the areas of publlc sector management and good governance, much more resources will be needed now than in recent years. In this regard, the Kenya Government is seeking the necessary financial and technical support from our development partners. Several development partners have aiready indicated their willingness to support areas of priority, including restructuring of public enterprises and privatization; local government and fiscal decentralization; public financial management reform, public service reform; and legal and judicial reforms, However, funding gaps can be foreseen. The World Eank-funded

4

105

FROM : M,INISTRYB F FINANCE FAX NO. : 219365 Jan. 02 2005 09:56PM p6

Public Sector Management Technical Asslstanco Project (PSMTAP) closed in June 2005. In this context, therefore, Government soeks financial support from the World Bank and other developmont partners to help fund the priority reform programmes.

Institutional reform and capacity building priorifies

16. Given the limited resources, the Government has Identified priorities in public sector reform for the medium term to constitute the institutional reforms and capacity building needed to achieve the priorities in the ERS, Alongside these reforms, the Government will continue to pursue prudent macro-economic policy characterized by an appropriate fiscal and monetary pollcy stance.

17. The institutional and capacity building reforms that Government targets to fast- track with Bank support fall under three components: (a) public financial management; (b) capacity building in selected ministries; and (c) transformative leadership and results based management (RBM).

18, The focus of the public financial management component is to enhance transparency in government financial transactions in order to improve service delivery and create an enabling environment for investments. The implementation of the Integrated Financial Management System (IFMIS), which is planned to improve accounting, transparency and effectlve financial management of public funds, will be accelerated. The system will be supported by the operationalization of the Financial Management Act, which was enacted in December 2004,

19. The implementation of the ERS requires an effective planning and a budgetary process that promotes fiscal discipline, strategic allocation of resources to pn’orities identified in the ERS wfthin a sustainable MTEF, and executlcn of the budget with minimum deviations. The Government has strengthened the credibility of the budget through the MTEF and Public Expenditure Review Process, The achievements have to be consolidated and institutionalized through the following: (i) improving macroeconomic forecasting leading to better fiscal strategies; (ii) strengthening of Sector Wide Approach to develop sectoral and ministerial priorities within hard budget constraints; (iii) ensuring public expenditures allocations are justified by measurable outputs, costs and performance benchmarks; (iv) ensuring all public expenditure are reflected in the MTEF and annual Budgets; (v)undertaklng regular Public Expenditure Reviews to provide analysis of expenditure issues and inform on both effective use of public funds and strategies to deal with efficiency and effectiveness; (vi) building a comprehensive budget management system that is properly linked to the IFMlS and the Integrated Personnel and Payroll Data (IPPD) systems; and (vi) promoting financial discipline within the public enterprise sector and ensuring that each enterprise maintains a sound investment policy,

20. To promote accountability, Integrity and value for money objectlves in publlc expenditure management, the project will strengthen both the internal and external audit functlons. The capacity of the internal audit department in the Ministry of Finance will be strengthened through recruitment of additional qualified personnel, tralnlng of personnel

106

FROM : MINISTRYE F FINRNCE FAX NO. : 219365 Jan. 02 2005 09:56PM P7

in the state of the art audit techniques, provision of belter equipment and improved mobility. The external audit of public expenditures calls for the following lntervontions: (i) onhancing fiduciary transparency by improving the quality and timeliness of audit reports; (ii)extmding the function of Controller arid Auditor General to ail public agencies; (iii) increasing autonomy of the Controller and Auditor General's office; (iv) operationalizing the newly established National Audit Ofice with recruitment of appropriate staff and required capadty building in modern techniques; (v) developing and implementing of an integrated training and capacity building programme for staff in accounting, auditing and flnanclal management; and (vi) strengthening the various parliamentary committees in the area of economic management (budget preparation, budget execution, and expenditure control). Thls will enable Parliament to play its oversight role In the area of economic management more effectively.

21. The Government, will through the proposed project, address itself to issues that constrain revenue enhancement and modernization of the Kenya Revenue Authority. Revenue collection has increased gradually from Kshs,122 billion in FY1995/96 to about a projected Kshs.310 billion in FY2005106, The Authority has proved to be a competitive employer attracting qualified, competent and experienced professionals. Notwithstanding these achlevements, there is urgent need to promote effective integration of adrninlstration of revenue, harmonize procedures across existing departments and also implement the Information Technology plan for the Authority.

22. The Government plans to promote integrity, transparency and accountability of public procurement through improved procedures for the procurement of public goods spearheaded by the following actions: (a) Enactment of Publlc Procurement and Disposal Bill (2005); (b) Operationalization of the Public Procurement Directorate; (c) Revision of procurement regulations; (d) Strengthenlng of the recently established appeals process,

23. The development of the new public financial management systems will take full advantage of cost-effective application of modern information and communications technologies (ICT), In particular, the lmplementatlon of the IFMlS and the integrated personnel payroll database (IPPD) Is based on effective use of ICT, In'this regard and to ensure this reform programme Is implemented successfully, it is imperative to ensure coordination, compatibility and connectivity of the disparate systems, both current and future. In the latter context, three main interventlons are already considered crucial: (i) development of a common systems architecture for all the main government ICT applications, with IFMlS as a priority; (ii) specification of common standards that will ensure compatibility and ready connectivity of the major applications, especially the IFMlS and the IPPD; and systematic identiflcatlon, planning and implementation of the user requirements, The Government considers these Interventions to be priorities under the proposed Institutionat Reform and Capacity Building project.

I

24, As regards the capacity building component of this reform programme, five ministries are targeted to spearhead the achievement of the main outcomes under the ERS. The five ministries are:

6

107

FROM : MINISTRY0 F FINRNCE FAX NO. : 219365 Jan. 02 2005 09:57PM P8

Ministry of Finance: The capacity building in this ministry aiins at ensuring that the annual budgets reflect the ERS priorities. To this end, there should be capacity for: integrating the MTEF process and the annual budget process; linking the ERS indicators directly with the budget process; Introducing political engagement in the MTEFIBudget process, especially in the development of the budget strategy paper and ministerial ceilings; analysis of line ministries' budget submissions; budget monitoring systems that reliably track funds flow to spending units below ministerial headquarters; and addresslng problems of cash flow to district and lower level of government departments.

Minlstry of Plannlng and National Development: This ministry needs capacity to operationalize a system for effective M&E of the ERS.

Ministry of Agriculture: The ERS shows that achieving higher levels of economlc gro@ as well as equity demands strengthening andlor ratlonalizing the roles and structures of some key agricultural institutions, Including: co-operatives, the Pyrethrum Board; the National Cereals and Produce Board; and the Kenya Meat Commission.

Ministry of Trade and Industry: This ministry has the role and mandate of trade and investment. The project should provide the ministry with technical assistance to support and improve trade and Investor climate and support private sector development.

Ministry of Local Government: The Government recognizes the urgent need to strengthen the capacity of the Ministry of Local Government to play its critical role In guidlng local authoritles to discharge effectively their mandate, which Includes, among others, provislon of infrastructure. Effective performance of iocal authorities is key to improving the investment climate.

25, The exact form and scope for capacity building in the above key ministries is not yet determined. In this context, the project will also promote an integrated and beneflciary-driven approach to capacity building and performance monitoring by setting up a Capacity Buliding Fund. The Fund wili have rules to govern access by those key ministries that are both directly related to the government's plan In addressing governance and meet the agreed benchmarks for future budget support operations.

26. Strong and committed transformative leadership is a necessary condition for achieving and sustaining institutional reforms. Accordingly, this programme Is also focuslng on enhancing the change management capacity of the executive, permanent secretaries and all public service leaders. The programme will support development of leadership skills and a code of ethics as a tool to Instill in public servants a culture of achieving results in service delivery and accountabiilty. Speciflcaliy, the project wlll support (i) implementing a programme to inculcate good values, ethics and discipline

108

FROM : MINISTRY8 F FINRNCE FRX NO. : 219365 Jan. 02 2005 09:57PM P9 , (

for kar~sformative leadership; ( i i ) mainslroaming RBM in ministries and departments to plan and achieve pre-dclormined outputs or targets.

27. The leadership initiative involves the following: (i) re-orienting the goals and objectives of the Institutions and workforce towards cost effectiveness and responsiveness to clientslcitizens demands and needs: (ii) modernizing personnel policy and management so as to Improve staff productivity and service delivery; (ill) deslgnlng and introducing a new performance appraisal system; (iv) designing and Implementing an affordable and sustainable IT strategy to enhance computerization, connectivity and networking; (v) institutionalking Service Delivery Surveys and utilizing the findings during the review and development of key targets or results and strategic Interventions and plans; and (vi) developing and implementing a comprehensive plan for capacity building and training to re-equlp the clvll service with Increased capacities to implement core functions and provide senior staff with managerial skills.

28. To generate wider participation, there is need to continue with sustained and coordinated efforts to inform and educate the general public on the goals and objectives, and the progress made in implementing the reform programmes, The full range of public media will be utilized. The strategy would also have an important role to play in extending knowledge and awareness among those responsible for Implementing the reforms and reinforcing coordination between the various components of this institutional and capacity building reform programme.

29. It is also important to note that development and implementation of the varlous reform components requires careful coordination so as to maximize the potential benefits of synergy. A Sub-committee of Cabinet provides policy direction and guidance to the reform process. Responsibility for overall coordination lies with the Coordinating Committee of Permanent Secretarles and Authorized Officers, chalred by the Head of Public Service. A newly established Institutional Reform and Capacity Building Coordinating Unit (IRCBCU) will undertake day-to-day working level coordination between reform “streams”. Appropriate technical secretariats or units will be set up in the relevant ministries and departments to be headed by the respective permanent secretaries to oversee the reform programme within each component.

30. The Institutional Reform and Capacity Building Project will be implemented within the institutional framework explained above. The Permanent Secretary in the Ministry of Finance, reporting to the Head of Public Service has been designated to be the Authorized Officer for the project. A Project Steering Committee made up df those Accounting Officers with immediate responsibility of the project components, will ensure overall coordination. Furthermore, a dedicated professional team will be created in the Ministry of Finance to provide support to Component Coordinators, monitor implementation, and ensure adherence to financial and procurement procedures.

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FROM : MINISTRY0 F FINANCE

109

FAX NO. : 219365 Jan. 02 2005 09:SEPM P I0

c 0 I1 cl u s ion

31. I wish at this point to reiterate the unqualified commitment of the Kenya Government to implement the reform policles and actions outlined in the ERS. However, to effectively implement our development agenda, there is need to create additional capacity in the Public Sector. This capacity building process requires more financial resources to fully implement the reform programme. In this regard, the Kenya Government seeks the collaboration and continued support of its development partners. The Government appreciates the support it Is already receiving from the partners, but the required additional support will enable it to consolidate and sustain the achievements that have been made in the area of public sector reform.

32. The Government appreciates the commitment the World Bank has shown in the support of the implementation of the ERS, The Bank contributed slgnificanily to the development of the strategy, and its investment programme. The Bank has also supported In the past institutional reforms and capacity building through the Public Sector Management Technical Assistance Project (PSMTAP), which closed in June 2005. The Government is seeking a new joint initiative with the Bank to establish a line of credlt to facilitate the implementation of the reform initiatives laid out in the Institutional Reform and Capacity Building Project. Implementation will focus on the pr iorks identified and elaborated in this letter, which, we believe, will enormously advance the governance reform agenda promulgated in the ERS.

33. Let me in conclusion take this opportunity to convey the gratitude of the Government and the People of Kenya to the World Bank for the strong support the Bank has extended to us in our development efforts, We confidently look forward to enhanced cooperation and collaboration with the World Bank as we continue to earnestly seek for prosperity and development for our people.

Yours e, - HON. DAVID MWIRARIA, EGH, MP MINISTER FOR FINANCE

COPV to: Mr, Gobind Nankanl Vice President for Africa Region World Bank Washlnuton, DC

Mr. Colin Bruce Country Director Kenya, Eritrea and Somalia World Bank Office _c_ Nalrobi

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