of the world for official use€¦ · for official use only report no: 33 12 1 -pak project...

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 33 12 1 -PAK

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT IN THE AMOUNT OF SDR 56.6 MILLION

(US$84 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR THE

SECOND IMPROVEMENT TO FINANCIAL REPORTING AND AUDITING PROJECT

AUGUST 5,2005

Financial Management Unit South Asia 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.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

AATI ADB ADP AG AGP AGPR A JK CAAT CAS CBR CFAA CGA CIA CoA CPA DAOs DDO DfID

EU FABS FD FM FMIS FMR GFS GM GOP IDA

CURRENCY EQUIVALENTS

(Exchange Rate Effective June 1,2005)

Currency Unit = Pakistani Rupees (PRs) PRs59.50 = U S $ l

US$O.O168 = PRs 1

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS

Accounts and Audit Training Institute Asian Development Bank Annual Development Plan Accountant General Auditor General of Pakistan Accountant General Pakistan Revenue Azad Jammu & Kashmir Computer Aided Auditing Techniques Country Assistance Strategy Central Board of Revenue Country Financial Accountability Assessment Controller General of Accounts Certified Internal Auditor Chart of Accounts Certified Public Accountant District Account Offices/Officers Drawing and Disbursing Officer Department for International Development

European Union Financial Accounting and Budgeting System Finance Department (in Provinces) Financial Management Financial Management Information System Financial Monitoring Report Govemment Financial Statistics General Manager Govemment o f Pakistan International Development Association

(UK)

IMF MDGs MIS MTBF N A M NAuM NBP O&M OAGP OCGA PAC PA0 PC PD PDte PFM PIFRA

PRGF PRSP SAIs SAP

SBP TMA UNDP USAID

International Monetary Fund Millennium Development Goals Management Information System Medium Term Budget Framework New Accounting Model New Audit Manual National Bank o f Pakistan Operation and Maintenance Office o f the Auditor General o f Pakistan Office of Controller General of Accounts Public Accounts Committee Principal Accounting Officer Planning Commission Project Director Project Directorate Public Financial Management Project for Improvement in Financial Reporting and Auditing Poverty Reduction Growth Facility Poverty Reduction Strategy Paper Supreme Audit Institutions A Financial Management Applications Software State Bank o f Pakistan Tehsil Municipal Administration United Nations Development Program United States Agency €or International Development

Vice President: Praful C. Pate1 Country Director: John W. Wall

Barbara Kafka Robert J. Saum Anthony Graeme Leehmaila B. Ceesay

Director, Operational and Quality Services: Manager, Financial Management:

Task Team Leader/Co-TTL:

FOR OFFlCIAL USE ONLY CONTENTS

Page

I . Strategic Context 'and Rationale ; ............................................................................................ 1 A . Country and Sector Issues .............................................................................................. 1 B . Rationale for Bank Involvement ................................................................................... 1

I1 . Project Descript ion ................................................................................................................. 2 A . Lending Instrument ....................................................................................................... 2

C . Higher Level Objectives to which the Project Contributes ........................................... 2

B . Project Development Objective and Key Indicators ..................................................... 2 C . Project Components ...................................................................................................... 3 D . Lessons Leamed and Reflected in the Project Design .................................................. 8 E . Alternatives Considered and Reasons for Rejection ................................................... 10

I11 . Implementation .................................................................................................................... 11 A . Partnership Arrangements ........................................................................................... 11 B . Institutional and Implementation Arrangements ......................................................... 11 C . Monitoring and Evaluation o f Outcomes/Results ....................................................... 1 2

F . Credit Conditions and Covenants ................................................................................ 15

D . Sustainability ............................................................................................................... 13 E . Crit ical Risks and Possible Controversial Aspects ...................................................... 13

I V . Appraisal Summarv ............................................................................................................ 15 A . B . C . D . E . F . G .

Annex 1 . Annex 2 . Annex 3 . Annex 4 . Annex 5 . Annex 6 . Annex 7 . Annex 8 .

Economic and Financial Analysis ............................................................................... 15 Technical ..................................................................................................................... 15

Social .......................................................................................................................... 1 6 Environment ................................................................................................................ 1 7

Policy Exceptions and Readiness ................................................................................ 1 7

Fiduciary. ..................................................................................................................... 1 6

Safeguard Policies .... ; .................................................................................................. 1 7

Country and Se.ctor Background .............................................................................. 18

PIFRA and Public Financial Accountabil ity Framework in Pakistan ... : ............. 22

M a j o r Related Projects Financed by the B a n k and/or Other Agencies ............... 28

Resul ts F ramework and Implementation Mon i to r ing ........................................... 2 9

Comprehensive Benchmarks . Implementation Performance Indicators ........... 33

Detailed Project Description ..................................................................................... 35

Communication and Change Management ............................................................. 5 1

Tra in ing ...................................................................................................................... 56

This document has a restricted distr ibution and may be used b y recipients o n l y in the performance o f their official duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

Annex 9 . Estimated Project Costs ............................................................................................ 60

Annex 10 . Economic and Financial Analysis ........................................................................... 63

Annex 11 . Implementation Arrangements .............................................................................. 65

Annex 12 . Financial Management and Disbursement Arrangements .................................. 68

Annex 13 . Procurement Arrangements ................................................................................... 73

Annex 14 . Safeguard Policy Issues ........................................................................................... 80

Annex 15 . Project Preparation and Supervision ..................................................................... 81

Annex 16 . Documents in the Project F i l e ................................................................................. 82

Annex 17 . Statement o f Loans and Credits ............................................................................. 83

Annex 18 . Country at a Glance ................................................................................................. 85

Annex 19 . M a p (IBRD 33460) ................................................................................................... 87

.. 11

PAKISTAN

Source Local BORRO WER/RECIPIENT 9.00 INTERNATIONAL DEVELOPMENT 52.28 AS SOCIATION Total: 61.28

SECOND IMPROVEMENT TO FINANCIAL REPORTING AND AUDITING PROJECT

Foreign Total 0.00 9.00

3 1.72 84.00

3 1.72 93 .OO

PROJECT APPRAISAL DOCUMENT

;Y 2006 2007 2008 2009 2010 0 h u a l 9.00 17.00 23.00 23.00 12.00 0.00 3umulative 9.00 26.00 49.00 72.00 84.00 84.00

SOUTH ASIA

0 0 0 0.00 0.00 0.00

84.00 84.00 84.00

SARFM

Date: August 5,2005 Country Director: John W. Wall Director, O&QS: Barbara Ka&a Manager, FM: Robert J. Saum Project ID: PO76872

Team Leader: Anthony Graeme Lee Sectors: General finance sector (1 00%) Themes: Standards and financial reporting (P)

Environmental screening category: Not Required

Lending Instrument: Specific Investment Loan Safeguard screening category: N o impact Project Financing Data

[ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m): 84.00 (SDR 56.600 million)

Borrower: ISLAMIC REPUBLIC OF PAKISTAN Economic Affairs Division, Government o f Pakistan, Islamabad, Pakistan Tel: +92 51 920 3815 Fax: +92 51 921 8976

Responsible Agency: DEPARTMENT OF THE AUDITOR GENERAL OF PAKISTAN PIFRA Directorate, Audit House, Constitution Avenue, Islamabad, Pakistan Tel: +92 51 922 4043 Fax: +92 51 922 4044

Does the pro ject depart from the C A S in content or other significant respects? Ref: PAD Section I C. [ No

Does the pro ject require any exceptions from Bank policies? Ref: PAD Section I V G. H a v e these been approved by Bank management? I s approval for any p o l i c y except ion sought from the Board? Does the pro ject inc lude any cr i t ical r isks rated “substantial” or “high”? Ref: PAD Section 111 E. Does the pro ject meet the Regional cr i ter ia for readiness fo r implementat ion? Ref: PAD Section I V G. Project development object ive Ref: PAD Section 11 B.9 The project will build capacity to improve the accuracy, comprehensiveness, reliability, and timeliness o f intra-year and year-end government financial reports at federal and provincial levels, and initiate the process at district and sub-district levels thereby strengthening the financial accountability cycle. It would therefore directly support the GOP’s commitment to improved public financial management, accountability and transparency, and enhance the capacity o f public sector managers in meaningfully using credible financial information for better and informed decision making. It wil l facilitate public oversight o f the use o f public monies, and increase the national and international credibility o f Governments’ financial statements and assurance processes. Project descr ipt ion [one-sentence summary of each component] Re$ PAD Section 11 C.11 PIFRA I1 has four core components: 1) Financial Accounting and Budgeting Systems (FABS) - US$ 48.739 mi l l ion (including contingencies): This component’s objective i s to fo l low up and extend the work done under PIFRA I in implementing policies, systems and procedures that support overall project objectives o f improving the accuracy, completeness, reliability and timeliness o f intra-year and year-end government financial reports in Pakistan at the federal and provincial, and some district and Tehsil governments. 2) Capacity Building and Upgrading o f the Office o f the Auditor General o f Pakistan - US$ 19.345 mi l l ion (including contingencies): The objective o f the OAGP component i s to adopt modernized government audit procedures and internationally accepted auditing standards that will contribute to eradicating deficiencies in program and evaluation capabilities in a timely and effective manner. 3) Capacity Building and Up-gradation o f the Office o f the Controller General o f Accounts - US$ 18.470 mi l l ion (including contingencies): The objective o f the C G A component i s t o assist the CGA’s Office and the AGs to professionally and adequately manage, and also to maximize the benefits from, the computerized accounting environment. 4) Project Management - US$6.446 mi l l ion (including contingencies): The framework for Project Management comprises: (a) A Steering Committee chaired by the Auditor General with general powers to oversee project policies, implementation, and responsibility for reviewing proposals for capacity development and for post completion activities shall be established. (b) A Project Director with adequate devolved powers to ensure that project implementation runs smoothly and i s coordinated (between components, between provinces, etc.) and not held up by administrative bottlenecks. (c) The Project Director would head a Project Directorate comprising a team based in Islamabad and a sub directorate in each province. W h i c h safeguard pol ic ies are triggered, if any? Ref: PAD Section I V F. Projects in Disputed Areas (OP/BP/GP 7.60) OP 7.60: A part o f the proposed project wil l be carried out in Azad Jammu Kashmir, an area over which Pakistan and India have been in dispute since 1947. By financing the credit, IDA does not intend to make any judgment as to the legal or other status o f the disputed territory or to prejudice the final determination o f the parties claim. Significant, non-standard conditions, if any, for : Ref: PAD Section 111 F. B o a r d presentation: None L o a d c r e d i t effectiveness: None Covenants applicable to pro ject implementat ion: None

[ ]Yes [XINO [ X I Y e s [ ] N o [ ]Yes [XINO

[ X I Y e s [ ] N o

[ X I Y e s [ ] N o

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and Sector Issues

1. by improved governance, better social indicators, and programs focused upon the poor and vulnerable. I t is being implemented by a range o f instruments including de-regulation to encourage private sector involvement; activities to support enhanced governance, such as devolution o f service provision to local government, and country-wide financial management reforms; increased investment in key bottlenecks such as infrastructure and the social sectors; and safety-net programs aimed at disadvantaged groups.

The primary focus o f Pakistan’s poverty reduction strategy i s economic growth, supported

2. and development challenges, and that public financial management (PFM) reform is essential. Action has been taken to address critical topics: for example, (a) Government accounting has been separated from Government auditing by the creation o f an office o f the Controller General o f Accounts (CGA), (b) a N e w Accounting Model (NAM) has been approved and i s being implemented under the preceding PIFRA I project. As part o f this model, the budget classification system and the chart o f accounts (CoA) have been revised to bring them in l ine with the IMF’s GFS and international standards. The federal budget and the budget for the province o f NWFP for FY 2004-05 have been prepared according to the new CoA. The budgets for the remaining provinces have transitioned to this CoA in FY 2005-06, (c) a new computer based information system designed to support NAM and the new CoA has been designed and has been implemented at 30 sites across various government agencies, and (d) the quality and timeliness o f audit reports i s improving.

The Government has recognized that weak governance i s at the heart o f Pakistan’s poverty

3. promulgation o f the C G A Ordinance 2001 and the Auditor General’s Ordinance 2001 separates the roles and responsibilities o f the two offices, confusion remains relating to the responsibility for the staff o f the two separate departments, which come from the unif ied auditing and accounting cadre. There are also challenges between the C G A and lower t iers o f Government concerning control over preparation o f accounts and authorization o f payments. Hence, effectively managing implementation o f the ambitious and diverse strategy o f PFM reform remains a key challenge.

Nevertheless, the implementation o f policy changes takes time. For example, while the

B. Rationale for Bank Involvement

4. The development hypothesis underlying both PIFRA projects i s that Governments’ financial control, reporting and audit systems make a substantial contribution to sound public financial management, which in turn impacts on better governance and hence improves the efficiency and effectiveness o f public expenditure and increases the potential for economic growth and poverty reduction.

5. widespread replicatiodroll-out o f the systems developed in PIFRA I, and can accommodate the different tiers o f Government by working with the other reform efforts o f the Government o f Pakistan (GOP) such as introducing devolved local government, introducing a medium term

The Second Improvement to Financial Reporting and Auditing Project (PIFRA 11) supports

1

budget framework (MBTF), and assisting in deepening the changes in Government financial management. These parallel efforts, which are seen as complementary, are being coordinated by the Ministry o f Finance (MOF) and supported by the Asian Development Bank (ADB), UK’s Department for International Development (Dff D) and International Monetary Fund (IMF), respectively.

6. The f i rst hand knowledge o f the lessons from implementing PIFRA I, relationships formed during this process, our understanding o f national accounting and macroeconomics, and our experience o f implementing similar projects in other countries are al l contributions that the Bank brings to PIFRA 11, beyond i t s role as financier.

C. Higher Level Objectives to which the Project Contributes

7. timely and accurate data about the Government’s plans, progress with implementation, and final achievements shall become widely available as a result o f the new systems, for example by publication o f financial and fiscal performance data on web-sites. The Governments’ performance shall also be subject to scrutiny through respective Public Accounts Committees (PACs), which should receive an improved quality and standard o f audit reports, focused upon matters o f substance, and have the implementation o f recommendations followed-up routinely by the CGA and line agencies.

The project contributes to improved governance and accountability. Clear, transparent,

11. PROJECT DESCRIPTION

A. Lending Instrument

8. A Specific Investment Loan, using International Development Association (IDA) resources, i s proposed based upon the judgment that it i s the most appropriate instrument to provide the Government with an assured mix o f planned specialist support f rom project-funded activities, dedicated project management, and detailed external supervision by the Bank. Development Policy Lending operations should be complementary to this effort, and should especially support resolution o f any major policy concerns that may arise.

B. Project Development Objective and Key Indicators

9. The project will build capacity to improve the accuracy, comprehensiveness, reliability, and timeliness o f intra-year and year-end government financial and fiscal reports at federal, provincial and district levels, and initiate the process at sub district levels thereby strengthening the financial accountability cycle. It would therefore directly support the GOP’s commitment to improved public financial management, accountability, and transparency, and enhance the capacity o f public sector managers to use credible financial information for better and informed decision making. It will facilitate public oversight o f the use o f public monies, and increase the national and international credibility o f financial statements and assurance processes o f governments.

10. intermediate benchmarks such as:

Progress towards this goal shall be measured by monitoring the achievement o f

2

a.

b.

C.

d.

e.

f.

implementation and operation o f IT-based budgeting and accounting systems, for example, number o f sites operational and establishment o f an SAP competency center;

the extent o f reconciliation o f accounts achieved and progress towards introducing interfaces with State Bank o f Pakistan (SBP)/National Bank o f Pakistan (NBP)/Central Board o f Revenue (CBR);

the adoption o f the N e w Accounting Model and reduced level o f date entry errors;

improvement to the scope, timeliness and quality o f reporting delivered to end-users;

the extent to which entity accounts are audited using modern audit practices, and savings are identified by the audit; and

creation and maintenance o f a pool o f professionally qualified government accountants/auditors capable o f developing and sustaining further initiatives.

C. Project Components

1 1. PIFRA I1 has four core components: a) financial accounting and budgeting system (FABS); b) capacity building and upgrading o f the Office o f the Auditor General o f Pakistan (OAGP); c) capacity building and upgrading o f the Office o f the Controller General o f Accounts (OCGA); and d) project management. Operational and maintenance costs arising from PIFRA I and I1 investments, such as hardware and software maintenance and computer stationery, constitute an expenditure category in each o f the components that would be financed wholly by the GOP as part o f i t s counterpart contributions to the project. Also as part o f the overall allocation to the project management component, an allocation o f US$2 mi l l ion i s made for FMIS and training and development expenditures for the finance departments o f the federal and provincial governments. This amount i s for use by them, in three or four phases, at their discretion, for enhancement o f fiscal reporting and monitoring activities related to PIFRA implementation.

12. Project costs are as follows:

A. Estimated Project Costs by Components/Currency Outlays Local US$ Foreign US$ Total US$

Sr. Project Cost By Component million million million 26.741 20.802 47.543

B. Capacity Building and Upgrading o f OAGP 11.067 5.660 16.727 C. Capacity Building and Upgrading o f CGA 16.526 1.301 17.827

Total Baseline Costs 56.303 30.137 86.440

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

................................................................................................................................................................................................................................................................¹� ................................................................................................................................................................................................................................................................¬� D. Project Management 1.969 2.374 4.343

2.700 0.300 3.000 Physical Contingencies 0.586 0.552 1.138 Price Contingencies 1.689 0.735 2.424

Total Project Costs (rounded*) 61.276* 31.724 93.000" Total Financing Required 61.276 31.724 93.000

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

B. Estimated Total Project Costs by Categories of Expenditure (Excl. Contingencies) Project Costs O h Financing

US$million IDA GOP Sr. Project Cost B y Category

................................................................................................................................................................................................................................................................�� Goods 34.797 100 ........................................................................ E p i p m ent 32.187 ............................... Vehicles 2.61 0 100

Works 13.519 100 Services 15.540 100

Unallocated 6.564 100 Sub Total 84.000

................................................................................................................................................................................................................................................................C�

................................................................................................................................................................................................................................................................…�

................................................................................................................................................................................................................................................................•�

Training & Development 13.580 100

Operational & Maintenance 9.000 0 100 Total Project Costs 93.000 90.3 9.7 Total Financing Required 93.000 90.3 9.7

................................................................................................................................................................................................................................................................„�

13. The Government has proposed that i t would finance aboutlo% o f the total cost. IDA contribution (including contingencies) would therefore be $ 84 mi l l ion equivalent. The financing plan proposed i s that IDA finances al l expenditure categories o f the four components except the operational and maintenance costs at a rate o f 1 OO%, while Government finances al l operational and maintenance costs. The components, which group activities according to function, are described below. More details can be found in Annex 6.

1. Financial Accounting and Budgeting System (FABS)-US$48.739 million (including contingencies) :

14. implementing policies, systems and procedures that support overall project objectives o f improving the accuracy, completeness, reliability and timeliness o f intra-year and year-end government financial reports in Pakistan at the federal, provincial district and some Tehsil governments. Successful completion o f this component would be instrumental to achieving full government financial accountability and transparency in the new automated environment. The component consists o f three phases:

This component’s objective i s to fo l low up and extend the work done under PIFRA I in

a. The f i rs t phase includes extending the FABS designed under PIFRA I to the balance o f District Accounts Offices (DAOs), to the headquarters o f some departments currently responsible for their own accounting, and to key sites in Azad Jammu and Kashmir.

b. The second phase includes further extension o f PIFRA systems to 140 central l ine ministries and provincial l ine departments to support budget preparation and execution, and 105 district government finance offices, to enable them to connect electronically with finance during budget preparation and to directly access information on the status o f their accounts during the year; plus the design and pi lot implementation in 15 Tehsils o f a simpler financial management system for Tehsil local governments in the immediate term, with the option to extend the application to a total o f a l l 105 Tehsil Municipal Administrations (TMAs) at the district headquarters around the country. The form o f architecture and application platform wil l be defined and fine-tuned during the implementation process o f FABS at the D A O sites. (PIFRA’s work in local government will be closely coordinated with

4

respective Governments’ other initiatives in this area including those supported by Asian Development Bank (ADB)).

c. A third phase, implemented in parallel with first and second phases, would provide for :

o a comprehensive end user training program, the training o f finance managers and building accounting capacity through training on financial management, the New Accounting Model, and the new chart o f accounts;

o design o f an interface between PIFRA systems and the NBP and SBP, CBR and the Planning Commission (PC), to allow for timely reconciliation o f accounts;

o accommodating MTBF provisions in system configuration;

o the development o f an overall systems and data architecture and capacity to ensure compatible information flows and summarization among national, provincial, district, and Tehsil governments, and between PIFRA and non-PIFRA systems for whole o f government reporting;

o upgrading o f DAOs and other infrastructure as may be necessary;

o determining the feasibility, benefits and costs o f extending FABS systems to the Ministry o f Defense and the Railways; and

o the establishment o f a data warehousing capability and system.

2. Capacity Building and Upgrading of the Office of the Auditor General of Pakistan-US$l9.345 million (including contingencies):

15. The objective o f the OAGP component i s to adopt modernized government audit procedures and internationally accepted auditing standards that will contribute to eradicating deficiencies in program and evaluation capabilities in a timely and effective manner. There i s also an urgent need to upgrade the organization and administrative support for OAGP to support plans to meet i t s extended audit mandate. This i s to be achieved through four sub-components:

a. reorganization and support technical assistance for audit management and development activities to implement new methodologies, and significant expansions o f office space and equipment to meet the needs o f expanded professional audit functions directed at improving the central capacity to report publ icly on the full regularity and performance audit mandate including adequate audit o f revenue, and the certification o f annual accounts o f corporate entities, and national, provincial and district levels o f government;

b. physical upgrading and I T support for field audit - poor conditions and equipment will be upgraded to enable more efficient implementation o f audit methods designed during PIFRA I;

5

c. implementation o f an integrated audit management information system (AMIS) - to improve audit control, reporting and fol low up through better communications and planning between Islamabad and the decentralized audit directorates; and

d. upgraded training facilities and programs to develop staff to internationally accepted professional standards; deficiencies identified by a training needs analysis conducted during PIFRA I will be corrected through the implementation o f a comprehensive training program conducted in upgraded training facilities.

3. Capacity Building and Upgrading of the Offices of the Controller General of Accounts- US$ 1 8.4 70 million (including con tingen cies) :

16. offices at federal and provincial levels have been made his responsibility as well as the departmentalized accounting entities. This has considerably enhanced the policy formulation, coordination, and administration responsibilities o f the CGA. The C G A i s also expected to play the lead role in developing an integrated accounting and financial reporting environment. The systems that the C G A inherited are, in a real sense, undergoing comprehensive change and the new systems will be very different from the legacy systems. The objective o f the CGA component i s to assist the CGA’s Office and the AGs to professionally and adequately manage, and also to maximize the benefits from, the computerized accounting environment. This objective i s to be achieved through two categories o f assistance:

The CGA Ordinance conceives a broad role for the CGA. Accountant General (AG)

a. Strengthening Government Financial Management Policy and Capacity by:

o strengthening the CGA’s administrative and management powers through capacity building o f C G A staff; and recruitment o f senior staff with qualifications and experience required to take over, manage and maintain the new system;

o building a skilled internal audit complement v ia training and recruitment, and developing a comprehensive set o f internal controls, internal audit work programs, and reporting regime, meeting the international standards o f the Institute o f Internal Auditors (IIA);

o revising/developing government accounting, budgeting, financial, and internal control manuals, taking into consideration the long-term vision o f eventual transition to full international accounting and internal auditing standards;

o creating a SAP Competency Center, including help desks, to provide reliable technical and maintenance support for SAP applications; building I T capacity through recruitment o f technical professionals and providing technical training opportunities (local and foreign) for the staff responsible for the systems. The M O F has recognized the necessity for supporting the recruitment o f well qualified counterpart staff by the C G A for the IT function and has already sanctioned the necessary posts;

b. Strengthening o f the CGA’s facilities and systems to take maximum benefit from the IT-based environment by:

6

o renovation o f CGA headquarters (HQ) -the HQ building would be upgraded to adequate standards to support a computerized environment;

o construction and renovation o f Accountant Generals offices in Balochistan & Sindh (and others as required) to adequate standards and to support a computerized environment;

o the conversion o f Balochistan Treasury Offices to DAOs, including logistical support for the more remote sites, and new sanctioned posts;

o improved internal controls, specified by the C G A in consultation with the Auditor General and MOF/finance departments, for use by the Chief Financial Officers, and pi lot implementation in ten sites; and

o improved records management needed to improve financial reports to assist accountability and management. A contractor will help set up archival policies and arrangements, supervise equipment procurement, train internal resources and transfer the systems to the department.

17. The project also includes provision for training o f officers (a) to develop staff to internationally accepted professional standards through degree courses in accounting, financial management and IT; (b) to familiarize them with the concepts, techniques and methods o f internal audit; and (c) for training o f officers for the implementation o f the Internal Audit Manual.

4. Project Man agemen t- US$6.446 million (including contingencies) :

18. The framework for project management comprises the fol lowing arrangements:

a. A Steering Committee, chaired by the Auditor General, with general powers to oversee project policies, implementation, and responsible for reviewing proposals for capacity development and for post completion activities shall be established. I t s functions will include receiving quarterly reports o n the project’s progress, assisting coordination, approving activities and helping mitigate risks, within the project’s general framework. The Steering Committee’s core membership will include Audit, CGA, Finance (federal and provincial), Planning, SBP, N B P and CBR; others like local government agencies may be co-opted from time-to-time as necessary.

b. A Project Director with adequate devolved powers to ensure that project implementation runs smoothly and is coordinated (between components, between provinces, etc.) and not held up by administrative bottlenecks. The Project Director’s Terms of Reference, powers and responsibilities, as contained in Annex 6, were reviewed and azreed at nezotiations.

c. The Project Director would head a Project Directorate. The directorate would comprise a team based in Islamabad and a sub-directorate in each province. The Islamabad team would deal with overall coordination o f implementation, change management and communication, and back-office functions such as project

7

accounting, reporting and procurement including, through i t s M I S wing and the monitoring and evaluation (M&E) cell, running a project implementation tracking model. Incremental staff (including consultants as required) would strengthen the existing core team. Provincial sub-directorates would play the pivotal role for local implementation, with each client nominating an officer to be solely responsible for managing project work within hidher business unit. The chart showing the service delivery relationships with these arrangements i s provided in Annex 1 1.

d. Project-oriented personnel in the project management team have a major positive impact on the pace o f implementation. An attempt to attract such staff and to limit staff turnover shall be made by adopting incentives such as special and project allowances, honoraria, and provision o f good office facilities and transport. The Project makes provision for contract hiring o f qualified consultants on contractual basis for appropriate support, at market rates during the 5-year project implementation period, to further accelerate project implementation progress during the crucial implementation phase. In addition, a performance oriented incentive scheme shall be put in place to reward project management staff, based on satisfactory implementation performance rating o f the project at the end o f each assessment period, and with due regard be paid to individual performance levels o f staff.

e. The Project Director would have Principal Accounting Officer (PAO) responsibilities for project finances. This will help to ensure that project implementation and coordination are integrated with project finances.

f. Communication and change management will be the responsibility o f a designated senior officer, who will determine strategy, oversee implementation and report results achieved. Change management related to project implementation shall be managed through the sub-directorates, and tailored to the needs o f particular activities. Consultancy services and technical assistance will be secured to support the Government in implementing the change management activities (see Annex 7 for further details).

g. Adequate space for the Project Directorate at Islamabad and sub-directorates at provincial headquarters shall be needed. In Islamabad, space sufficient to house the complete project management directorate at one site would be acquired. Provincial governments would be requested to accommodate their respective sub-directorates.

h. The project management component includes US$2 mi l l ion to be utilized for activities under the aegis o f the federal and the four provincial finance departments in order to reinforce the effective delivery o f the fiscal management capacity part o f the project through those offices.

D. Lessons Learned and Reflected in the Project Design

19. Key lessons from PIFRA I which influenced the design o f PIFRA I1 are:

8

a. Stakeholder participation and strong ownership i s critical to project success. The project’s design provides for extensive interactions early and often with a wide range o f Government counterparts, at federal, provincial and lower levels o f Government, and across Government, including finance and l ine agencies in addition to core accounting and auditing staff, to acquire and maintain solid support and engagement in advancing the reform agenda and monitoring the project’s implementation. Strong support from the AG, M O F and CGA i s needed to help weather the inevitable storms encountered when implementing systems that are aimed at financial transparency. Strong resistance and attempts to discredit systems may be experienced and need to be managed well.

M O F (and finance departments at provincial level) have roles as opinion-makers, and wield influence over line ministries or departments. T o keep MOFs’ and finance departments’ (FDs) attention on PIFRA requires that i t s fiscal management reform attributes be stressed (and not solely i t s contribution to accounting and auditing). As opportunities arise, i t should continue to be linked to fiscal reform benchmarks in Development Policy Loans and IMF programs, which also get full attention from finance.

b. Communication at al l levels i s an essential part for developing participation and ownership. It i s needed to ensure that al l stakeholders are aware o f the project objectives at the outset and over time as events unfold. Collecting input from various stakeholders increases the project’s chances o f success, indicating a clear need for two-way communication channels.

Communication about PIFRA, the high level support for it, what the project implies for both users and providers o f financial information, opportunities for associated training, and so on, will be made available through the central and provincial project management directorates on a continuous basis. Information on the project’s status and progress reports shall be available through a variety o f sources such as a newsletter, a web-page, videos and posters.

c. Strong project management i s essential for smooth implementation. Having personnel in the Project Directorate with a project-oriented mindset makes a significant difference to the quality and timeliness o f project outputs. Measures to limit the turnover o f such staff, as defined above, make the directorate more effective.

d. Arrangements for project management are much more developed than was initially the case for PIFRA I, as the positive impact o f strong project management on implementation has become clear. Project monitoring arrangements are now designed to monitor results as well as inputs on a quarterly basis. The Bank’s supervision arrangements provide much more attention to the project with the Co- Task Team Leader based in Islamabad.

e. There is a critical need to have a Government IT Manager with extensive experience in management o f large-scale IT systems implementations in place in order to make PIFRA I and PIFRA I1 successful. A General Manager (GM) Manager MIS has in

9

fact been appointed and the staffing; o f the SAP Competency Center has commenced with the init ial appointment o f 17 staff.

f. More realistic and less ambitious lead times in an environment o f weak technical capacity have to be given for implementation o f roll-out sites. Greater efforts will be made to liaise with those involved in other aspects o f financial reforms such as for local governments.

g. Contractual issues that emerged during PIFRA I and resulted to delays in project implementation have now been recognized in the design o f PIFRA I1 through insistence o f the Bank’s task team for tabling potential contractual failure issues in good time and for ensuring that procurement plans are adequately and systematically developed to avert implementation delays and sequencing problems.

E. Alternatives Considered and Reasons for Rejection

20. The option o f expanding the scope o f the existing PIFRA project to include additional capacity building and organizational change for the accounting and auditing functions was considered but rejected. This i s because after some delays, the PIFRA project was occupied with implementing New Accounting Model (NAM) and had an extension until M a y 2005 to complete about 30 sites. Given this challenge, it was considered essential to avoid diluting i t s focus during i t s critical closing stage.

2 1. PIFRA’s original design, such as the Government’s commitment to the devolution o f financial power and information to provinces and local governments. PIFRA I1 activities needed to include strengthening the offices o f the Controller General o f Accounts, provincial AGs and DAOs, the Office o f the Auditor General, Internal Audit departments in l ine ministries, and capacity building o f IT, accounting, and auditing sk i l ls at al l levels o f government.

Furthermore, a number o f structural changes had occurred which were not included in

22. Consideration was given to isolating each t ier o f government and providing a unique budgeting and accounting architecture to run in parallel. While this could be an idea that further supports the devolution process, i t i s evident that at the lower levels o f government, financial management capacity is very weak and will take a very long time to develop. The ro l l out o f the FMIS i s not undermining the devolution process since the gradual strengthening o f the financial management systems at the local levels will in itself accord with the reinforcement o f the accountability system and create a platform for building on a lower domestic skill base in the medium term. The SAP/R3 system i s designed under the project for implementation essentially at the federal, provincial and district government levels. It has a l l the requisite hc t i ona l i t i es to support a decentralized management and ownership o f accounts when the government’s pol icy directions become clearer. Below these levels, Le., at Tehsils and lower levels, a simplified FMIS solution requiring less technical and operational capacity i s planned to be introduced and this will be piloted in 15 largely big spending TMAs which together represent about 15% in fiscal expenditure terms. Thereafter, the system shall be rolled-out to the rest o f the district headquarter TMAs during PIFRA I1 implementation.

10

23. Accordingly, given these factors, changes in the government’s interests and the new emphasis on devolution to provinces and districts, starting a new project which gives due cognizance to these, and through the continued adoption o f the selected FMIS system that has the requisite flexibility options to adapt to changed circumstances, was deemed to be the best approach.

111. IMPLEMENTATION

A. Partnership Arrangements

24. with other donors through formal and informal means.

There i s no co-financing in the project. However, there would be intensive collaboration

B. Institutional and Implementation Arrangements

a. The institution(s) responsible for implementation o f the project and i t s various components are shown in the table below:

Component Agency Responsible 1.

2. 3. 4. Project Management Steering Committee and PD

Financial Accounting and Budgeting System

Office o f the Auditor General of Pakistan Office of the Controller General o f Accounts

CGA, AGPR, AGs, MOF, FDs, District Govts. with Project Directorate OAGP with Project Directorate CGA with Project Directorate

................................................................................................................................................................................................................................................................ä� .............................................................................................................

................................................................................................................................................................................................................................................................Ý�

o The project i s designed so that individual components are somewhat independent o f each other and fal l under the responsibility o f their respective implementing agencies, with implementation and co-ordination assistance f rom the Project Directorate and responsibilities for operation o f developed activities by the respective Departments o n completion. The Auditor General, as Chairman o f the Steering Committee, has the overall coordination role to ensure that progress i s made in each o f the components according to plan and that steps are taken to address any outstanding issues as soon as they are identified.

o Training i s an integral part o f each component. The Accounts and Audit Training Institute (AATI) shall continue to provide i t s regular blend o f short courses and probationers’ training through i t s headquarters in Lahore, and training schools in Islamabad and each provincial capital. In some instances, such as the training o f Drawing and Disbursing Officers in NAM, it will also assist with mass training. The AATI has headquarters in Lahore and training schools in Islamabad and each provincial capital. Training may be outsourced to private suppliers (such as for routine computer familiarity training) and to local academic institutions for more advanced level courses. Specialized training and refresher courses may also be handled by departments through their field offices. Annex 5 provides a detailed number o f trainees for each activity and the timing o f training activities (linked to the recruitment and implementation plans). The associated costs are provided in the detailed cost tables for each component.

11

b. On what basis were the institutional arrangements selected?

These arrangements are based upon the functional responsibility o f respective departments. Accounting and financial reporting i s handled by the C G A and his office, audit by the Auditor General, and project management by the Project Director. The M O F and the provincial finance departments are responsible for managing the budget preparation and expenditure policy part o f the arrangements.

c. What capacity constraints need to be addressed, including financial management and procurement, and how wil l this be done?

The Project Directorate for PIFRA I has basic experience o f Bank procedures. It shall continue in PIFRA I1 and be the focal point o f the project for these activities, although it shall have enhanced capacity. For example, i t s own financial management system will be upgraded and incremental accounting and audit staff recruited, and i t s M I S wing strengthened by additional expertise in progress monitoring and reporting. The major constraints encountered under PIFRA I o f inadequate attention to communication and change management shall be catered for by the creation o f a separate directorate wing to undertake these functions, with support from the regional offices in each provincial capital. Procurement capacity is weak but i s already being upgraded through training o f procurement staff on Bank procurement procedures, policies and guidelines. Additional procurement staffing has already been recruited during PIFRA I to support PIFRA I1 preparations and implementation.

d. What will be the f low o f funds and the accountabilities for financial reporting?

As noted above, these functions will be managed by the Project Directorate using existing systems, enhanced as appropriate. Regional Project Directorates and finance departments will have direct access to project funds (see Section IV C and Annex 12 for further details).

C. Monitoring and Evaluation o f Outcomesbtesults

a. Where wil l the data for the project’s outcome and results indicators come from?

Initial data will come from a baseline survey (where appropriate) and during implementation data will be gathered by the MIS wing and the M&E cell from monthly progress reports submitted by provincial sub-directorates and the respective implementing agencies.

b. Where wil l the capacity and responsibility for collection o f indicator data and analysis o f results be located? D o capacities have to be strengthened? If so, how?

Monitoring and evaluation efforts will be centered in the MIS wing o f the Project Directorate. It will be responsible for establishing the implementation plan’s Gantt chart/critical path analysis for tracking progress against the plan and for analyzing

12

implications. Quarterly progress reports will be submitted to the Steering Committee and the Bank.

c. What additional costs are required, if any?

The MIS wing has an allowance for additional expertise and personal computer hardware and software built into project costs to support this activity.

d. What mechanisms will allow the indicators to be used by managers and policy- makers to assess the project’s effectiveness during implementation and after the project i s completed?

The implementation data including achievement o f milestones and any slippages occurring, plus an analysis o f the implications o f the current status for future achievement o f benchmarks, will be reported quarterly to the Steering Committee and the Bank. The Steering Committee is mandated to be responsible for overseeing the project’s implementation within i t s policy framework and for post-completion activities. The implementation arrangements for the project will have the requisite in-builtjlexibility, including re-prioritization of implementation in select provinces that are in more advanced stages of readiness.

D. Sustainability

25. Sustainability o f the PIFRA I1 project depends upon:

a. Continued government commitment to the extent and pace o f the fiscal and financial accountability reform agenda.

b. Collaboration among GOP and donors on a shared vision o f financial reforms, devolution, financial management, accountability, and financial reporting.

c. Successful ro l l out o f the new financial systems to 133 sites started in PIFRA I and to be completed under PIFRA 11.

d. Sufficient accounting capacity in the offices o f the CGA; effective reporting relationships, control o f staff, and administrative powers; plus sufficient internal audit capacity in l ine departments.

e. Sufficient external auditing capacity in the office o f the AG, adequate tools, and empowerment o f the function within the government.

f. Sufficient IT capacity to effectively operate and maintain the systems at the national and provincial levels, and fully funded operating, maintenance and upgrade budgets.

E. Critical Risks and Possible Controversial Aspects

26. Critical r isks o f the project are as follows:

13

Risk Risk Rating Risk Mitigation Measure

From Outputs to Objective: Government fails to maintain commitment Links with IMF and PRSC/DPL triggers to ensure that reform to fiscal and budgetary reforms. agenda retains momentum. Resistance to financial transparency cannot Links with IMF and PRSC/DPL triggers to ensure that reform be overcome. agenda retains momentum. Provincial, district, and sub-district Agree on respective donor roles, financing, and timelines. governments do not work cooperatively to Provision o f resources support to finance departments for their implement a seamless accounting and own fiscal management capacity building, training and reporting system, and donors assistance i s operation and management of their respective PIFRA sites. not properly directed and coordinated. Build public awareness early to exert pressure for reforms.

Design a comprehensive communications plan for PIFRA with a feedback mechanism to identify gaps needing rectification. As head o f the Audit and Accounts Cadre, obtain the AGP’s commitment to avoid such a problem. If it arises obtain MOF’s commitment to intervene.

H

H

S

................................................................................................................................................................................................................................................................ð�

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

................................................................................................................................................................................................................................................................ì� AGP and CGA’s discharge o f responsibility for recruitment, staff deployment and development o f career paths does not become effective and clear.

H

The size of the projects overwhelms implementation capacity.

H Strengthened project management, full readiness of first year contracts, and involvement o f a l l stakeholders. In addition the project shall have two formal ‘mid term’ reviews to permit restructuring as appropriate. Establish recruitment guidelines for accounting and auditing staff and training programs for existing staff with specific timelines and progress measures. Monitor turnover levels.

............................................................................................................................................................................................................................. Adequate, qualified accounting and audit staff are not hired, trained, and equipped with effective tools and these staff which are adequate are not retained.

H

Adequate, qualified IT staff are not hired, trained, and equipped with effective tools and these staff are not retained to maintain and operate the system. implemented. Project systems operation are not sustained after closure of PIFRA 11.

H Use market-based term contracts to attract and retain qualified IT staff. Recruit IT qualified staff in the civil service to build own sustainable capacity. Tools need to be budgeted for and

Aim to develop supports for systems’ outputs by end-users; ensure full operating costs of the systems are factored into revenue expenditure budgets.

................................................................................................................................................................................................................................................................ö� S

From ComDonents to OutrJuts: Financial Accounting and Budgeting System component i s implemented without creating total linkage between budgets and accounts at some accounting sites within the time frame for project implementation. Training ‘in and around the computer’ under the component, ‘capacity building and upgrading o f the OAGP’ may not be appropriately sequenced with the development and computerization o f the accounting sites. Capacity building and upgrading o f the CGA component: this component may be slow in the development o f an in-house capacity to manage the accounting sites due to skill shortage.

M Meticulous supervision of implementation progress and fine- tuning and addressing significant deviations relating to data capture and migration.

................................................................................................................................................................................................................................................................õ� H Ensure that adequate training i s imparted to an adequate

number o f audit staff in anticipation of the productivity o f accounting sites through focus monitoring.

H The early staffing o f SAP Competency Center and recruitment o f adequately qualified accounting staff to support system and operational maintenance under the CGA as designed under the project.

14

Risk Risk Ratinp Risk Mitipation Measure

~~

Project Management component: High staff turnover impacting on sustainability coupled with fledgling project management arrangements. implementation performance ratings.

M The strengthened project management arrangements to be supported by awarding performance related incentives to project management staff based on satisfactory project

Risk Rating: H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

Possible Controversial Aspects:

None noted at this time.

F. Credit Conditions and Covenants

27. safeguards will apply.

Standard implementation covenants including staffing arrangements, financial, and

IV. APPRAISAL SUMMARY

A. Economic and Financial Analysis

NPV = US$ million; FRR = YO (see Annex 10)

28. o f public finances using a controlled, secure, and accountable system that i s less prone to manipulation. The quality o f expenditure audit will be significantly enhanced as a result o f the use o f modern techniques in compliance, certification, and performance audits. The project will support better fiscal and financial management decision making in government; provide timely, comprehensive and reliable budget execution data to line ministries and other spending agencies; allow for the timely production o f accurate and meaningful financial statements based on international standards; raise the capacity and competencies o f the manpower responsible for budget preparation, budget execution, internal auditing, accounting and financial and fiscal reporting, and external auditing. Although difficult to quantify, each o f these factors has a positive economic impact. In cost-effectiveness terms, the project’s costs amount to about a half o f one percent o f the U S $ 17 bi l l ion equivalent expenditure being managed.

The project would contribute to the objective o f better budgeting, accounting, and reporting

B. Technical

29. and the implementing agencies and contractors are familiar with these. Technical issues that were addressed during appraisal include:

The project does not involve introduction o f complex new technologies beyond PIFRA I

Connectivity, capacity, and reliability o f communications l inks ; and

0 Arrangement for quality control o f works implemented by various contractors.

3 0. The following shall require continued attention during project implementation:

15

0 Coordination with work o f other donors such as ADB and DffD; and

0 Fully integrating systems to generate outputs that facilitate decision making at the implementing agency and project coordination levels.

C. Fiduciary

3 1. The arrangements are centered within the institutional set up o f the Project Directorate (PDte), but the accounting, internal control and reporting functions wil l be strengthened under this project by redeployment, f rom the Audit and Account Service, o f a suitably qualified and experienced accountant and an internal auditor acceptable to the Bank. With the technical complexity o f this follow-on project as well as the quantum o f financial resources to be managed over the project’s five-year l ife, i t i s imperative that adequate financial management staffing i s maintained. The project shall submit quarterly Financial Monitoring Reports (FMRs) to IDA on a format that was agreed between IDA and the GOP during negotiations. Project financial statements covering each fiscal year shall be prepared by the PDte, and audited by an independent firm o f Chartered Accountants whose terms o f reference have been agreed with IDA. Overall the FM arrangements for this enlarged project will be adequate with the recruitment o f the two qualified staff to work with and guide the government accounting and auditing team assigned to the project.

PIFRA I1 would apply the same financial management (FM) arrangements as PIFRA I.

32. proceeds o f the credit against which eligible project expenditures shall be incurred. Withdrawals f rom the Special Account shall use the FMR-based disbursement method. A mechanism shall also be established whereby the GOP provides annual budget allocation as i t s counterpart funds for financing the operational and maintenance costs o f the project through Accountant General Pakistan Revenue (AGPR). The funds f l ow arrangement shall provide for replenishable (revolving) imprest funds to be disbursed f rom the Special Account to meet the specific and general financing needs o f the finance departments as wel l as the regional Project Directorates. The ceiling o f an equivalent o f U S $ 50,000 shall be set for finance departments and US$ 1,000 for regional Project Directorates and these shall be accountable to the central Project Directorate for financial reporting to IDA.

A Special Account would be established for IDA funds. The Account will receive the

33. for Pakistan which al low for up to 100 % IDA financing o f a l l specified expenditure categories except ‘operational and maintenance costs’ which shall be financed by GOP.

The project wil l benefit f rom the outcome o f the agreed Country Financing Parameters

D. Social

34. I t i s not anticipated that personnel would become redundant as a result o f the project. There shall be changes in the responsibilities o f individual posts, and certain new sk i l ls shall need to be acquired. The project has a substantial change management component to help reassure staff about the impact o f change and a major training component to upgrade sk i l ls as required. (One very encouraging sign f rom PIFRA I i s the enthusiasm o f staff once they become trained in the new system, which hopefully wil l continue and become a major factor in easing implementation o f PIFRA 11.)

16

35. There i s no land acquisition anticipated; however small piece(s) o f land, if required, for construction o f new offices will be purchased by the GOP through commercial means. There i s no involuntary resettlement envisaged. As such no implication on indigenous people i s envisaged and therefore those policies are not triggered.

E. Environment

36. land held free o f encroachments, and the balance shall be refurbishment o f existing office space by items such as installing electrical and communication wiring, general repair and maintenance. All works shall be overseen by well-qualified local consultants whose TORS shall state that appropriate local planning, building and environmental requirements must be met. The balance o f the project i s concerned essentially with upgrading financial systems. Accordingly the project i s not anticipated to cause adverse environmental impacts.

The project involves some construction but new building wil l be on Government-owned

37. Assessment.

This i s proposed as a category C project which does not need an Environment

F. Safeguard Policies

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OPBP/GP 4.0 1) [I XI Natural Habitats (OPBP 4.04) [I [ XI Pest Management (OP 4.09) 11 XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [I XI Involuntary Resettlement (OPBP 4.12) [I [ XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [ XI Forests (OP/BP 4.36) [I [ XI Safety o f Dams (OPBP 4.37) [I XI Projects in Disputed Areas (OPBP/GP 7.60) [ XI 11 Projects on International Waterways (OP/BP/GP 7.50) [I [ XI OP 7.60: A part o f the proposed project will be carried out in Azad Jammu Kashmir, an area over which Pakistan and India have been in dispute since 1947. By financing the credit, IDA does not intend to make any judgment as to the legal or other status o f the disputed territory or to prejudice the final determination o f the parties claim.

G. Policy Exceptions and Readiness

a. The project complies with Bank policies.

b. Major contracts to be let in the f i rst year o f the project shall be procured to the point o f negotiation and issuance o f IDA'S no objection and hence be ready for award immediately fol lowing project effectiveness.

Robert J. &um Abid Hasan Task Team Leader Sector Manager, SARFM Acting Country Director

17

ANNEX 1. COUNTRY AND SECTOR BACKGROUND

1. second-generation reforms to accelerate growth while maintaining macroeconomic stability. Other pillars o f the PRSP include strengthening governance and furthering devolution, accelerating investments in human capital, and targeting the poor and vulnerable. The PRSP targets are in l ine with the progress necessary to meet the Millennium Development Goals (MDGs) and provide a good policy framework for the implementation o f a strong reform program, which can translate into the Government’s ambitious development goals and thus accelerate progress towards the MDGs for Pakistan.

The main focus o f government’s Poverty Reduction Strategy Program (PRSP) is on

2. governance remains a priority for the Government o f Pakistan. The PRSP builds on the positive developments o f the past three years and outlines an ambitious governance agenda which includes measures to advance financial management and procurement reforms, accelerate police reforms and improve citizens’ access to justice, improve the functioning o f the c iv i l service, increase transparency o f pol icy making and improve public accountability. These measures are expected to contribute to an improved investment climate and thus contribute to faster growth and poverty reduction. The PRSP also outlines critical next steps to advance fiscal and administrative devolution which are expected to improve delivery o f key public services and empower local governments to respond to local development priorities.

Improving governance i s critical to poverty reduction. The PRSP states that improving

3. request o f the Government o f Pakistan, the Bank supports Pakistan’s reforms and development through development pol icy and investment lending as well as non-lending instruments. The CAS specified the instruments best suited to pursue the strategy: (a) policy-based, fast- disbursing lending to pursue the governance and sectoral reform agenda; (b) programmatic sector and investment lending to support implementation o f reforms in economic management and governance (e.g., technical assistance to the central bank and reforms in tax administration and public financial management); social infrastructure and delivery systems for education and health; and community infrastructure services (including water management) at al l levels o f government; and (c) analytical work and other non-lending services to monitor developments in the areas o f l o w engagement and to encourage reforms.

Guided by the Country Assistance Strategy (CAS) and based on the track record and

4. The Government’s reform program has been supported by strong external bilateral and multilateral financial and technical assistance. In particular, the Wor ld Bank has supported the Government o f Pakistan’s structural reforms with two national Structural Adjustment Credits, and the reform programs o f provincial governments with multi-sectoral provincial Structural Adjustment Credits for Sindh and NWFP and an Education Structural Adjustment Credit for Punjab. The IMF has supported macroeconomic stabilization policies with a 3-year Poverty Reduction and Growth Facility (PRGF). The Asian Development Bank has supported Pakistan with development policy programs and investment projects at the national and provincial levels. A number o f UN agencies have expanding programs in Pakistan, as have UK’s DFID and US AID. The EU and several other bilaterals are also providing project finance as wel l as budget support in cash or in debt reduction. Coordination with al l these institutions shall constitute a continuous feature o f project delivery and implementation in order to create complementarity and avoid overlapping programs.

18

ANNEX 1

5. governance and high levels o f corruption have been at the heart o f Pakistan’s poverty and development challenges, the government made improving government and public sector performance a central element o f i t s poverty reduction strategy. As outlined in the National Anti-Corruption Strategy (2003), the government has recognized that i t s approach needs to be comprehensive including awareness-building, strengthened accountability mechanisms, and improved management to reduce the need and opportunities for corruption. Beginning in 1999, the government launched far-reaching governance reforms including (a) reforms in P F M and procurement to increase fiscal transparency and accountability; (b) restructuring o f the Central Board o f Revenue to strengthen tax administration; (c) a devolution initiative aimed at improving the delivery o f public services by creating more accountable local governments; and (d) reform o f the c iv i l service to improve incentives and accountability.

Governance reforms have continued to advance. Recognizing that problems o f weak

6. comprehensive strategy to improve public accounting and auditing. The two functions have now been separated through the promulgation o f the Controller General o f Accounts Ordinances. With the introduction o f a N e w System o f Financial Control and Budgeting, significant spending powers are now delegated to the administrative heads o f spending agencies, thus impacting on improvements in budget execution. The thrust o f the Government o f Pakistan’s financial management reforms, however, rely on the widespread implementation o f an automated accounting system (under PIFRA) which will improve the transparency in the government’s financial administration as wel l as the timeliness, accuracy, reliability, comprehensiveness o f financial and fiscal data and information. Fiscal Monitoring Committees at the federal and provincial levels prepare, reconcile and publish updated quarterly consolidated data verified by the Controller General o f Accounts. This will help address the problem o f unreconciled and unidentified expenditures and thus enhance the reliability o f financial and fiscal reports. Next steps also identified in the PRSP include accelerating PIFRA implementation, strengthening accounting expertise, and building capacity o f Public Accounts Committees’ secretariats.

In financial management, the Government’s plan i s to continue to pursue a

7. While progress has been achieved so far in embracing financial management reforms, there are remaining contentious issues which require increased focus and attention o f the Government o f Pakistan. Among these issues are the ‘provincialization and districtization o f accounts’ as wel l as the unresolved ‘duality o f control’ o f accounting and treasury officers at the provincial and district levels. The lack o f clarity in the effective direction o f devolution as related to the ownership o f accounting and the inherent risks related to the commitment and ownership philosophy in financial stewardship, management and control are fundamental issues which impact o n the desired outcome o f the project. Notwithstanding, the project design provides for inbuilt flexibility to creating a form o f unique decentralized functionality for each tier o f government in pursuance o f the devolution strategy o f government when the policy issues are better clarified. Presently the Controller General i s responsible through respective Accountants General o f the provinces and the AGPR to prepare separate accounts for the federation, federal, provincial and district governments. The audit o f these accounts i s conducted by the Auditor General o f Pakistan and the audited accounts and reports are submitted to the respective governments’ legislative organs for scrutiny. By these means, apart from the ownership for preparation o f accounts which i s conducted as a federal responsibility by the CGA, the scrutiny o f those accounts, after audit, i s the responsibility o f the respective governments - a f i rs t step in the right direction.

19

ANNEX 1

8. Financial management reforms have progressed well with a number o f actions taken to improve budgetary and accounting systems and internal control arrangements. These actions consist o f both technical reforms such as the implementation o f a new chart o f accounts and an automated accounting system as well as institutional reforms to improve accounting, financial reporting, internal controls, external audit, and legislative oversight. The Bank’s proposed PRSC I1 program would support some o f the next steps in the implementation o f the financial management reform program, consistent with the 2003 CFAA. The accuracy o f financial information i s crucial for improved utilization o f public expenditures and particularly for tracking key PRSP expenditures. A key challenge remains the adoption o f a methodical and comprehensive accounts reconciliation framework and strengthened internal control systems particularly at the provincial and local levels where some deterioration has taken place.

9. financial reporting and tracking o f expenditures, and to build adequate financial controls at al l levels o f government. A fundamental reform requirement being implemented under PIFRA is upgrading the fiscal management dynamics in the government o f Pakistan. The project is not entirely accounting and auditing focused but one that strongly supports a framework o f integrating and linking budgetary planning and management, budget preparation, budget execution and monitoring, payments processing, accounting, financial and fiscal reporting, and auditing. The key reform priorities as identified in the Country Financial Accountability Assessment - C F A A (2003) also include improving financial reporting through accelerating PIFRA implementation, working towards automating bank and account reconciliation processes, and strengthening internal controls through the introduction o f Chief Financial Officers to assist the Principal Accounting Officers (PAOs). With regards to external auditing, improvements are needed in the methodology and scope for national, provincial, and district audits, specifically moving from transaction-based auditing to system-based auditing and with audit reports focusing more on key issues and significant irregularities. Finally and most importantly, effective legislative oversight is required. This has been accomplished through the setting up o f PACs and establishing precedence for open proceedings (to the press and public) o f some o f these committees. Legislative scrutiny by other tiers o f government (District, TMA and Union Council) has yet to be effective due to weak capacity at those levels. Looking forward, providing these committees with the necessary technical support and capacity building assistance will contribute to their effectiveness.

Improving the effectiveness o f public expenditures also requires reforms to improve the

10. The government’s reform program in P F M has advanced in a number o f key areas:

0 Accounting and Financial Reporting. The Controller General o f Accounts (CGA) organization has been strengthened and annual final accounts for the federal government have been produced within six months o f year-end. Data reliability has improved so that monthly and quarterly federal reports are posted on the web and budget execution data i s sent to ministries by mid-month for reconciliation. The medium-term objective i s to consolidate and deepen the adoption o f a new chart o f accounts and financial reporting requirements under a new computerized accounting system supported by the Bank-funded Project for Improvement in Financial Reporting and Auditing (PIFRA). There i s an urgent need to enhance the accountability framework at the sub-district leve l - an action that i s not fully

20

ANNEX 1

supported under this phase o f the project although ADB and DfID are providing capacity enhancement support to them under their respective programs.

0 External Auditing;. There has been considerable progress in improving the timeliness o f audits in FYs 2000/01 and 2001/02 with audit reports available within twelve months o f the end o f the fiscal year (Le., six months after the accounts have been prepared by the CGA). An Annual Audit Program that sets out specific goals and targets has been published and the Auditor General o f Pakistan (AGP) has recently begun the process o f recruiting over 800 qualified auditors to conduct audits under the District Audit Infrastructure. Timeliness o f audit will be improved under the project although the audited accounts for FY 2002/03 and 2003/04 have yet to be fully delivered due to the newly introduced policy o f carrying out separate audits for district government accounts under the Local Government Ordinance. However at the sub-district levels, auditing i s carried out by Local Fund Auditors who are provincial government staff without the requisite technical capacity. The AGP will take over the auditing role for these lower tier governments in the medium term when the AGP’s own capacity i s developed. PIFRA I1 makes provision for this capacity enhancement initiative.

0 Legislative Oversight. A key element o f the government’s strategy i s to revitalize transparency and effective legislative oversight through the PACs o f the National and Provincial Assemblies which review the findings o f audit reports. The ad hoc PACs which were formed during the military government have now been replaced by PACs under the auspices o f the newly elected national and provincial assemblies. The federal government and the four provincial governments have now reconstituted the PACs. The district and sub-district governments have their own PAC-style institutions which have yet to achieve the required operational maturity and capability. A high priority for the future will be to devise a strategy for addressing the backlog o f reports awaiting review (starting f rom the most current year) while focusing on significant findings. An IDF Grant has been approved recently by the Bank to support the strengthening o f the federal P A C and, by extension, serve as a prime mover to the strengthening o f the provincial PACs. The district and sub- district PACs would benefit from the experience and know-how at the federal and provincial level PACs in due course.

21

ANNEX 2. P I F U AND PUBLIC FINANCIAL ACCOUNTABILITY FRAMEWORK IN PAKISTAN

A. An Overview o f Financial Management Systems in Pakistan

1. Good public sector financial management i s essential for ensuring proper utilization o f public resources. This can be achieved by improved financial transparency, accountability and adequate systems used by trained personnel. Public sector financial management helps to achieve the economic objectives set through various policies, action plans and strategy papers. The process starts f rom budgeting in accordance with the medium term objectives set out in the annual budget framework. Line departments give their separate budget proposals for the development and recurrent components o f the budget. The development projects are appraised and evaluated by the planning departments whereas the overall budget is compiled at the finance departments. The budget i s debated and approved by the legislature and sent back to the line departments for execution. The accounts offices, being regulated by the Controller General o f Accounts, process the payment claims while exercising the budgetary control and regularity checks, maintain the accounts o f financial transactions and prepare financial reports. The Auditor General o f Pakistan performs the statutory audit as required under the Constitution and submits these reports to the legislature. Public Accounts Committees are mandated by the legislature to perform a detailed legislative scrutiny.

2. ten months before submission o f the budget, circulars issued by finance and planning departments initiate the preparation process. In this circular, agencies are requested to submit a statement o f permanent expenditures on the current budget and proposals for new expenditures, projected expenditures on existing projects, as well as proposals for expenditures on new projects.

Budget preparation i s based on well defined timetables. O n the expenditure side, eight to

3. are “permanent” or are “new”. The bulk o f the budget - more than 90% in the case o f the current budget - is covered by existing expenditures and i s treated as fixed and not subject to review. All establishments (Le., personnel) and pension costs, un-allocable charges, debt servicing charges and office administration fa l l under “old” or “fixed” expenditures. The finance department and respective line departments review new items o f expenditure.

The review o f the budget proposals varies greatly depending on whether the expenditures

4. projects in the development program. Large investment projects undergo a more systematic review through the review o f the project proposals and their investment and recurrent expenditure implications in future years.

Committees having jurisdiction for projects falling in different categories examine the

5. current and development budgets, respectively, and enter into negotiations with the l ine departments on the size o f their proposals. This process o f bilateral negotiations i s continued until March or April (at this time the revised estimates o f the ongoing year - based on nine months o f actual expenditures and three months o f projected expenditures - are also prepared). Negotiations with l ine departments are closed after expenditure aggregates have become consistent with revenue forecasts and later fine-tuned based on inter-governmental fiscal transfer estimates. Finally the budget is presented to the legislature for final approval.

The finance and planning departments review proposals for new expenditures for the

22

ANNEX 2

6. payment authorization. DDOs are nominated officers in the spending departments. DDOs also keep records o f financial transactions made by these departments and the P A 0 o f the department draws departmental financial statements from these records. The accounting at al l levels i s on cash basis and accruals are only made in respect o f some debt instruments. Separate dead stock registers are maintained to record assets.

Drawing & Disbursement Officers (DDOs) submit expenditure bills to the D A O for

7. The PAOs are required to submit a statement o f excesses and surrenders at specified times and in specified forms to finance department. If funds for excess expenditures are not available within grants, then a supplementary grant can be approved by the finance department on a temporary basis. All supplementary grants are subject to approval by the legislature sometimes under the approval o f a supplementary budget and sometimes under the approval o f the revised budget, which i s approved at the time o f approving the next year's budget.

During the budget execution, re-appropriation powers are distributed at various levels.

8. along with finance accounts and audit reports. The appropriation accounts present a variance analysis o f the budget versus actual revenues and expenditures and after the legislative scrutiny thereof, there i s a requirement o f preparing an Excess Budget Statement for the submission and ratification to the legislature.

The Accountant General prepares appropriation accounts. The P A C discusses these

9. The Bank has conducted C F A A and PFAAs in three provinces' which identified some o f the common issues. These issues included the disconnect between the long term planning framework and yearly budgets. Budgetary process i s more procedural and incremental in nature and not directly based o n the desired performance outcomes. There i s dearth o f specialized people in finance and planning offices at the local government level. Budget execution has weaknesses in monitoring o f spending programs, outcomes and service delivery along with the lack o f information to track actual expenditures versus planned. Accounting, Jinancial reporting, and internal controls are improving but technical capacity and difficult management and organization issues involving both federal and provincial staff cadres need to be resolved. The internal audit system i s stagnant and needs to be revitalized with additional resources along with an enhanced role based on international benchmarks, External auditing has developed improved capacity at the provincial level but local audit lacks capacity and power to audit to the same standards as the AGP. The OAGP, responsible for external auditing, i s faced with new challenges including certification o f accounts and audit o f newly created local governments. Legislative oversight o f budget activities i s weak due to l imited technical capacity and the uncertain charter for Accounts Committees. To compound the situation, the information that PACs receive i s often dif f icult to understand and not timely. In general there i s weak enforcement and implementation o f the oversight recommendations. The laws and subordinate legislation require updating by removing obsolete items and modernizing concepts and terminology.

10. A majority o f the issues are common to the federal government and provincial governments and are generally understood and accepted. The gravity o f issues requires a consistent and gradual approach to on going and continuing reforms at a l l levels to reduce the institutional gaps and constraints and enhance capacities o f financial managers. The use o f the ~ ~~

PFMA Punjab - draft report already discussed in the stakeholders workshop in March 2005 i s being finalized.

23

ANNEX 2

international standards and technology solutions i s seen as a most important dimension o f the reform efforts.

B. Local Government Fiscal and Financial Management

1 1, At present Pakistan i s going through transition with a commitment to poverty reduction and action on political, judicial and economic reforms. Pakistan’s poverty reduction strategy paper (PRSP) has been discussed with provincial governments and c iv i l society. The IMF, the World Bank, ADB, UN system and other bilateral donors including DFID, JICA, etc., support this strategy. The devolved governance systems as set up for the social service delivery are recognized as being key to that strategy. GOP accepts that developing the capacity for good governance i s one o f the important primary means o f eradicating poverty

12. and accountability. The devolution o f power to the grass roots level and decentralization o f administrative and financial authority i s seen as one o f the means for improving the governance crisis leading to poverty reduction. N e w local governments will be the sole providers o f critical social services including education, health, water supply and sanitation. A s a result, more funds are at the disposal o f local governments to be budgeted and spent in accordance with local priorities. Fiscal decentralization i s underway but there are certain transition issues adversely affecting financial accountability at the local level.

The PRSP rightly visualizes the inter-linking relationship between poverty, governance

13. The rationale behind development o f new financial management systems/modification o f existing systems i s to keep the stakeholders (management, elected representatives, citizens, etc.) informed about the government activities and their financial impact. The efficient functioning o f financial management systems ensures transparency leading to greater citizen involvement and accountability.

14. The FM processes in local governments, particularly the district governments, are a refined replication o f processes at higher levels o f government. All agencies give their separate budget proposals for the development and recurrent components o f the budget. The development projects are appraised and evaluated by D O (Planning) where as the overall budget is compiled by the D O (Finance), both working under the supervision o f Executive District Officer-Finance & Planning (EDO-F&P). The budget i s debated and approved by the Council and sent back to the EDOs for execution. ED0 (Revenue) manages the revenues o f the LG. All receipts are deposited with the State Bank o f Pakistan or the National Bank o f Pakistan acting as an agent o f SBP. The overall funds are managed into two accounts including the LG Fund and the Public Account. All expenditure bills at the district government level are submitted to the District Accounts OfficedTreasury Offices which, after the pre-audit and budgetary scrutiny issue cheques for payment. The DAO maintains the accounts. The Auditor General o f Pakistan performs the statutory audit and submits his reports to the council. The District Accounts Committee i s mandated by the council to perform a detailed legislative scrutiny.

15. replication o f the majority o f issues also. Therefore any reforms at the higher levels should be extended to the local governments to cope with the issues existing at that level.

Replication o f systems prevailing at the higher levels to the local governments means

24

ANNEX 2

C. PIFRA

16. o f Financial Reporting and Auditing (PIFRA), a major initiative to streamline the financial management and accountability in Pakistan, was started in 1998. Due to i t s pivotal importance in improving the fundamental systems o f budgeting, accounting, payments and auditing, and i t s thematic and institutional coverage, PIFRA has become a cornerstone o f al l reform efforts for the financial accountability system in Pakistan. PIFRA components included improvement o f accounting and reporting systems, internal control systems, government auditing, human resource management, training and other policy support. The guiding principle remained the use o f information technology and international best practicedstandards to produce relevant, reliable, comprehensive, and decision-support fiscal and financial information for a more transparent management o f the economy.

In conjunction with the government efforts, the Bank-supported Project for Improvement

17. public finances, using a controlled, secure and accountable system. The quality o f expenditure audit will be significantly enhanced as a result o f the use o f modern techniques in compliance, certification and performance audits which will together constitute a focal area o f the project's intervention.

The project contributes to the objective o f better budgeting, accounting, and reporting o f

18. Accounting Model (NAM). The model consists o f seven volumes as follows:

PIFRA revamped the legacy accounting system by introducing the New Budgeting and

a. Manual for Accounting Principles b. c. d. New Chart o f Accounts e. Financial Reporting Manual f. Handbook on Accounting Guidelines g.

Accounting Policies and Procedures Manual Accounting Policies and Procedures Manual (Book o f Forms)

Accounting Codes for Self Accounting Entities

19. capability across al l the various arms o f the government. So far despite the many achievements, the progress o f implementation o f activities remained slower than originally envisaged.

The challenge i s to implement this model with complete functional and operational

20. In addition, a new Financial Audit Manual has been developed for improvement in the government auditing process and management. A draft Internal Audit Ac t as well as an Internal Audit Manual was also developed to strengthen the internal controls in the public sector. The implementation o f the Internal Audit Manual will be piloted in ten sites during PIFRA 11. The overall reforms are backed by effectively designed components for change management, training and institutional development.

2 1. PIFRA I1 for eventual rollout to the whole o f the country. The real benefits o f these reform efforts are implicit in the complete rollout wh'en effective reconciliations, consolidation and reporting o f data to executive agencies will be easily achieved.

The successful implementation o f NAM at various places has guided the design o f

25

ANNEX 2

22. offices. I t will also cover 105 EDOs (F&P) and up to 105 T M A s at the district headquarters. There are provisions for automation o f departmentalized accounts, Azad Kashmir, and support for training, related studies and change management.

PIFRA plans for complete implementation o f SAP in al l DAOs and higher-level accounts

23. By extending automation to the l ine ministries for the purpose o f budget execution, reconciliation through the current manual process would become unnecessary since a uniform set o f accounts and budget execution information will be held at both the l ine ministries and the AGPR and AG offices. The upgrading and capacity building o f the AGP’s staff will create a more timely completion o f external audit and thus allow for the audit certification to be available at the earliest.

24. payments offices will assure timely determination o f accurate balances for each o f the governments’ accounts. Determination o f cash balances in the present circumstances where there are no electronic interfaces i s not supporting the provision o f reliable public financial statements.

Reconciliation o f accounts through interfacing with CBR, SBP, NBP, and accounting and

D. Resource Coverage - PIFRA i s Designed to Achieve Above 95% Transactions Processing, Reporting and Management o f Public Monies

25. the district level including automation o f al l the higher level accounts offices. This will also extend to meeting the budget preparation needs for 105 district finance offices and the accounting requirements for up to 105 TMAs, which manage higher volumes o f transactions in financial terms and cover over 15% o f sub-district level fiduciary risk in monetary values. Overall PIFRA supported uniform automated systems will create an enabling environment for processing financial transactions o f the Government o f Pakistan equivalent to over 95% o f total expenditures in any single year (excluding defense expenditures) as explained in the analysis below.

PIFRA would be having long-lasting effect since it covers al l the accounts offices up to

26. district governments are about Rs. 1,020 billion2. Another Rs. 10.36 billion3 represent the estimated local revenue generation by the district governments, bringing the total resources at these three levels to about Rs. 1,030.36 billion. Out o f these resources, an amount estimated at about Rs. 25.46 billion4 is allocated for the TMAs and lower tiers which, when combined with Rs. 13.5 billion3 estimated TMAs’ own source revenue generation, equates to a total o f disposable resources at TMA and lower levels o f about Rs. 39 billion. PIFRA will support the total transaction processing, reporting and management o f public monies under the control o f federal, provincial and district governments as wel l as 15 pi lot TMAs, with the option to extend to al l the remaining district headquarter TMAs during the project’s 5-year implementation

The total o f federal and provincial annual public resources including the transfers to

The federal resources are limited to exclude the expenditures on defense which are not supported by PIFRA. A study i s planned to assess the methodology and strategy for successfully implementing PIFRA in Defense. Budget figures of 2004-05 are used except for NWFP (2003-04 figures). (Source: Economic Survey o f Pakistan & Government Budget Documents).

These are estimates based on year 1999-2000 figures totaled for the local revenues of Zila Councils/Municipal Committees, taxes devolved to district governmentsiTMAs under LGO and the receipts of the devolved departments. The impact of inflation and local resource mobilization has been considered to be cancelled out due to other factors telling upon the local revenues during the period.

Allocation to TMAs and lower tiers, calculated on the basis of PFC awards and PFC annual reports.

26

ANNEX 2

period. O n a conservative basis, since 15 largest TMAs (operating at the lower levels) manage about 15% (Rs. 5.85 billion) o f overall TMA finances o f about Rs. 39 billion, the overall percentage capture o f PIFRA supported transaction processing, reporting and management o f public monies increases to about 96.82% o f al l transactions at al l levels, excluding defense. With the coverage o f al l TMAs at the district headquarters, the percentage o f public expenditure transaction coverage further increases to about 99%. Even where the T M A s are not accounted for at al l in PIFRA supported applications, the percentage o f public expenditure coverage remains at a high o f about 96.26%. In the same vein, when the defense expenditures are taken into account as part o f the overall public expenditures, the percentage o f government financial transactions that PIFRA will cover under the 5-year implementation period is s t i l l a high o f about 81.65%.

27. The implications conveyed by the preceding paragraph indicate that the underlying accountability progress that Pakistan would achieve under a successful PIFRA I1 implementation will be phenomenal when considered against what proportion o f the country’s resources will have to be captured, controlled, and accurately and comprehensively reported in any given year.

27

ANNEX 3. MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES

1. for US$ 350 mill ion and investment credits focused on supporting reforms to improve the investment climate and the delivery o f basic services. In FY02, the second Structural Adjustment Credit for U S $ 500 mill ion was released. A US$ 300 mill ion support under PRSC I was approved by the Bank in FY04 as well as a US$ 100 mill ion for Punjab Education Sector under Development Policy Lending. The Bank i s also supporting economic reforms in Sindh and NWFP provinces which have major financial management reform action plans, and the Asian Development Bank i s implementing a Resource Management Program in Punjab.

In FYOl the World Bank's program o f assistance included a Structural Adjustment Credit

2. with outstanding commitments o f US$ 1.5 billion. The PIFRA project was extended to 3 1 May 2005 to allow time for i t s completion after delays which were mainly overcome. In FY05 a US$ 100 mill ion Tax Administration Reform project was launched. The PIFRA follow-on project i s planned to deepen and broaden reforms, upgrade systems, build interfaces with existing revenue systems, advance progress toward full accrual accounting, and align practices with international accounting and auditing standards.

As at May 2002, overall Bank support for Pakistan has been in the form o f 16 projects

3, focusing on improvements to governance at the central government level. The Bank i s concentrating on areas where it has a comparative advantage such as planning, budgeting and resource management. An IDF grant has been provided to the National Reconstruction Bureau, and the Bank has also started to process a project for devolution support with NRB (and the provincial governments) as the main counterpart. DfID, with grant financing, i s leading a project on devolution to local governments and supporting the MTBF. The Asian Development Bank i s engaged with federal and provincial governments and i s the lead donor on devolution through i t s Devolution Support Program. I t shall support the legal, institutional and capacity building costs o f devolution with a focus on local government and be implemented by the federal Ministry o f Finance. This demand-driven ADB program i s establishing a menu o f eligible activities to enable each province to choose to apply for activities that meet their particular needs.

UNDP provided the initial effort to support the Government's devolution program,

Latest Supervision (PSR) Ratings Sector Issues Project (Bank flnancedprojects only)

Bank financed Implementiat ion Development Progress (IP) Objective (DO)

Public Sector Accounting and Financial PIFRA I S S Systems & Accountability

SAC I S S SAC I1 S S PRSC I S S

Other development agencies Asian Development Bank

DfID

Punjab Provincial Government Public Resource Management Reforms Project Devolution Support Programs Devolution to Local Governments Grant Organizational Support to CGA

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

28

ANNEX 4. RESULTS FRAMEWORK AND IMPLEMENTATION MONITORING

A: Storyline Analysis for Outcome-Focused Design5,6 Problem@) being Strategy to address the Vision of success

addressed problem@) ( P W Evidence of success (KPIs) Weak

governance [IM] i s at the heart o f Pakistan’s poverty and development challenges [IM] and public financial management (PFM) reform [OPIOC] i s essential.

Effectively managing implementation o f the ambitious and diverse strategy o f PFM reform remains a key challenge [OP].

The basic strategy involves an attempt to improvement o f Governments’ financial control, reporting and audit systems in order to make a substantial contribution to sound public financial management, improve governance, improve the efficiency and effectiveness o f public expenditure, and increase the potential for economic growth and poverty reduction.

Components being implemented include: (a) financial accounting and budgeting system (FABS), US$48.739 M; (b) capacity building and upgrading o f OAGP, US$19.345 M; (c) capacity building and upgrading o f CGA, US$ 18.470 M; and (d) project management, US$6.446 M.

Improved capacity [OP] and financial resource management [ OP], budgeting, expenditure control [OP] and accountability [OP/OC/IM] at national, provincial, and district levels [OPI.

0 Federal budgets for FY 08 and beyond prepared under MTBF principles

Full real-time quarterly reconciliation o f expenditures and revenues at federal and provincial levels by FY 09 using PIFRA interfaces with SBPINBP/CBRIPlanning [OP]. 0 Proper recording o f accounting entries according to NAM to enable federal unidentified expenditures reduced to no more than 0.5% o f total actual expenditures by end o f FY 2009 [OP].

Reliable Monthly Budget Execution Reports available within four weeks o f the end o f each month by 2007 [OP]. 0 All district government and self- accounting entity accounts are audited using modem audit practices by 2007 and al l national and provincial government accounts by 2008 [OP]. 0 Audited accounts presented to the legislature within 12 months o f the end o f the fiscal year by 2008 [OP].

0 Accurate, timely and comprehensive financial statements used for decision making by PAOs in line departments, and MOF/FDs by 2008 [OP].

[OPI.

The basic idea o f this analysis i s to determine if the storyline presented in the document provides the basis for a well-conceived intervention, that is, one that links a specific identified problem [OC] to a future vision o f success [OC] by way o f a focused and realistic strategy [OP] that can be expected to induce outcome-level results among key stakeholder groups within the time and the resources allocated. Ouality-at-Entry definition for outcome-focused design: A fully satisfactory project contains a well conceived intervention model (Le,, storyline) which: (a) i s designed to bring about specific, worthwhile and economic outcomes; (b) embodies a focused and realistic strategy; and (c) can be expected to document and achieve expected results (outputs and outcomes) within the time frame and resources allocated to the project. A fully satisfactory project also meets or exceeds the requirements o f the Bank‘s current guidelines and procedures for projects ‘at entry’.

[IP] = input-level issue (in project design, inputs are resources) [OP] = output-level issue (in project design, an output i s a supply-side project deliverable within the control of the implementing agency that adds value and stimulates outcomes) [OC] = outcome-level issue (in project design, an outcome i s an expected demand-side behavioral response from beneficiaries, users, or other stakeholders -- or even systems or processes -- outside the control of the implementing agency which serves to validate the intervention model o f the project if it i s observed to be occurring and it can be causally linked to the project’s outputs) [IM] = impact-level issue (in project design, an impact i s an aggregated CAS-level, sector-level, or country-level effect or goal that several projects, programs or efforts may work together to achieve in the longer term -- also sometimes called a ‘country-level outcome’) [AP] = item i s likely to experience attribution problems

Notations:

29

ANNEX 4

A: Storyline Analysis for Outcome-Focused Design5,6 Problem@) being Strategy to address the Vision of success

addressed problem (s) ( P W Evidence of success (KPIs) The basic strategy involves

~~ ~

To significantly Weak governance [IM] i s at the heart o f Pakistan’s poverty and development challenges [IM], and public financial management (PFM) reform [OP/OC] i s essential;

Effectively managing implementation o f the ambitious and diverse strategy o f PFM reform remains a key challenge [OP];

Currently, confidence by key stakeholder groups in the effectiveness o f Government’s financial management processes remains low [OC].

an attempt to improvement Governments’ financial control, reporting and audit systems in order to make a substantial contribution to sound public financial management, improve governance, improve the efficiency and effectiveness o f public expenditure, and increase the potential for economic growth and poverty reduction.

Components being implemented include: (a) financial accounting and budgeting system (FABS), US$48.739 M; (b) capacity building and upgrading o f OAGP, US$19.345 M; (c) capacity building and upgrading o f CGA, US$ 18.470 M; and (d) project management, US$6.446 M.

improve the effectiveness [OC] o f OAGP and CGA in the areas o f Government financial resource management, budgeting, expenditure control and accountability at national, provincial, and district levels.

Federal budgets for FY 08 and beyond prepared under MTBF principles [OP];

Full real-time quarterly reconciliation o f expenditures and revenues at federal and provincial levels by FY 09 using PIFRA interfaces with SBPh’BPICBRPlanning

according to N A M to enable federal unidentified expenditures reduced to no more than 0.5% o f total actual expenditures by end o f FY 2009 [OP];

Reliable Monthly Budget Execution Reports available within 4 weeks o f the end o f each month by 2007 [OP];

A l l District Government and self- accounting entity accounts are audited using modem audit practices by 2007 and all National and Provincial Government accounts by 2008 [OP];

Audited Accounts presented to the legislature within 12 months ofthe end o f the fiscal year by 2008 [OP];

Accurate, timely and comprehensive financial statements used for decision making by PAOs in line departments and MOF by 2008 [OP];

Evidence o f higher confidence by key stakeholder groups in the effectiveness o f Government’s financial management

[OPI; Proper recording o f accounting entries

processes [OC].

30

ANNEX 4

B. Results Framework PDO Outcome Indicators Use of Outcome Information

Improved capacity and financial ~ ~ O u r c e management, budgeting, expenditure control and accountability at national, provincial and

Federal budgets for FY 08 and beyond To con fm the government maintains its commitment to fiscal and budgetary reforms. under MTBF principles.

district levels. ................................................................................................................................................................................................................................................................½� Full real-time quarterly reconciliation of expenditures and revenues at federal and provincial levels by FY 2009 using PIFRA interfaces with SBP/NBP/CBRTlanning.

Proper recording of accounting entries according to NAM to enable federal unidentified expenditures reduced to no more than 0.5% of total actual expenditures by end of FY 2009.

Reliable Monthly Budget Execution Reports To ensure real time linkages between budgets available within four weeks of the end of each and expenditure processing. month by 2007.

To check that capacity to implement PIFRA interfaces with the banks and revenue collection agencies i s enhanced and resistance to financial transparency overcome.

Commitment to ensure effective linkage between accounting and budgeting and the overall accountability and control under the N A M and MTBF remains in place.

................................................................................................................................................................................................................................................................â�

................................................................................................................................................................................................................................................................Á�

A l l district government and self-accounting entity accounts are audited using modem audit practices by 2007 and all national and provincial govemment accounts by 2008.

PIFRA’s implementation of the audit component i s not delayed and auditors’ training on new methodologies and A M I S has been conducted as scheduled.

Audited accounts presented to the legislature within 12 months of the end of the fiscal year by 2008. statements.

To allow for timeliness in accountability assurances for any given year’s financial

Accurate, timely and comprehensive financial Sustained COmmitment of the CGA office to implement the roll-out PIFRA systems to all statements used for decision-making by 140 line ministrieddepartments.

PAOs in line departments and MOF by 2008.

Intermediate Results One per Component Result Indicators for Each Component

District, provincial and federal governments are using N A M and common account classifications that can be readily aggregated and disaggregated by automated systems by 2007.

Use of Results Monitoring

Component One: FABS Component One: FABS Component One: FABS Budgeting, accounting, intemal controls and systems support decision makers at the federal, provincial and district levels.

To establish there i s full agreement and compliance with chart of accounts and New Accounting Model at federal, provincial and district levels.

Component Two: Office of Auditor General

Component Two: Office of Auditor General

Auditor General’s Office is fully functioning in Relevant Auditor General’s staff trained in its role to enhance government accountability certification, financial audits and AMIS by and productivity through financial and 2008 as well as in performance audits by performance audits. 2009.

Component Three: Office of CGA Component Three: Office of CGA Automated sites which have been handed over Acceptance of, and direct management and are being maintained and are producing control of, handed over PIFRA accounting primary and consolidated financial sites. information based on the new system.

Component Two: Office of Auditor General To confirm that newly hired and retrained audit staff are now equipped with adequate tools and can be retained.

Component Three: Office of CGA Allows assessment of availability of capacity in respect of technical staff, accounting staff and conduct of prior training of users.

Component Four: Project Management



80% federal and provincial government decision makers using the system by 2008. report. assured.

Communication Management Plan progress High level commitment to project success

31

ANNEX 4

C. Arrangements for Results Monitoring

Outcome Indicators Value Data Collection for Data (Sector) (US8 Frequency and Reports Instruments Collection

Budget Responsibility

Restoring the 93.000 Annual Progress Reports Integrity and Accountability o f State Institutions

Government Effectiveness in Public Financial Management

Improving

Project Management Reports DirectorateiGOP

Aide-Memoires Annual Budgets Audited Financial Statements and Reports

Results Indicators for Each Component Financial Accounting 48.739 and Budgeting System- FABS: Enhancing the comprehensive, state of the art, reliable and timely 0

budgeting, accounting, internal control and financial reporting

0

0

Annual budget documents and 0

quarterly execution reports Bi-annual presentations on 0

implementation progress o f training CGA’s and FMC’s monthly report on account reconciliations Twice annual Bank supervision reports (aide memoire) 0

Federal, provincial PIFRA and district budgets Directorate Annual Project Bank Task Management Reports Team Final audited accounts and audit reports District Accounts

Capacity Building and Upgrading o f OAGP: Effective, timely and comprehensive provision of the requisite financial and operational assurances in the use of public funds

Officers .... .................................................. ........................................................................................................................................................... ... .... .......... .... ........................................... ............................................................................................................................

19.345 All audit operating manuals and field Federal, provincial PIFRA guidelines - prepared, applied and and district audit Directorate updated after every three years

Audit quality guidelines - prepared, applied and updated every three years

progress in civil works and A M I S

teams Annual extemal audit reports

Presentations on implementation

Capacity Building and 18.470 Upgrading of OCGA: Timely provision of reliable, comprehensive, and accurate financial and fiscal information for informed decision making and for external audit

Project Management: 6.446 Providing an enabling and sustainable benchmarkfor effective and efficient coordination ofproject implementation in the area offinancial accountability

Intemal control procedures and Final audited PIFRA manuals - prepared and updated accounts and audited Directorate every three years Annual reports from A A T I on trainings conducted for intemal audit and control staff Auditor General’s annual report on internal control Acceptance of, and direct management and control of, handed over PIFRA accounting sites -upon each site handed over

reports (audit paras.)

Quarterly Project Implementation Project Component PIFRA Progress Reports Directorates Directorate Semi annual Bank supervision aide memoire Bank Task Team

32

ANNEX 5. COMPREHENSIVE BENCHMARKS - IMPLEMENTATION PERFORMANCE INDICATORS

Year I Year 2 Year 3 Year 4 Year 5

1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd Su b-componenUA ctivities Total Half Half Half Half Half Half Half Half Half Half

1. FABS & CAPACITY BUILDING OF CGA I I

1.1 FABS at 81 DAO (sites) ! 81 12 13 15 11 1 20 10 , . .

1 1 1 1.2 FABS to Departmentalized 1 4 1 1 1 j j Accounts Office (HQ), Foreign I

I ! j j

........................................................................................................................................................... 6 1 4 i

Office (HQ) & Geological Survey 1 I (sites) j ......................... .............................................................. ................................................................... .................................................................... ................................................................

1.3 FABS to AzadKashmir (sites) 1 10 ' 1 2 2 1 4 2 1

1 1 28 28 1 26 26 I 22 10 i j j

1.4 FABS at Ministries Departments I 140 1

1.5 FABS to District Finance Offices , 105 1 I 185 18 , 18 18 I 21 14 ,

.......................................................................................................................................................... ............................................................................................ ........................................................ .................................................................. .................................................................... i

(sites) i j I i

(sites) j ; i .......................................................................... i :

1.6 Pilot implementation of Accounting/ 105 , System at 15 Tehsil Accounts I !

Offices not necessarily SAP (sites) j I and extension of implementation to all remaining District HO TMAs ~

15 20 15 20 20 15

! 1 1 I i ! j i j

j

1.7 System Interface with 1 1 ;

1.8 Data Warehouse (whole) 1 1 1 j ! 1 ............................................... ......................................... ............................................................................................... .................................................................... ~

! SBPNBPICBR & PC (whole) .......................................................................................

1.9 SAP Competency Center (Contract I 60 ~ 15 \ 25 i 20 j 1 I ...............................................................................................................................................,.......................... i ~ i.

Staff Recruitment) - CGA (persons) i

SAP Competency Center (Recruitment or Reassignment of j ~

Staff - Civil Servants (persons) j !

......... ................................................................... .................................................................. .............................................. i 25 !

1 125 I 25 ' 30 j

25 20

2. CAPACITY BUILDING OF OAG

2 1 Organizational Restructuring 9

j j

j I

........................................................................................................................................................ i ........................... i .............................................................. i ................................................................ i ................................................................... i ................................................................... .i ..................................................................... j Implementation Services: AMIS 1

Implementation of AS I S & TO BE 1 1 1 1 Study 1

i I i j

, j j

j j

1 j I

15 I 10 i

Implementation of Software for 1

Upgrading o f F A 0 & Inclusion 04

OAT sites i 75 j 5 , 10 20 1 15 Go Live sites i 75 ' 1 ! 6 10 j 20 10 14 14 I

1 .......................................................................................................................................................... ........................... ................................................................ .............................................................. ........................................................................................................................................ .................................................................... AMIS

i I /... *

AMIS + 6 1 ~ ..+ j

1

i j 2.2

.......................................................................................................................................... ........................... .............................................................. ........................................................... .................................................................... ................................... * ................................................................................................. ................................................................................................................................................... ...................................................................................... ................................................................. .................................................................. .................................................................... ..................................................................... ' : i I >

i j i Hiring of IT experts - (persons) , 15 I 5 1 5 1 2 1 2 1 1

j ................................................................................................................................. i ...................... .: ............................................................ : ................................................................... i .................................................................. i ................................................................... .! ..................................................................... 2.3 AMIS Centers

j j 1

!

1 2 1 3 ................................................................................................................................................ ........................................................... ...................................................................

i 5 ( OAT - (sites) !

r r ~ i .................................................................................. ............................................................................................................................

i Go Live - (sites) 1 5 ; j 2 ; 3

3. TRAINING

1 1 Training of DAO Staff in N A M & 3750 0 500 600 600 600 600 ' 600 250 I

SAP R3 I

3000 , 3000 3000 ' 3000 3000 3000 750 ! 1

1.1 Training of DDOs with DAO in 18750 ! j ! i

i j

New Chart of Account and Input Forms

I

33

ANNEX 5

Year I Year 2 Year 3 Year 4 Year 5

1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd Su b-componenUActivities Total Half Half Half Half Half Half Half Half Half Half

departmentalized accounts in N A M , & SAP R3

j

j j

I 200 I 75 i 50 I j I

50 25 ! j

j j !

1.2 Training of Staf f of

j 100 75 I 125 75 1.3 Training o f DAO staff in Azad 1 500 , I

1.3 Training of DDOs in Azad Kashmir1 2500 , I 600 275 / 500 500

~

........................................................................................................................................................ ........................... .................................................................... ...................................................................................................................................... Kashmir in N A M & SAP R3 * I ' j :

in New Chart of Account & Input 1 j forms j j

15 50 1

500 125 i

j

................................................................. .j .....................................................................

j 150 150 250

200 i 250 250

j 1.4 Training of staff in line ministries 1000

1.4 Training of staff in line ministries , 1400 ' I i .......................................................................................................................................................... i ........................... !... .......................................................................... ......................................................................................................................... in financial management

in NAM & SAP R3 j 1

250 200 I j

250 250 I 200 j

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

1.5 Training of staff in District Finance I 1000 I i 200 150

1.6 Training of accounting staff of I 150 I !

! j j j

Offices in N A M & SAP R3 .............................................................................................................................................. ......................... ...........................................................................................................................

Tehsil Offices in appropriate I j accounting systems i

200 125 200 125 I j

30 30 ..................................................................

40 30 20

1.6 Training of DDOs with Tehsils in ; 750 appropriate accounting systems i

! 150 100 150 150 150 50

1.9 High level technical training for I 100 I 20 1 20 10 SAP competency center - local ~ j

10 10 i 10 10 1 10 1 i ......................................................... & .................................................................... : .....................................................................

High level technical training for ! 25 5 10 SAP competency center - foreign ' I

5 ; !

2.1 Training in govemment wide audit I 500 and central planning to support ; organizational restructuring in 1 OAGP

2.2 Training of field auditors in AMIS 375 .........................................................................................................................................................................

20 80 50 50 50 50 50 50 1 50 50 j

j ................................................................. : .................................................................................................................................... 75 ' 100 50 / 75 50

.................................................................... ~ ................................................................... 25 I

1 800 I 100 100 I 100 100 I 100 100 I 100 100 1

I i

2.2

2.2 Training of field auditors in 1 800 1 100 100 100 100 , 100 100 100 100 ' i j ................................................................................................................................................... ......................... ................................................................ .................................................................. .................................................................... .................................................................... ..............................................................

Training of field auditors in financial audit (AATI) * j i i ; 4

supervision instruments (AATI) j

2.2 Training o f field auditors in CAATS~ 400 I 50 50 1 50 50 50 50 ("4TI) j

2.3 Training in data extraction and 100 / analysis in audit nerve centers j j

i ........................................................................................................................................................... ......................... .................................................................. ................................................................ .............................................................. 4 + j 4

50 , 50 j j

50 50 / j

j i

.............................................................. i ....................................................................

25 j 25 25 i

i 2.5 Professional degrees through local I 100 I

institutions for audit

2 5 Professional certifications through ~ 30 , 15 10 5 1 foreign institutions for audit

25 25 j j institutions for CGA- accounting I ,

25 , 3.6 Professional degrees through local ~ 100 1 3.6 Professional degrees through local 1 60

institutions for CGA - intemal I audit j ...................................................................................................................................................... * ....................... . .

3.6 Professional certifications through I 10 foreign institutions for CGA - , accountinghntemal auditing i

12 12

5

34

ANNEX 6. DETAILED PROJECT DESCRIPTION

1. out at the 24th month from start o f implementation. I t has four major components at an estimated total project cost o f US$93 million as follows: a) financial accounting and budgeting system (FABS); b) capacity building and upgrading o f the Office o f the Auditor General o f Pakistan (OAGP); c) capacity building and upgrading o f the Office o f the Controller General o f Accounts (OCGA); and iv) project management. The operational and maintenance expenditure category o f each o f the components (totaling US$9 million over the project l ife) would be financed by the GOP entirely from own budgeted resources, while all the other expenditure disbursement categories o f the four components (civil works, goods, technical assistance & consulting services, and training & development) would be financed wholly by IDA consistent with the recently agreed Country Financing Parameters for Pakistan.

PIFRA I1 i s planned as a 5-year project with a f i rs t te rm review envisaged to be carried

2. Detailed description o f these components i s given below.

Component 1 : Financial Accounting and Budgeting System (FABS) - US$'48.739 million:

3. The Controller General o f Accounts (CGA) would l ike the FABS component to be implemented in three phases over a five year period and the design was based on this philosophy.

Phase I

Extension of FABS to 81 DAOs

4. financial accounting and budgeting system (FABS) designed under PIFRA I and being implemented at 52 sites to:

At the request o f the CGA, the first priority needs would be accorded to extending the

a. the remaining 81 District Accounts Offices (DAOs) thereby bringing the total systems deployment to 133 sites. This would extend the PIFRA systems to the entire accounting network currently under the CGA;

b. the headquarters o f some departments which are currently responsible for their own accounting (departmentalized accounts); these are the Pakistan Public Works Department (Pak PWD), the Foreign Office, the Geological Survey o f Pakistan and the post office. Under this activity, the accounts prepared at the individual accounts offices in the branches o f each o f these departments will be processed at their respective headquarters and merged to produce the finalized accounts o f that department. These will then be merged with federal government's main accounts produced by the CGA; and

c. Azad Jammu & Kashmir (AJK). In AJK, the accounting function has the same pattern as the GOP. Under this activity PIFRA systems would be implemented at the ten district accounts offices that perform the accounting function in AJK.

35

ANNEX 6

Phase 11

Extension of FABS to Federal Line Ministries & Provincial Line Departments Levels

5. The second phase would include a further extension o f PIFRA systems to:

a. federal line ministries and provincial l ine departments (about 140 in total). The implementation o f PIFRA systems at the federal l ine ministries and provincial l ine departments would assist them during the budget preparation cycle. Here the systems would enable them to consolidate the budget requests received from their subordinate departments and pass the consolidated budget request electronically to the M O F or the provincial finance departments, respectively, during the budget preparation process. The system would also enable them to directly access information on the status o f their accounts during the budget execution phase; and

b. 105 District Finance Offices (DFOs) to connect them with the respective provincial finance departments and assist them in the budget preparation, execution and reporting phases.

6. implementing it on a pi lot basis at 15 Tehsil accounts offices, and then extend to the remaining 90 district headquarter Tehsil accounts offices.

This phase would also include designing a simpler solution for Tehsil functionality and

Phase III

Parallel Supporting Activities

7. Parallel to these implementing phases, the FABS component would also provide for:

a. A comprehensive training program for conducting end user systems training for staff in the central, provincial, district, some Tehsils and A J K governments. This will include:

0 training finance managers in the MOF, the central planning division, and provincial finance departments;

0 building accounting capacity by training and supporting provincial AGs, DAOs, DDOs in central, provincial and district governments, and some Tehsil and AJK government, o n the topics o f financial management, the New Accounting Model, and the new chart o f accounts; and

0 providing the resource requirement to build the capacity o f finance departments at the federal and provincial governments in fiscal management related activities linked to PIFRA implementation as wel l as the operation and management o f the budget preparation, budget management and fiscal reporting functions at those departments. Additional funding has been provisioned in the project management component for

36

ANNEX 6

periodic releases to the respective finance departments in accordance with the defined funds f low arrangement.

b. Staffing a SAP competency center: for the proper functioning o f a mission critical application such as a government wide accounting system, it i s essential to have reliable technical maintenance and support arrangements in place including a help desk and an adequately staffed end user support and technical team organized on a more formal basis which can support the system. The operation o f the system also requires some very technical tasks such as operation and maintenance (O&M) o f all devices on the network including servers, work stations printers and communications equipment, database administration, operating systems administration (UNIW Windows), DBMS administration, SAP system administration, capacity for doing simple enhancements such as new reports, etc. For this purpose the Government will need to hire technical IT staff to perform these tasks. The project will provide for the salaries (at Pakistan private sector levels) o f about 60-80 contract professionals o f various specialties required to man the IT and technical support function. The project will also finance training opportunities (both local and foreign) for staff responsible for operating and maintaining these systems. To this end, the C G A shall recruit and/or assign staff f rom within the accounting cadre in a phased manner over a five year period as defined in Annex 5 to support the outreach activities o f the contract professionals o f the SAP CC. These staff shall be qualified in IT and/or accounting at least at first degree level and be provided adequate professional training in SAP and related applications in order to take over the role o f the contracted professionals and thus assure full in-house competency in, and sustainability of, system operation, maintenance and management. In the short run, however, this activity shall be considered as a deliverable with direct support from the PIFRA Directorate. At a later stage when the capacity o f the Office o f the C G A is adequately enhanced, the management o f the activity shall be shifted to that office.

c. Designing a program for PIFRA systems to enable them to interface with the:

0 National and the Central Banks and the Central Board o f Revenue - The State Bank and the National Bank o f Pakistan are intimately involved with processing Government payments and receipts. The State Bank holds the Government’s consolidated fund accounts and the National Bank serves as i t s fiscal agent and processes government payments and receipts. Individual payments and receipts are recorded in the NBP/SBP systems. However, the process o f reconciliation o f these records with those at the D A O i s manual and results in major discrepancies. It i s proposed to develop electronic interfaces between the NBP/SBP systems and PIFRA systems so that this can lead to quicker and more accurate reconciliation o f D A O accounts with the banks. A similar interface i s planned to reconcile revenue receipts collected by the CBR;

0 Planning commission - The planning commission i s responsible for preparing and monitoring the development budget. The project proposes to provide facilities to the planning commission to assist it in this process and to integrate the budget

37

ANNEX 6

preparation and budget monitoring operations for the revenue and the development budgets; and

MTBF provisions - The Government i s planning to move to a multi year budgeting under an MTBF program. This would entail enhancement o f PIFRA systems to be able to incorporate these features.

d. Development o f a data warehouse capability: At present reports produced by the office o f the C G A are restricted to statutory mandated structured reports such as the appropriation accounts, and the finance accounts. Besides these, finance managers in GOP require analytical reports such as forecasts o f the costs o f servicing and repaying outstanding debt, contingent pension liabilities, etc. These reports require gathering information required from different sources and hence are time consuming to produce manually. With the implementation o f PIFRA, FABS systems transaction data pertaining to expenditures and receipts will be readily available and could be used for M I S reporting and decision-making purposes. The PIFRA systems would in fact form the key transaction processing layer o f the GOP M I S information pyramid. With the implementation o f interfaces with other GOP systems as mentioned above it would in principle be possible to provide GOP finance managers with a variety o f information that they require. For this purpose PIFRA systems functionality will need to be enhanced by the acquisition and implementation o f additional tools such as a data warehouse and report writing tools. PIFRA I1 will provide funding for setting up an initial data warehouse capability to augment the report writing and analytical capabilities o f PIFRA systems.

e. Developing an overall systems and data architecture and capacity to ensure compatible information flows and summarization between accounting systems operated by the federal, provincial, district governments and seamless interfaces between PIFRA and non-PIFRA systems.

f. Upgrading D A O and other site infrastructure as may be necessary to implement the FABS systems. The physical infrastructure at many D A O sites is in need o f repair and refurbishment. For the state o f the art computer based accounting systems being installed under the PIFRA program to be used effectively, it i s imperative that physical infrastructure upgrades be carried out along with the installation o f these systems. This upgrade program would cover both PIFRA I and I1 sites.

g. Studying the feasibility o f extending FABS system to the Ministry o f Defense and the Railways.

8, Successful completion o f these sub-components i s considered fundamental to achieving full government financial accountability and transparency in the new automated environment.

Major Procurement Contracts for FABS

9. Given below is an overview o f major procurement contracts anticipated under FABS:

38

ANNEX 6

Approximate

$0.5 million No. Contract Item cost 1. Consulting services to prepare designs/BOQs, etc. required for site preparations and

upgrading o f DAO sites ( 25 PIFRA I + 8 1 PIFRA 11); activity related to the 106 sites to be carried out by negotiations and partially financed out o f PIFRA I. Civil works contracts for site preparations and upgrading DAO sites ( 25 PIFRA I + 81 PIFRA 11); activity related to the 106 sites to be carried out by negotiations and partially financed out o f PIFRA I.

................................................................................................................................................................................................................................................................î� 2. $2.8 million

3. Goods contract: procurement o f hardware, software and implementation services for systems to be installed at 81 DAO sites, departmentalized accounting offices (PWD, etc.), AJK DAOs, line ministries and provincial departments; district finance departments; activity to be carried out in year two o f PIFRA I1 (and onwards); SAP software wi l l need to be specified since this platform has already been selected during the implementation o f PIFRA I.

$14.7 million

4. Consulting firm to assist in installing a data warehouse capability; Activity to be carried out in year three o f PIFRA 11.

$0.4 million

5. Consulting firm to assist in design o f interfaces with CBR, SBP, NBP, Planning, etc.; activitv to be carried out in vear two o f PIFRA 11.

$0.5 million

6.

7.

Studies to modify PIFRA systems to take into account implications o f the MTBF methodology; activity to be carried out in year four of PIFRA 11. Consulting assignment to assist in design and implementation o f accounting system for Tehsils, etc., and implementation at 15 pilot Tehsil sites and the remaining 90 district HQ sites; activity to be carried out as o f year three of PIFRA 11.

$0.2 million

$1.8 million ................................................................................................................................................................................................................................................................ð�

8. Consulting firm to study feasibility and costs o f extending FABS systems to Ministry o f Defense and Railways; activity to be carried out as o f year three o f PIFRA 11.

$0.5 million

Draft Terms o f Reference (TORS) for Civil Works for FABS Component: Designs and BOQ Relating to Civil Works for DAO Upgrades, etc.

Background

10. PIFRA envisages implementation o f Financial Accounting and Budgeting System (FABS) at various accounting offices, MOF, and provincial finance departments. FABS shall have been implemented at 30 sites as at closure o f PIFRA I on M a y 3 1 , 2005 and plans for extending i t s implementation at 32 ro l l out sites have been finalized. FABS implementation will be extended to 25 DAOs under PIFRA I and to another 8 l D A O sites under PIFRA 11. These offices use legacy systems and need major refurbishment before FABS implementation.

1 1. The site preparationhefurbishing activity being outsourced under this consultancy is the first step towards implementing FABS at these sites. The consulting firm will work in liaison with Regional Director (Operations) PIFRA and Provincial AGs.

Objective

12. PIFRA envisages, among other things, implementation o f New Accounting Model at federal, provincial and district levels with the aim o f creating an integrated financial management system for better macroeconomic coordination and policy formulation. The replication phase for

39

ANNEX 6

which these 100 or more sites are to be prepared will increase PIFRA coverage and get GOP closer to creating the kind o f financial management system it requires for good governance.

13. Currently the accounting offices in which these sites are to be located perform accounting functions manually. At the moment the sites are not in the shape in which hardware and allied equipment could be installed, and the accounting functions computerized. Site preparation i s hence the f i rst step towards computerization o f the accounting functions.

Scope o f the Services

14. The consultants will prepare al l layouts, designs, drawings, specifications, cost estimates and tender documents based on World Bank formats including BOQs for the work described in these TOR. The consultants will ensure that specifications o f different categories o f sites are clearly explained to the f i r m s so that the f i r m s interested in the work could submit their cost estimates accordingly.

15. bids received from contractors and during project implementation will undertake the role o f the Engineer and will carry out full-time supervision o f renovation work being undertaken including quality, timeliness and cost control. All procurements will be carried out in accordance with the World Bank’s procurement guidelines. This will also include review and certification o f payment invoices submitted by the constructiodrefurbishment contractor and goods suppliers. The work to be carried out at the different sites i s indicated below.

The consultant will also be responsible for procurement support including evaluation o f

N e w Sites

Civil W o r k s 0 Site design

C iv i l work, including construction o f the site (computer lab, incharge room, male/female toilets, store room, generator room, reception, sewerage, water supply, gas lines, boundary walls and security arrangements, etc.) Complete internal and external paints Floor tiling, false ceiling, glass partitioning, and blinds

0

0

Furnishing 0 Fire extinguisher 0 Door closer

Electrical

0 Communication system 0 Generator

Air conditioners 0 Heater 0 Bracket fans 0 Earthing 0 Security system

Completer electrical works according to site requirements.

40

ANNEX 6

Renovation/Refurbishing of Existing Sites 0

0

0

0

0

0

0

0

0 Communication system 0 Generator 0 Air conditioners 0 Heater

Bracket fans Earthing Security system

Interior development including flooring, false ceiling, glass partition and blinds. Removal o f structure wherever necessary Replacement o f doors and windows wherever required. Complete renovation o f toilets, etc. Improvement o f faqade, external and internal signage Furnishing including f ire extinguisher and door closers as necessary Complete internal and external paints Complete electrical works according to site requirements

Report and Time Schedule

16. Site preparation work at 25 DAOs sites o f PIFRA I financed under PIFRA I1 has commenced in the f i rs t week o f January 2005. The work has been completed by M a y 31,2005. Site preparation work at the 81 remaining DAOs sites o f PIFRA I1 i s covered under PIFRA I1 funding and i s expected to end by June 2006. It i s planned that al l 106 D A O sites in question will be ready for FABS implementation by that date.

Component 2: Capacity Building and Upgrading of the Office of the Auditor General of Pakistan (OAGP) - US$ 19.345 million:

17. by implementing modernized government audit procedures and implementation o f internationally accepted auditing standards that will contribute to eradicating weaknesses in program oversights and improving evaluation capabilities. There i s an urgent need to upgrade the organization and administrative support for OAGP to support plans to meet the extended audit mandate.

The objective o f the OAGP component i s to fo l low up the development work o f PIFRA I

18. In addition, the Government’s new procurement authority has approached the Auditor General to develop an enhanced role in auditing the Government’s procurement systems to ensure the fiduciary reliability o f the systems. Also the Bank has requested the OAGP to assist i t in a similar manner. While recognizing that the OAGP already reviews expenditure transactions in agencies as part o f i t s compliance audit programs, a different more systems-based approach will be needed to provide the desired assurance that the overall procurement system i s working satisfactorily. As part o f the curriculum for training o f audit staff both at the central and field levels, procurement audit methodology and approach would be included.

41

ANNEX 6

Organizational Restructuring

19. Civ i l Works - Additional Auditors General now head, respectively, an operations and a development sub-division o f the department to ensure that operational exigencies do not relegate systems development priorities and vice versa. The development sub-division has been given new positions o f Deputy Auditor General (Accounting Policy, Research and Systems Development) and Deputy Auditor General (Training and Human Resource Development) to manage development activities in line with operational needs. Early physical capacity enhancement o f the audit house facilities through c iv i l works and office equipment i s needed for expansion o f the management and research and development activities to provide upgraded audit methodologies and reporting formats. The c iv i l works for the audit house extension have been initiated during PIFRA I. Schematic plans have been developed by the Public Works Department and a contractor i s to be selected to carry the design and construction forward. Finalization o f the award o f the contract for construction i s subject to credit effectiveness o f PIFRA 11.

20. Consulting Services - Certification o f government and corporate accounts, and expenditure and revenue audit are to be made more effective through increased capacity support for higher- level analysis and improved testing. Procurement audit i s to be strengthened. Consultants may be used more flexibly than under PIFRA I for example to assist with development o f revenue audit, corporate audit and accounting policy.

2 1. reengineering o f processes identified in the operational wings for best practice reform.

Consultants will also assist with information systems design and the restructuring and

Physical Upgrading o f Field Audit Offices

22. the financial statements o f provincial and district governments and o n the financial statements prepared at the sub-district level. Particular needs are the upgrading o f the facilities o f the field offices at provincial and district level to cope with the increased work.

Civ i l Works - Increased capacity i s needed in the audit offices in order to issue opinions on

23. Office equipment, hardware and furniture are needed. For audit o f IT based sites, computer equipped audit teams wil l enhance the use o f CAATS in audit fieldwork and enable the use o f computerized workbooks, manuals, audit program guides, drafting templates and instructions as developed by the Research and Systems Development area.

24. staff to and from their assignments.

Vehicles - A vehicle will be supplied to each office for the purposes o f transporting audit

Integrated Audit Management Information Systems

25. relevant and adequate information to manage a countrywide network o f operational offices supported by host hardware, software, communication network and proper physical premises to house the facilities. Data o n auditee profile, audit findings, rules, regulations, policies, relevant laws, and on departmental audit guidance as wel l as personnel and audit planning and

Hardware and Software Acquisition and Implementation - Audit operations need timely,

42

ANNEX 6

management data will be available from the system. A Management Information System for the library and for training wil l be developed. Implementation consultants will assist with applications for library cataloguing, training course schedules, registrations o f participants, etc. Job descriptions mentioning specific ski l l requirements will be used to identify critical skill deficits and link with training policies to help manage human resources more efficiently and maximize returns on investment in SAP technology. Implementation consultants will configure and help integrate skill matching, career planning, training needs analysis and planning, succession planning and staff management. The system will bring together such information as the audits conducted by an individual, the sectoral specialization, the rating o f actual work and matching o f this information with the Annual Performance Reports providing the basis for merit based placements and promotions. The system will also provide support for monitoring the outputs and outcomes o f audit reports including recoveries and savings fol lowing audit reports.

26. Training - Provision has been made for training required for implementation o f al l the sub- components, e.g., training in New Audit Manual (NAuM), Computer Aided Auditing Techniques (CAAT), Human Resources Management, and developments in the MIS.

27. specialization in designing ERP-based organizational management information systems that are relevant to the systems development needed by a modern SA1 for Pakistan.

Consulting Services - Selected consultants wil l have to demonstrate high-level

Upgrading Training Facilities

28. are inadequate. The physical training infrastructure will also be augmented through establishment o f additional facilities. Estimates for c iv i l works include construction o f additional space, heating, ventilating and air-conditioning. Associated computer hardware, furnishings, furniture, as we l l as computer labs upgrading have also been allowed for under the project.

Civ i l Works - The existing Audit and Accounts Training Institute (AATI) arrangements

29. Training - Developments in audit certification and reporting need to be supported by technology and in-house specialized training capability to assist with implementation o f the major audit staff training and certification program underway. Using the Research Center to set up a computer center to develop electronic data f i les and work books for more modern audit programs based on the new Financial Audit Manual will enhance capacity to train and supply audit teams with adequate methodology. Extensive training will develop staff expertise to use CAATs applications and foreign training will expand senior officers’ capabilities to design and manage computer supported certification and performance audits. Training consultants under PIFRA I have already carried out a training o f trainers program and these trainers will be used to establish an in-house network o f trainers. These trainers will be provided with an extension lecture fee. In some areas, part time faculty will be hired from the private sector. Development o f a comprehensive database o f available sk i l ls using an automated system will help to develop the link between HRD and training.

30. practices as will orientation visits at management level and participation in international workshops and meetings. Hosting o f two such significant international events in Pakistan has

Attachment o f officers with sister SAIs will impart hands-on training in international best

43

ANNEX 6

been provided for. Audiovisual equipment to develop training packages for web-based and tele- learning and multi-media class room equipment will be acquired. Libraries will be set up in Peshawar and Karachi; existing libraries in Lahore, Islamabad and Quetta will be upgraded and collaboration with the training facility o f private institutions or public sector will be arranged to help kick start the crash-training program in certification audit and NAM. A Training Material Development Unit will be established in order to develop a consistent standard o f quality in training. All trainers at regional AATI will deliver these standard packages. Options for specialized training and professional qualifications include collaboration with the Lahore University o f Management Sciences (LUMS) and the Institute o f Business Administration (IBA) in Karachi for example, through formal recognition o f the nine months specialized training program o f probationers in the form o f credits towards a recognized masters program. Some use will be made o f specialized foreign training courses and in pre-requisites for Certified Public Accountant, Certified Internal Auditor (CIA), Certified Information System Auditor or CIPFNACCA.

Component 3: Capacity Building and Upgrading of the Office of the Controller General o f Accounts (CGA) - US$18.470 million:

3 1. The C G A institution has been created as an independent function f rom auditing through the CGA Ordinance 2001. The role o f CGA i s to ensure financial regularity and report to the legislature o n the use o f appropriations. The new ordinance has conceived a very broad role for the CGA. AG offices at federal and provincial levels have been made his responsibility as well as the departmentalized accounting entities. Thus the C G A has considerable responsibilities for coordination, policy formulation, and administration.

32. The objective o f the C G A component i s to assist with the development o f the Offices o f C G A and the Accountants General to maximize the benefits the executive can gain from the computerized accounting environment. These systems will enable the government to better formulate, control and monitor i t s budget through more useful, complete, reliable and timely financial information. Improved data will also facilitate program management by departmental decision-makers. Re-developed standards for internal controls, supported by internal audit, will lessen the occurrence o f errors and irregularities in the processing o f payments and receipts and improve management procedures and the effectiveness o f service delivery.

33. The C G A is expected to play the lead role in developing an integrated accounting system which requires an environment where the current disparate arrangements work together cooperatively. The systems that the CGA inherited are undergoing comprehensive change and will be very different f rom the legacy systems. Capacity building is therefore required.

34. The project includes provision for (a) training o f officers through sub-professional , professional and degree courses in accounting, financial management and IT; (b) training o f officers to familiarize them with the concepts, techniques and methods o f internal audit; and (c) training o f officers for the implementation o f Internal Audit Manual.

35. The physical sub-components for the CGA in PIFRA I1 are:

44

ANNEX 6

CGA HQ

36. nascent organization. Provision has been made for building, logistical support, computers and network and furnishing o f the C G A HQ. This upgrade o f C G A H Q will facilitate the functions o f policy formulation, monitoring and coordination by providing a more conducive work environment to the personnel.

Suitably staffed, equipped and furnished headquarters for the C G A will help strengthen the

AG Balochistan and Sindh

37. AG Balochistan and Sindh do not have their own buildings. Investments in terms o f network, computer and physical upgrade can be better planned if new complexes for these offices are built. These complexes will also house other audit offices and regional AATI housed in rental units as appropriate.

Upgrading o f Treasury Offices in Balochistan to DAOs

38. DAOs are important units o f accounting at the district level. It is a pre-requisite for implementation o f PIFRA at district level; obligatory preparation o f district accounts requires functionally operative accounting units (DAO) at the district level. However unlike the rest o f the three provinces, the treasuries largely carry out the accounting function at the district level in Balochistan. There are only three DAOs working in Balochistan; the rest o f the district accounting function i s done by 23 treasuries. These treasuries have grossly inadequate capacity. Clients have to be referred to remote locations for their pensions, GP funds, pay fixations and other services. Meaningful and timely reconciliation o f accounts i s lagging far behind. There i s dire need for the 23 treasuries in Balochistan to be upgraded. Estimates for this activity have been provided in the proposal. The government has decided to sanction extra posts for upgrading the treasuries into DAOs in Balochistan. The same premises o f existing treasuries will be extended and refurbished. Logistical support for these far o f f sites located mostly in rugged terrain has been adequately built in the proposal.

Improved Internal Controls

39. CGA will specify internal control principles in consultation with the M O F and the provincial finance departments for use by these officers. PIFRA I has recommended a framework for improved internal audit and this sub-component provides facilities for p i lot implementation.

Chief Financial Officers are being established in ministries o f the federal government. The

Records Management

40. Records are poorly organized. Intervention is needed to archive this record as appropriate.

Adequate record management procedures have broken down over a period o f time.

41. train resources and transfer the systems to the department.

A contractor will help set up archival arrangements, supervise equipment procurement,

45

ANNEX 6

SAP Competence Center (CC)

Background

42. accounting system being designed and implemented under PIFRA, it is essential to have reliable technical support and maintenance arrangements in place including a help desk and adequately staffed user support technical team. The operation o f the system requires some very technical tasks such as O & M o f al l the devices on the network including servers, printers, workstations and communication equipment and tasks such as database administration, operation system administration, SAP system administration and capacity for enhancement to the system. For this purpose, the government proposes to set up a SAP competency center. The project will provide for the salaries at Pakistan private sector level for 60-80 contract officials o f various specialties required to man the IT and technical support function. The project wil l also finance the training opportunities, both local and foreign, for the staff responsible for operating and maintaining the system.

For the proper functioning o f mission critical applications such as the government wide

43. on a province based centralized architecture with central servers located at federal capital Islamabad and each o f the provincial capitals. District Account Offices connect to these offices to these servers through remote telecom links. In addition, servers are also located at the federal Ministry o f Finance and each o f the provincial finance departments.

The new SAP based accounting and budgeting system set up under PIFRA I i s operating

44. The proposed system landscape has f ive server solutions. Each server solution will comprise various layers o f software (Application, Database, Network and Operating System, etc.). These software components wil l use hardware l i ke Servers, Network, Switches, PCs, etc. 52 sites were planned under PIFRA I but about 30 sites have come into operation by closure o f PIFRA I in M a y 2005. The system landscape will extend to 133 sites during the course o f PIFRA 11. In addition, other organizations l i ke ministries and finance departments will also be connected to the system in PIFRA 11. Over 2000-3000 SAP users will be using these systems after full implementation.

Organization

45. for the SAP CC to be set up under C G A to operate and maintain the system and provide end user support.

In order to support these systems, the fol lowing organizational arrangement is proposed

46. The SAP CC will operate under a Senior I T Manager as shown in the attached diagram. A central maintenance team at C G A Islamabad comprising 10-1 5 professionals such as Subject Matter Experts, Business Analysts, Quality Assurance Specialist, Basis, A B A P Programming, HR Module Specialist, and FI Module Specialist will provide high level technical maintenance support to the system. In addition, five directors are located at each o f the provincial headquarters and AGPR Islamabad to provide maintenance support at these locations.

47. experts such as System and Network Administrator, Database Administrator, Basis expert,

Each director will be supported by 4-5 highly qualified and experienced SAP technical

46

ANNEX 6

Infrastructure expert. In addition, the servers located at Ministry o f Finance and each o f the provincial finance departments will need similar support.

48. as help desk administration, end user support and daily administration tasks. The above model comprises three level support structures as described below.

The regional directorates o f the SAP CC will also require support for routine tasks such

Level 3 Support: This wil l be provided at the CC headquarter at Islamabad. A team o f SAP certified and experienced people will provide this support. Tasks and activities involving configuration changes, programming, advanced performance tuning, landscape security, etc., wil l be carried out at this level. All the changes carried out by this team wil l be transported into a l l the production systems from this level.

Level 2 Support: Tasks and activities requiring higher sk i l l s wil l be escalated from level 1 to this level. These activities wil l be performed at the Regional Competency Centers. Sk i l l s for this level support will be hired f rom the market (17 IT posts for example).

Level 1 Support: To be provided for routine basic level support to the users. This will be provided by C G A resources. Help desk administration will be provided at this level in addition to the routine administration tasks.

49. Personnel at level 1 would be deputed to the SAP CC from the CGA’s existing staff.

Personnel at levels 2 and 3 will be hired from the market and financed under the project.

Activities

50. The tasks performed by the SAP CC are defined below:

Monitor system performance, response time.

Perform routine administration tasks like back up, user creation, password recovery, maintaining authorizations, creating/deleting users.

Plan, implement, test and monitor system design changes arising out o f new requirements, e.g., pay scale changes, income tax rate change o n salary, upward revision o f commitment limit, new reporting requirement, troubleshooting, etc.

Analyze, plan, design, implement, test and monitor process improvements, business process re-engineering proposals, etc.

Ensure system i s available and the downtime i s minimum.

Plan, institute and execute disaster recovery procedures.

Manage disc space.

47

ANNEX 6

0 Support help desk for end users.

Ensure electrical and cooling systems are working adequately and are available.

0 Impart technical training to users.

0 Coordinate site hand-over to C G A and other user units.

Staffing for the SAP CC

5 1. some time to build the in-house pool o f skilled resources for managing these complex technical activities. In the wake o f these capacity deficiencies, it i s imperative these sk i l ls are hired from the market. The project will finance costs associated with staffing the competency center with highly skilled positions. This could be done by direct hiring o f staff o n contract terms by .

PIFRA or hiring these professionals through a private sector firm.

Skilled personnel as highlighted above must staff the CC. C G A organization will need

Timing

52. Since 30 PIFRA I sites have become operational by M a y 2005, the process o f contracting for the skilled professionals has been finalized by project negotiations. Until such time that the capacity o f the CGA’s Office i s adequate to manage and coordinate the SAP CC, PIFRA Directorate shall continue to oversee the development o f the center.

Component 4: Project Management, Communication and Change Management - US$ 6.446 million:

53. Project Management: The framework for project management comprises a:

a. Steering Committee, chaired by the Auditor General, with general powers to oversee project policies, implementation, and responsible for reviewing proposals for capacity development for post completion activities; and

b. Project Director with adequate devolved powers to ensure project implementation runs smoothly, i s coordinated (between components, between provinces, etc.), and not held up by administrative bottlenecks.

54. provincial), SBP, NBP, Planning and CBR. The Project Director i s the Committee’s Secretary. I t s functions are to receive a report on the project’s progress, assist coordination, approve activities and help mitigate r isks. I t has powers over pol icy matters within the project’s general framework.

The Steering Committee’s membership wil l include Audit, CGA, Finance (federal and

55. The Project Director, who reports directly to the Project Steering Committee, heads a Project Directorate. The directorate comprises a team based in Islamabad dealing with overall coordination o f implementation, change management and communication, and back-office functions such as project accounting, maintenance - through the M I S wing - o f a critical path

48

ANNEX 6

model o f project activities, reporting and procurement. Each province shall have a sub- directorate, focused upon implementation o f the project, including selected change management activities in that location through a matrix structure with clients (which are the functional departments o f audit, accounting, finance, etc.). Each client shall nominate an officer to be solely responsible for managing project work within hidher business unit.

56. include the following:

In addition to hidher general powers, the specific powers o f the Project Director shall

a. authority to appoint qualified staff on term basis during project implementation;

b. authority to procure equipment, stationery and other consumables up to an individual procurement ceiling o f Rs.500,000 on emergency requirement basis;

c. as pertaining to the financial management o f the PIFRA project, a l l applicable powers as assigned by the Principal Accounting Officer;

d. authority to hire/lease office accommodation at market rates during the period of implementation o f the project with concurrence o f the Chairman o f the Steering Committee;

e. authority to provide incentives including project allowances to the project team as and when appropriate, according to the criterion agreed by the MOF; and

f. select project staff members for local or overseas sk i l ls enhancement training with concurrence o f the Chairman o f the Steering Committee.

57. The Service Delivery Relationships chart shows these arrangements as per Annex 1 1.

58. PIFRA I demonstrated the positive impact on the quality and pace o f implementation which can be achieved by having project-oriented personnel in the project management team. A similar approach shall be used in PIFRA 11. An attempt to limit staff turnover shall be made by adopting incentives such as performance related allowances, honoraria, good office facilities and provisions o f transport.

59. officer who wil l determine strategy, oversee implementation and report results achieved. Change management related to project implementation shall be managed through the sub- directorates and tailored to the needs o f particular activities (see Annex 7 for further details).

Communication and change management will be the responsibility o f a designated senior

60. based implementation plan as a base l ine used to track progress.

Project monitoring shall be strengthened by the adoption o f a critical path analysis/Gantt

61. Adequate space at Islamabad and at provincial HQs shall be needed. In Islamabad, additional space sufficient to house the complete project management directorate together shall be acquired. Provincial governments shall be requested to accommodate their respective sub- directorates.

49

ANNEX 6

62. management/coordination, communication sk i l ls and change management.

Provision has been made for local and foreign training o f officers in areas o f project

50

ANNEX 7. COMMUNICATION AND CHANGE MANAGEMENT

A. Background

1. play a crucial role in smooth implementation by establishing ownership and effective coordination among the various levels and departments o f Government. Although the new system and the related on-going reforms have apparently been accepted with enthusiasm by some, others are less involved. Hence, there i s a need for a comprehensive and wel l planned communication and change management intervention in order to establish wider and deeper ownership at al l levels o f the government.

It has been recognized during PIFRA I that communication and change management helps

B. Objectives

2. The main objectives o f the communication and change management sub-component are to: (a) ensure better coordination o f stakeholders and wider ownership o f PIFRA’s overall objectives (involving communication and cooperation among various government departments both federal and provincial); (b) increase the understanding o f the relevant government staff directly and indirectly involved with the systemheform by an effective information and education effort; and (c) provide accurate and timely information o n the project’s progress and achievements.

3. To accomplish this, a strong communication structure i s to be established for communicating with external organizations and government stakeholders including staff. I t will organize meetings, distribute information, organize presentations, maintain project documentation, archive record and leverage technology to facilitate communication including strengthening o f existing PIFRA web site contents.

C. Communication Interventions in Different Levels with Different Stakeholders

4. at two levels:

An effective communication and change management intervention i s required primarily

a. among the government departments such as the offices o f the Auditor General, CGA, provincial AG offices and finance departments, Finance ministry, etc.; and

b. among those engaged in implementing the various components o f the projects such as the PIFRA systems, NAM, training/capacity building, and HWchange management.

5. also essential for the secondary government stakeholders such as the line ministries and the external parties such as the media and donor agencies.

In addition, communication interventions for information dissemination and sharing are

6. involvement in the project:

The following table presents different groups o f stakeholders and their levels o f

51

ANNEX 7

Level o f Involvement Primary Direct Involvement Indirect Involvement

Internal Stakeholders Office o f CGA implementation operation o f the system

administration o f system Dolicv related issues

Office o f Auditor General implementation operation o f the system policy related issues oversight user ................................................................................................................................................................................................................................................................Ž�

Ministry o f Finance policy user endorsement supervision

Provincial Accountant Generals operation supervision support

policy

Provincial DGs o f Audit operation policy supervision support

Provincial Finance Departments policy supervision support

DAOs direct user operation

................................................................................................................................................................................................................................................................4� ...................................................................................................

................................................................................................................................................................................................................................................................ƒ�

DDOs user

Secondary Line ministries support user

Planning and other provincial support user government departments Legislature budget laws oversight

................................................................................................................................................................................................................................................................�� ..............................................................................................................................................

budget enactment audited public accounts review

External Stakeholders Donor agencies operation

support Media information dissemination

D. Strategic Approach to Communication for PIFRA I1

7. process and for the PIFRA systems in particular. In place o f the currently ad hoc approach, a strategic communication approach and a wel l designed change management effort would be based on sound opinion research and analysis, be coordinated across departments and ministries,

A strategic approach to communication i s essential for Pakistan’s ongoing financial reform

52

ANNEX 7

and integrated with planning and actions at federal and provincial levels. The communication program would be aimed at promoting a vision for the ongoing reforms showing progress, building consensus and ownership, ind creating confidence and momentum.

8. A set o f communication activities in relation to the change will be implemented following the development o f a comprehensive and well defined communication strategy agreed upon by the supervisory committee actively representing all key agencies involved in the implementation o f the PIFRA system and related other changes.

’

9. developed considering the following issues:

The communication and change management intervention for PIFRA would hence be

Communicate a vision for ongoing change that would inspire confidence among the government staff at al l levels.

Show progress towards this vision in an ongoing, systematic way. Short-term achievements, whether quantifiable or not, should be brought to the attention o f the government staff as wel l as the public to sustain confidence in the Government’s commitment and ability to deliver. Government officials o f the departments directly involved in PIFRA should routinely meet with the other relevant departments to ask their feedback on proposed measures and explain their importance within the framework o f the broader vision.

Promote dynamic leadership within the departments primarily involved in the project in order to help build consensus, ownership and create momentum. If used strategically, communication can activate staff at various levels to take on leadership and create cohesion.

E. Planning of Communication Actions

10. hand in hand with the actual implementation process o f the new systems. The role o f communication i s to support, facilitate and speed the design and implementation o f PIFRA. Hence there are a number o f measures that could improve the quality and impact o f communication for the project. The following are key elements:

Planning and implementing a communication and change management strategy should go

a. Internal Communication: develop an internal communication plan with the Project Director, Auditor General’s office, C G A and provincial AGs, and other relevant departments;

create a liaison mechanism among al l the relevant departments and ministries;

build the communication capacity o f the CGA’s office; and

build capacity o f the Project Directorate to implement the communication plan and manage potential crisis.

0

0

53

ANNEX 7

b. Government: raise awareness o f the need for communicating in a unified and consistent way to the government staff in federal and provincial levels who are directly or indirectly involved in the PIFRA system. Top government officials should be made aware o f both the value o f strategic communication and their necessary role in ensuring its success. This implies a consensus should be established o n the key elements o f the communication program;

establish a decision mechanism with the authority to approve and take quick action on communication needs;

designate spokespersons on PIFRA at the Project Directorate, CGA and Auditor General’s offices. Ensure that al l spokespersons are adequately prepared, trained in public and media appearances, and that each has access to consistent information;

organize study tours, workshops, seminars and presentations;

establish “feedback” mechanisms such as focus groups that can provide immediate information on the effectiveness o f messages; and

ensure the coordination o f communication among al l units o f government involved in the communication effort by assigning accountability to a member o f communication staff for distributing and receiving information and feedback.

c. Preliminary Research: research to assess past and current communication effort as a baseline for further action;

analyze, breakdown and identify issues o f primary concern o f each group. O n that basis, design communications strategies to reach each group and their representatives more effectively to inform them about the process and increase support; and

0 undertake in-depth analysis o f proposals and related background information in order to make a compelling argument in the eyes o f stakeholders in favor o f the new systems.

d. Public Opinion Research: 0 gauge the attitudes and perceptions o f the primary stakeholder groups through in-

depth interviews, focus groups and surveys;

0 on the basis o f preliminary research and focus groups, formulate and test messages to communicate; and

0 plan o n repeated and systematic research to measure the evolution o f attitudes o f the stakeholders, as well as the success o f communication efforts before and after key events.

54

ANNEX 7

e. Information Campaign: invite the media to selected workshops, seminars and special events to build their understanding o f the government program on financial reporting and auditing reform;

0 prepare a set o f well-designed and high quality materials o n PIFRA to disseminate to the government staff at al l levels directly or indirectly involved in the PIFRA. These should avoid highly technical or quantitative presentation o f data and seek to make information user-friendly;

the human side o f the story should be presented at every opportunity; and

regular briefings by government spokespeople should be planned and the officials and media both well prepared in advance.

f. Communication Capacity Building establish a communication unit at PIFRA Directorate; and

build capacity to design, implement and supervise communication intervention for financial reporting and auditing at relevant departments in the federal and provincial governments.

55

ANNEX 8. TRAINING

A. General

1. function, and i s conscious o f i t s institutional responsibility to ensure the provision o f suitable programs o f adequate training for al l officers and staff working under the Auditor-General and the Controller General o f Accounts. It i s accepted that the principal components o f PIFRA I1 would realize their full potential only if the staff dealing with them, along with the end users affected by them, are al l adequately trained to acquire the requisite skil ls, knowledge and attitudes. The department is, therefore, prepared to allocate sufficient resources to achieve these objectives.

The Office o f the Auditor General (OAGP) recognizes the importance o f the training

2. The training component o f PIFRA I was intended to move the department towards professional level training, providing training associated with the changes introduced by the project, strengthening the quality o f training and training facilities, and expanding the circle o f beneficiaries.

3. There i s evidence o f progress towards these broad objectives.

4. PIFRA I on such issues as Training Needs Assessment (TNA), Comprehensive Training Plans (CTP), and Materials Development Proposals (MDP) have been approved by the OAGP.

The reports and recommendations o f the training consultants (Bearingpoint) appointed during

5 . in the Director General (DG) AATI’s action plan, which i s under consideration o f OAGP.

The timetable for the implementation o f the approved recommendations i s to be incorporated

B. Training Policies

6. compliance among the C G A and his AGs, al l audit formations, Military Accountant General, Member Finance o f the Railway Board, and heads o f departmentalized accounts offices. The goals and objectives o f the policy have been listed at some length. Some o f them are described briefly

A revised training pol icy has been approved by the Auditor General and circulated for

below:

0

The policy indicates the approved criteria for selection o f trainees for short and long training courses, both local and foreign.

All PIFRA-related training i s to be centralized in the training wing o f OAGP and will be conducted by in-house faculties. Outsourcing i s envisaged in case o f non-availability o f adequate expertise in the department.

The DG AATI and DG (Performance Auditing Wing) will circulate their calendars o f training courses to al l field offices, and arrange for maximum participation for cost effective and optimal utilization o f training facilities.

Heads o f f ield offices may also organize training courses that are specific to their own areas o f work.

The average number o f days per quarter or year for which the employees in various grades are expected to receive training have been specified.

56

ANNEX 8

At the end o f each training course the head o f the training institution will submit a report on the performance and interest o f each trainee.

Promotion to BS 18, 19 and 20 will be conditional, amongst other criteria, to an assessment o f satisfactory participation in training courses.

Some management training will also be imparted to AAOs and AOs to make them good managers and supervisors.

On-the-job training will be emphasized and it will be related to the j o b description o f each post in the department.

It has been stated that generally an official sent on training should be employed on return in a position where the training should help him to work better or i s directly related to his training.

Officers who have a flair for imparting training will be identified and given TOT courses.

Monetary and other incentives for the trainers have been spelled out in the policy.

The department’s training institutes shall occasionally accept personnel f rom the executive departments to promote exchange o f knowledge, to equip their executive staff with desirable practices in financial management and accounting, and to improve quality o f record keeping in line with PIFRA reforms.

It i s also proposed to collaborate with professional institutes l i ke CIPFA, ICAP, ICMAP , ACCA and IIA.

7. The success o f the policy will depend on a faithful implementation o f i t s provisions over the years to come. The policy should be subject to periodical review and modification, where necessary, o f the scope o f the policy and i t s provisions in the light o f actual experience. One such review will form part o f the f i rs t mid-term review o f the project. A system for watching proper management and quality assurance o f training provided at various levels, and for impact evaluation o f the training function in the department would o f necessity be developed and set up.

C. DG AATI’s Action Plan

8. implementation o f the four components o f PIFRA 11. The plan creates linkages o f the training effort to the anticipated progress on the implementation o f the main components, as well as with the upgrading o f AATI’s own facilities and capacity. Bar charts have been drafted indicating the timing o f various activities for the implementation o f the project’s four components. These include the provision o f requisite training to the staff concerned.

DG AATI has drawn up an action plan for the delivery o f training required for

9. The action plan for F A B S component envisages training o f 4,250 employees o f DAOs in NAM and SAP R3, o f 25,550 DDOs in NAM/CoA/Input forms, and o f 200 employees o f self- accounting entities in NAM & CoA. Similarly, training will be provided to finance managers in MOF, provincial departments and district finance officers, to site staff, and to Tehsil office staff. In addition, local and foreign training i s to be arranged for the staff o f the SAP Competency Center. The areas o f training, numbers o f expected trainees, and timing and duration o f training courses for other components have been included in the action plan as well as in the Output Monitoring Benchmarks and Indicators (Annex 5).

57

ANNEX 8

10. Overall, a very large number o f staff would require training in the use o f the new systems. The training program has several activities: training for finance managers and relatively senior staff in the overall concepts o f the new system and how to generate their desired financial and fiscal information; training for staff who would be doing transaction processing and report production on a dai ly basis; end-users in other departments who would need to be trained in the new input documents to be used with the new system; and technical training for staff who would be responsible for operating and maintaining the new system. Successful implementation at the pi lot sites has indicated that the training effort needs to be coordinated closely with implementation plans and focused to specific requirements o f a given site implementation. Even for a perceived complicated system l ike SAP, staff need to know only the specific features o f the system that they would be using and only a small number o f staff need to acquire a comprehensive knowledge about the entire system functionality. Managing the training effort with the aforementioned segmentation arrangement would make training coverage more manageable.

D. Master Trainers

1 1. for training course design to be completed within specified periods. The progress in this matter has been slow, thus requiring close monitoring by management in order to achieve the desired outcome of effective knowledge transfer. Lessons learned from the deployment o f master trainers should be used when designing training courses for the audit staff that are programmed for overseas training under the project.

The 25 master trainers who were trained in Canada have been given individual assignments

E. Outsourcing

12. Outsourcing o f training needs in some areas such as basic IT training shall constitute a regular activity during PIFRA I1 implementation in order to provide timely enhancement o f capacities in the absence o f adequate capacity at AATI in the short run. This will help AATI to focus their training delivery effort on areas where the institute has comparative advantage.

13. the concepts o f and appropriate procedures for ensuring effective security o f the hardware, software and sensitive data in the new computerized environment

Suitable arrangements shall also be made for the training o f senior officers and supervisors in

F. Upgrading of AATI, Lahore

14. For DG AATI to be able to provide proper training in support o f PIFRA I1 components, it is necessary that additional space, equipment, facilities and faculty are available in good time. It is planned to construct a new building at Lahore as wel l as design and supervise the construction o f additional training blocks.

15, The consultant/architect has already been hired to commence the design work. If the additional blocks cannot be put up by the f i rs t year o f PIFRA 11, it might become necessary to hire and equip suitable accommodation to enable the planned training to be conducted in the interim. DG AATI i s also examining the possibility o f augmenting h i s capacity by starting a second shift in the existing premises.

58

ANNEX 8

G. Information Flows During Period o f Transition

16. system to ensure compatible information flows, summarization and consolidation among federal, provincial and district governments, and between PIFRA and non-PIFRA systems. Training shall be imparted to staff o f the CGA’s office to support this transition and cut-over strategy.

In parallel with i t s implementation, FABS component o f PIFRA I1 i s to provide for an overall

H. Training of DDOs

17. With the decision o f the federal and NWFP governments to prepare and present their budgets for the year 2004-05 according to the new CoA, it was necessary to train al l the DDOs responsible for initiating transactions in the new Chart o f Accounts and the concepts o f NAM. This critically important activity was entrusted to AATI and has been satisfactorily completed except in the case o f northern areas where the federal government DDOs could not attend the training classes due to disturbed conditions. Training, including refresher courses, shall remain a continuing activity during the l i fe o f PIFRA 11. This will ensure sustainability. In the medium term however, the responsibility for D D O training would vest with their respective governments.

I. Foreign Training

18. proposals to be financed under the credit will be subject to prior clearance from the Bank. The training proposal would require to indicate the relevance o f the training to the project outcomes, the planned future position that the potential trainee shall hold upon successful completion, and the certification that the trainee shall remain in the service o f the project for at least four years or during the l i f e o f the project, whichever is longer. In the event that the continued retention o f the trainee within the project has not been fulfilled after the training, the training expenditures financed from the credit shall be considered ineligible and refunded by the government to IDA.

Lessons learned from PIFRA I will be fed into this follow-on project. All foreign training

59

H Q)

P - P

s 2 i

s 2 m

r- N

2 3

0 W : r- W 9 3 3

" 0 " 0

0 0 0 ? " : ?

- 0 0 0 " N O r - w m

3 3

d - - 0 b W m c o r - w

r - b C Q W l n

' d o c m o u : 09P\c

3 -

P p $ b? r, 2

n m o w r 0 d r - d

ANNEX 9

Accounting Building and Building and and Budgeting Upgrading of Upgrading of Project

Categories/Components System-FABS OAGP CGA Management

Civ i l Works 3.257 2.405 7.857 Equipment (incl. Duties and Taxes) 24.858 5.810 0.794 0.725 Vehicles (incl. Duties and Taxes) 1.529 0.692 0.389 Technical AssistanceiConsulting Services 10.615 3.292 0.300 1.336 Training & Development 3.453 2.123 6.670 1.335 Operational and Maintenance 5.360 1.569 1.514 0.556 Sub Total 47.543 16.727 17.827 4.341

Total

13.519 32.187 2.610

15.543 13.581 9.000

86.440

Physical Contingencies Price Contingencies Special Contingency - Loca l Govt. Audits 1 .ooo 2.000 Total 48.742 19.345 18.471 6.446 Decimals Rounded to: 48.740 19.345 18.470 6.445

1.138 1.138 1.199 0.480 0.644 0.105 1 2.428

3.000 93.006 93.000

Civ i l Works

Project Cost Summary - Excluding Contingencies Summary Expenditure Rs million

Table 5 (b)

193.792 143.092 467.468 804.35 1

Financial Capacity Capacity Rs million Accounting Building and Building and

Operational and Maintenance Sub Total

and Budgeting Upgradation Upgradation Project

318.949 93.351 90.109 33.075 53 5.484 2,828.8 15 995.276 1,060.709 258.283 5,143.180

Physical Contingencies Price Contingencies Special Contingency - Loca l

Total Decimals Rounded to:

Govt. Audits

Equipment Vehicles Technical Assistance1

Consulting Services Training & Development

67.71 1 67.71 1 71.341 28.560 38.318 6.248 144.466

59.500 119.000 178.500 2,900.156 1,151.047 1,099.027 383.530 5,533.857 2,900.030 1,151.028 1,098.965 383.478 5,533.500

1,479.021 345.695 47.243 43.138 1,915.097 90.976 41.174 23.146 155.295

63 1.593 195.874 17.850 79.492 924.809 205.46 1 126.289 396.865 79.433 808.047

62

ANNEX 10. ECONOMIC AND FINANCIAL ANALYSIS

NPV = US$ million; ERR = %; FRR = % (Not Applicable)

1. the provision o f a comprehensive, reliable, timely and accurate data for better and informed decision making. The beneficial features o f the project, justifying its economic and financial soundness, include:

The project will improve the financial and fiscal accountability regime in Pakistan through

a.

b.

C.

d.

e.

f.

g.

h.

i.

j.

improved and timely budgeting using international best practices;

adoption o f commitment accounting (modified cash basis) as a f i rs t step towards an accrual basis o f accounting and updating the systems on a double entry method using a new Chart o f Accounts. The new CoA captures budgeting and accounting information with suitable dimensions and disaggregating at the lowest level o f financial responsibility;

enabling physical/financial assets accounting, liabilities accounting and periodical reporting to relevant stakeholders;

improved business processes, better accounting and system security, thus creating substantial savings through elimination o f rent-seeking intermediaries and faster detection o f fraudulent practices;

complete elimination o f unidentified expenditures, achievable through full reconciliation o f expenditures and revenues on a timely basis with the use o f enhanced internal controls, systems security, and optimal interfaces established between accounting and payment entities, the banks and the revenue collection agencies. At the end o f the project, the timeliness and accuracy o f federal and provincial accounts will allow for comprehensive and on-time reconciled reports;

provision o f a cost effective solution to the Government o f Pakistan’s financial information infrastructure and needs and a set o f efficient tools for public expenditure management in the country. This includes computerization o f accounting and related financial transactions through 15 functional modules o f SAP W3; reinforce the introduction o f uniform standards o f accounting for Pakistan, consistent with international standards, and upgrade the competence and capacity o f the public sector oversight institution (Auditor General o f Pakistan);

introduce and consolidate on measures to increase institutional capacity through amending manpower policies, training, use o f private sector in areas o f comparative advantage, and technical assistance to enhance the development impact o f improved financial information and to ensure sustainability o f improved procedures;

preparation o f financial management information in the context o f an overall integrated information architecture to enable better government fiscal management decisions to be made and avoid overlapping or duplication o f functionality;

with the inbuilt flexibility o f the selected application, the project can support the devolution initiatives and strategies for Pakistan through the enhancement o f accountability and ownership at the local level and by the introduction o f increased

63

ANNEX 10

functionalities as may be required particularly for district government budgeting and accounting; and

integrate and create linkages between expenditure policy, budget execution, expenditure control and accounting policies, and thus al low for timely, comprehensive and accurate provision o f fiscal and financial data o n GFS standards as wel l as international accounting standards for decision making and comparative analysis.

k.

64

b,, . .... , ... , .... .. .... , .. .. . .

....,.. , , , , , ... .. , ... . , ,. . . , , , , , ..,. , ... , , ,,. . , .. , , . . , , .. , ..,. , , . . , . , e E

n

i 3

m

0

0

0

m

1

0

0

m

0

* I.

4' * m m

0

1

0

0

0

I +-I m I *

m m

0

0

I

I I I I

I I

I I I

I I I

I I I

I I

I I I I

I I I

I

I I

I I I I I I

I I I

[ I

I I :I I

U

6

1.. ...............

T

........................................... I 1 I I ....................... t i ! c.".L-. I

I , [ I

I 4 1 b e

I !

I I

1 !..'........... ................... .I !....

I .................................

!,.......A*...*. ...........................................

ANNEX 12. FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

I. Financial Management Arrangements

1. The same financial management arrangements used in PIFRA I shall apply for PIFRA 11. However, PIFRA I1 would be disbursed on the basis o f FMRs. The arrangements are centered within the institutional set up o f the Project Directorate but the accounting, internal control and reporting functions will be further strengthened under this project by the recruitment o f one adequately qualified accountant and one internal auditor from the market. With the technical complexity o f this follow-on project as well as the quantum o f financial resources to be managed over the project’s five year life, it i s imperative that the adequacy o f the financial management staffing i s sustainably preserved. The project shall be submitting quarterly Financial Monitoring Reports (FMRs) to the Bank as i s being done for PIFRA I on an enhanced format that was agreed between the Bank and the Government o f Pakistan during negotiations. Project financial statements (including FMRs) covering each fiscal year shall be prepared by the PDte and audited by an independent firm o f chartered accountants whose terms o f reference (TORS) were agreed with the Bank. Overall, the FM arrangements for this enlarged project will be adequate with the recruitment o f the two qualified financial management staff to work with and guide the government accounting and internal auditing team assigned to the project. PIFRA I had suffered from a recurrent turnover o f financial management staff and lack o f timeliness in the submission o f audited financial statements. These shortcomings would be taken care o f in PIFRA I1 by engaging a full time accountant and an internal auditor. An Internal Auditor has already been deputed for the project and a suitably qualified Accountant has been recruited.

2. There shall be a Special Account established for IDA funds. The Special Account shall receive the proceeds o f the credit against which eligible project expenditures shall be incurred. Withdrawals from the Special Account shall use the FMR-based method. A mechanism shall also be established whereby the GOP provides annual budget allocation as i t s counterpart funds for financing the operational and maintenance costs o f the project through AGPR. The funds f low arrangements shall allow for withdrawals from the Special Account o f replenishable (revolving) imprest account funds for use by the federal and provincial finance departments as wel l as the regional Project Directorates. The ceiling for the imprest account withdrawals shall not exceed US$50,000 for each o f the five finance departments and the maximum expenditure during the project l i fe shall not exceed US$2 mi l l ion for a l l provinces combined. The allocation to individual provinces out o f this amount shall be agreed between the Project Director and the respective Finance Secretaries. As regards the imprest funds for the regional PIFRA Directorates, the ceiling shall be U S $ 1,000 at any one time on revolving basis per province.

A. Country Issues

3. accountability. L o w institutional and staff capacity and uneven implementation o f reform measures have led to weak accounting and gaps in the accountability framework, including financial reporting, external audit and legislative oversight. The government i s taking the necessary steps to address the key shortcomings through the PIFRA project and other capacity building measures.

Inadequate budget management and control resulted in weak financial management and

68

ANNEX 12

B. Financial Management Issues Faced in PIFRA I

a. StafJing: PIFRA I faced inadequate FM staffing due to high staff turnover. In recent years, however, this turnover has significantly improved.

b. Delay in submission of auditedjhancial statements: The present practice for preparation o f financial statements i s that these are prepared and audit commenced after the figures have been reconciled with the respective AGs. I t was agreed that financial statements would be prepared from the data received from the respective regional offices and auditors requested to commence audit. Reconciliation would be undertaken as a parallel activity. This would ensure that submission o f audited financial statements i s not delayed.

c. Training: N o training was provided to the FM staff. This would be taken care o f in PIFRA 11.

C. Risk Analysis

4. project and the level o f financial management supervision envisaged, the project may be rated ‘medium risk’ as far as financial management aspects are concerned.

In view o f enhanced financial management arrangements prescribed for this follow-on

5. accordance with the prescribed measures.

The salient weaknesses identified in the succeeding paragraph will be mitigated in

D. Strengths and Weaknesses

a. Major strengths: o Prior experience o f handling financial management o f Bank financed project

o Suitably qualified and experienced staff to handle financial management

o Clear cut j o b descriptions o f staff

o Adequate segregation o f duties

b. Major weaknesses: o Monitoring o f physical performance and outputs targets

o Staffing inadequacy and recurring staff turnover at the supervisory level

6. The critical weaknesses as above identified shall be mitigated through the design o f a set o f comprehensive performance indicators for each strategic component o f the project and through the formulation o f effective monitoring and evaluation mechanisms; the output o f the monitoring and evaluation exercise shall serve as an input into the FMR - ‘physical versus financial’ performance reports under FMR arrangements. In respect o f staff turnover, intensive Bank supervision initiatives during PIFRA have created a reinforced consensus with PIFRA

69

ANNEX 12

Directorate to ensure long term continuity o f key personnel assigned to accounting and financial management area.

7. Staffing: The following staffing functions have been deputed for the project:

c. Director Budget & Accounts d. Accounts Officer e. Drawing & Disbursing Officer f. Administration Accountant g. Assistant Accounts Officer h. Cashier i. System Operator j. Internal Auditor k. Suitably qualified and experienced accountant acceptable to the Bank

8. Job descriptions for these positions have been prepared that assure effective internal control. The above positions have been included in the PC- 1. An Internal Audit Expert (IAE) has been posted to carry out internal audit at PIFRA headquarters and regional offices and he will be directly reporting to the Project Director.

9. submit budgets for field/operational offices and communicate to al l concerned after their approval. Director Budget & Accounts would ensure monitoring o f expenditure through preparation o f periodic expenditure reports and other relevant analytical financialhudgetary data which will serve as inputs to the quarterly FMRs to be presented to IDA for disbursement and reporting purposes.

Budget Preparation and Execution: The Assistant Accounts Officer would prepare and

10. Funds Flow: IDA funds withdrawn from the Special Account to meet the imprest requirements o f the federal and provincial finance departments as wel l as the regional PIFRA Directorates shall be replenished o n monthly basis through an imprest accounting mechanism. The expenditures from the imprest accounts shall be for eligible expenditures only. Replenishments to the imprest accounts for the actual eligible expenditures shall be withdrawn from the Special Account at the end o f each month in order to bring the imprest cash funds held to the original approved level at any one time during project implementation. An overall ceiling o f US$250,000 shall be set for imprest accounts. Counterpart funds provided through the Annual Development Plan (ADP) for the project would be used to enable the central directorate to meet the operational and maintenance expenditures as defined in the cost tables.

1 1. project. The computerized accounting system developed in-house for PIFRA I would continue to be used to process PIFRA I1 transactions. A financial management manual has been prepared and approved by the Auditor General. Fixed Assets accounting would be carried out using the software developed under PIFRA. The regional directorates shall maintain subsidiary records o f their assets holdings and values for periodic reconciliation with the control accounts at the central directorate.

Accounting Policies and Procedures: Cash basis o f accounting would be used for the

70

ANNEX 12

12. management. The project would provide FMRs to IDA o n a quarterly basis, the format and content o f which were agreed during negotiations. The FMRs will be submitted to IDA within 45 days o f the end o f each quarter. The following constitute the quarterly FMRs to be submitted:

Financial Reporting: Monthly expenditure monitoring reports would be prepared for the

1. Cash Flow Statement 2. Cash Forecast Statement 3. 4. Output Monitoring Report 5. Special Account Activity Statement 6. Procurement Status Report

Uses o f Funds by Project Component/Activity Statement

13. Impact o f Procurement Arrangements: The Bank’s procurement guidelines would be followed for procurement o f goods, services, etc., for the project. A separate Contract Management Cell i s in place to handle procurement. There i s no conflict between financial management and procurement requirements for this project.

14. External Audit: External audit o f the project shall be carried out by a firm o f chartered accountants, selected by the Implementing Agency, under TORS agreed with the Bank. The audit costs shall be met by IDA under the project’s ‘Consultant Services’ category. IDA shall be required to consider granting a no objection on the contract terms for the selected auditor. To ensure timely submission o f audited financial statements to IDA, financial statements would be prepared latest by the end o f three months (September) after the close o f each fiscal year (June), and audit commenced in the f i rs t week o f October.

15. December 3 1 each year.

16. the project, Bank’s supervision will be intensive during the f i rs t two years to ensure that the prescribed arrangements remain in force and the mitigating factors are pursued.

The project audited financial statements would be required to be submitted to IDA by

Supervision Plan: Notwithstanding the effective financial management arrangements for

17. Agreed Action: Actions agreed during appraisal have since been completed.

11. Disbursement Arrangements

18. The proposed credit amount o f U S $ 84 mi l l ion i s expected to be disbursed over a period o f five years and would cover about 90% o f the overall project cost. The PIFRA Directorate would have adequate financial management capacity for disbursements to be made on the basis o f FMRs.

19. The allocation o f the credit proceeds by disbursement category and allocations are shown in the table below. IDA would finance 100% cost (including taxes and duties) against these categories, whereas the borrower would meet al l the operational and maintenance expenditures estimated to cost about $ 9.00 mil l ion (about 10% o f the overall project cost). Based on the counterpart funding requirement established and provided for by GOP under PIFRA I (about

71

ANNEX 12

US$ 9 million), a total o f about US$ 9 mil l ion allocation for PIFRA I1 over a five year period appears appropriate and within the capacity o f the GOP to finance on a sustainable basis.

Allocation o f Credit Proceeds (Table C) Total Project IDA Financing Financing

Expenditure Category costs (US$ M) (US$ M) Percentage Civil Works 13.519 13.519 100%

Goods 34.797 34.797 100%

Technical Assistance/Consultants’ Services 15.540 15.540

Training and Development 13.580 13.580

................................................................................................................................................................................................................................................................m�

................................................................................................................................................................................................................................................................¥�

................................................................................................................................................................................................................................................................Ã� a1 and Maintenance 9.000 0.000 _--

Unallocated 6.564 6.564 _ _ _ ................................................................................................................................................................................................................................................................¡�

Total Project Costs with IDA Financing 93.000 84.000 90.3%

A. Special Account

20. dollars according to terms and conditions acceptable to IDA. Requests for advances and/or deposits into the SA would be accompanied by duly completed FMRs. Payments out o f the SA can only be made for IDA’S share o f eligible project expenditures as and when they are incurred by the PIFRA Directorate, subject to the an advance o f a maximum amount o f US$250,000 from the Special Account for the purpose o f meeting expenditures at satellite implementation sites (federal and provincial finance departments and regional Project Directorates).

PIFRA Directorate will be responsible for maintaining a Special Account (SA) in US

21. one o f two designated directors o f PIFRA.

The Special Account would be operated joint ly by Director (Budget & Accounts) and any

B. Retroactive Finance

22. expenditures for project activities after March 3 1 , 2005.

Retroactive financing o f up to an amount o f US$4.5 mi l l ion would cover eligible

72

ANNEX 13. PROCUREMENT ARRANGEMENTS

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Banks "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated M a y 2004, and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 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 loadcredit, 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.

B. Procurement o f Works: Works procured under this project would include:

Component 1 - Financial Accounting & Budgeting System (FABS) 0 Site preparation and physical upgrading o f 358 sites (DAOs; Headquarter Post Office,

Headquarter Foreign Office, Geological Survey o f Pakistan and PWD; AJK; and Ministries, etc.)

Component 2 - Office o f the Auditor General o f Pakistan (OAGP) 0 Extension o f Audit House (Software Development Center) 0 Upgrading o f Field Audit Offices

Upgrading o f AATI, Lahore and establishment o f additional training facilities at Islamabad and other key centers

Component 3 - Controller General o f Accounts (CGA) 0 Renovation o f C G A headquarters 0

0

0

0

Construction and renovation o f various AG offices for internal audit implementation Upgrading 26 Balochistan Treasury Offices to DAOs New office building for AG Balochistan New office building for AG Sindh

2. The upgrading o f the sites involves the refurbishment o f the present premises to house IT equipment. The work includes erection o f partition walls, plastering and painting, installation o f false ceiling, the upgrading o f electrical wiring and the provision o f a diesel generator and air- conditioning equipment.

3. Development Center, AG Balochistan and AG Sindh are in the range o f US$ 1.7 mi l l ion equivalent to US$ 4.3 million equivalent.

The estimated costs o f the construction o f the new Office Buildings for Software

4. physical upgrading o f the sites will be procured through national competitive bidding (NCB)

Because o f the scattered nature o f the works, the construction o f new buildings and

73

ANNEX 13

procedures acceptable to the Bank. These are embodied in the Bank’s Sample Bidding Documents for NCB, Pakistan - Procurement o f Works - and will be used for al l works to be procured through the N C B procedures.

5 . It i s envisaged that physical upgrading may also have to be carried out at very remote locations. These small works estimated to cost US$ 100,000 equivalent per contract will be procured through shopping by inviting quotations from at least three qualified contractors.

C. Procurement o f Goods: Goods procured under this project would include:

Component 1 - FABS 0

0

0

Hardware and software for the systems to be installed at various sites Procurement o f incremental software SAP/R3 licenses Office equipment and furniture for al l sites indicated under the works category o f this component

Component 2 - OAGP 0 Hardware/software for the various sites 0 Office equipment and furniture for field audit offices 0 Vehicles

Component 3 - C G A 0 Hardware/software at various sites 0

0 Vehicles

Office equipment and furniture for al l sites indicated under the works category o f this component

Component 4 - Project Management 0 Office equipment and furniture 0 Vehicles

6. Contracts o f goods valued at more than $200,000 equivalent will be procured through international competitive bidding (ICB) procedures. Other goods will be procured through N C B procedures (between $ 50,000 and $200,000). However, goods estimated to cost less than $ 50,000 equivalent may be procured on the basis o f national shopping.

7. All goods to be procured through I C B procedures will use the Bank Standard Bidding Documents for this purpose. For goods to be procured through N C B procedures, the Bank’s Sample Bidding Documents for NCB, Pakistan - Procurement o f Goods - will be used.

8. platform has already been selected during implementation o f the FABS component o f PIFRA I. Other critical proprietary items required to ensure compatibility with the existing platform may also be procured through direct contracting with each contract not to exceed US$ 100,000 equivalent.

The SAP/R3 system software will be procured through direct contracting since the SAP

74

ANNEX 13

D. Improvement of Bidding Procedures under National Competitive Bidding

9. The following improvements in bidding procedures will apply to al l procurement o f goods and works under national competitive bidding in order to ensure economy, efficiency, transparency and broad consistency with the provisions o f Section 1 o f the guidelines:

e

e

e

e

e

e

e

e

e

e

e

e

Invitation to bid shall be advertised in at least one national newspaper with a wide circulation, at least 30 days prior to the deadline for the submission o f bids;

Bid documents shall be made available by mail or in person to al l who are willing to pay the required fee;

Foreign bidders shall not be precluded from bidding and no preference o f any kind shall be given to national bidders in the bidding process;

Bidding shall not be restricted to pre-registered firms;

Qualification criteria shall be stated in the bidding documents;

Bids shall be opened in public immediately after the deadline for submission o f bids;

Bids shall not be rejected merely on the basis o f a comparison with an official estimate without the prior concurrence o f the association;

Before rejecting al l bids and soliciting new bids, the Association’s prior concurrence shall be obtained;

Bids shall be solicited and contracts shall be awarded on the basis o f unit prices and not on the basis o f a composite schedule o f rates;

Contracts shall not be awarded on the basis o f nationally negotiated rates;

Contracts shall be awarded to the lowest evaluated and qualified bidder; and

Post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders.

E. Selection o f Consultants

10. Services to be procured under this project would include:

Component 1 :

e

Preparation o f design, bidding documents, etc., and supervision o f works Implementation services at al l physically upgraded PIFRA I1 sites System design and installation for system cutover strategy Technical assistance for data warehousing Studies to assess feasibility o f extending new accounting model to defense services and Pakistan railways

Component 2: Preparation o f design, bidding documents, etc., and supervision o f works Assist in development o f revenue audit, corporate audit and accounting policy

75

ANNEX 13

0 Technical assistance for A M I S centers

Component 3 : 0

0

0

Technical assistance for web publishing (individual consultant) Technical assistance to improve internal audit implementation (individual consultant) Preparation o f design, bidding documents, etc., and supervision o f works

Component 4: 0 Technical assistance for communication and change management

1 1. services under the project.

Bank Standard Request for Proposals Document will be used for the procurement o f

12. Short l i s ts of consultants for services estimated to cost less than $ 500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 of the consultant guidelines.

13. Firms for services estimated to cost $ 100,000 or more shall be procured through Quality and Cost Based Selection method. For contracts less than $ 100,000 equivalent, f i r m s may be selected following the method o f Selection Based -on Consultants Qualifications.

14. 5.4 o f the consultant guidelines.

Individual consultants will be selected following the provisions o f paragraph 5.1 through

F. Operating Costs

15. These include:

0

0 Telecom charges 0 Stationery supplies 0 POL & miscellaneous expenses 0

0 Incremental staff

Maintenance o f hardware and software

Maintenance o f offices & buildings

16. implementing agency’s administrative procedures. These procedures have been used during PIFRA I. These are acceptable to the Bank.

The operating costs l isted above would be financed by the project and procured using the

G. Organizational Setup o f PIFRA Procurement Wing

17. the DAG Audit, DAG HFW/Training, CGA, MOF, FDs and Provincial AGs, which are the Implementation Agencies o f the four components o f the project. It is headed by a Project Director and i s staffed by Director Audit Component, Director C G A Component, Director FABS, General Manager MIS, Director Training, Director Change Management Component and Director General - Coordination and a Director General - Procurement.

The Project Directorate o f PIFRA I1 will carry out al l procurement activities in liaison with

76

ANNEX 13

18. specialist staff will form the basis o f a stronger procurement unit for PIFRA 11, but until this arrangement takes root the procurement capacity o f PIFRA remains weak.

A fully dedicated Director General Procurement, supported by a Director Procurement and

H. Assessment o f Capacity o f PIFR4 Procurement Wing

19. Directorate to implement procurement actions for the project. The assessment analyzed the procurement capacity o f the Project Directorate and specific risks on (a) organizational structure; (b) facilities and support capacity; (c) staffing; (d) professional experience; (e) record keeping and filing system; (0 procurement planning and monitoring; and (8) capacity to meet the Bank’s procurement reporting requirements.

World Bank Procurement Unit has carried out an assessment o f the capacity o f the Project

20. goods, works and services during PIFRA I. Guidance was also taken from the Country Procurement Assessment Report (June 2002) in finalizing this assessment.

The assessment took into account the Bank experience with PIFRA in the procurement o f

I. Key Issues and Risks/Corrective Measures

2 1. been identified and include:

The key issues and r isks concerning procurement for implementation o f the project have

There has been a very high turnover in the staff o f the Project Directorate including those involved in procurement during the implementation o f PIFRA I. This factor has had an adverse impact on the implementation o f PIFRA I. The expertise gained by the staff involved in the procurement o f very large value contracts in the early phases o f PIFRA I has been lost, as these personnel are no longer working on the project.

During the implementation o f PIFRA I, the Project Director did not have enough devolved powers. This resulted in procurement (and with it the implementation o f the project) being held up by administrative bottlenecks.

Strong support f rom the stakeholders i s needed for the success o f PIFRA 11. As the procurement wing o f the Project Directorate has to interact with the implementing agencies o f the four components o f the project, stakeholder participation i s very necessary.

Implementation o f large-scale IT systems i s planned in PIFRA 11. The absence o f a Government Manager with experience in managing these systems has been fe l t in PIFRA I. The delay in procuring hardware for PIFRA I under I C B procedures can be cited as an example o f this lack o f expertise in the field o f IT in the Project Directorate. PIFRA relies totally on technical assistance and expertise provided by the consultants for MIS.

22. PIFRA Directorate are:

The corrective measures which have been agreed with or have been implemented by

The Procurement Wing - DG (Procurement) and Director (Procurement) - has been augmented with the hiring o f two procurement consultants posted at the Project Directorate,

77

ANNEX 13

Islamabad since September 2004. These consultants are working under the Director (Procurement) while the overall in-charge is the DG.

0 PIFRA I1 lays out the framework for project management to comprise o f a Steering Committee, chaired by the Auditor General with general powers to oversee implementation. The Project Director will be the Secretary o f the committee. It i s envisaged that with support from the AG and MOF, administrative roadblocks faced by the Project Director will be overcome.

0 The Director (Procurement) and the two procurement consultants have recently attended courses in the procurement procedures under World Bank aided projects at the Administrative Staff College in Hyderabad, India. The Bank will further assist in capacity building by conducting training workshops in Pakistan for PIFRA staff on dates to be agreed with PIFRA.

0 PIFRA will hire a General Manager (MIS) to manage the IT systems envisaged in PIFRA 11.

23. The overall project risk for procurement i s High.

J. Procurement Plan

24. The borrower has developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the project team on June 1,2005 and i s available in the f i les o f both the Bank and PIFRA Project Directorate in Islamabad. It will also be available in the project’s database and in the Bank’s external website. The procurement plan will be updated in agreement with the project team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

K. Frequency of Procurement Supervision

25. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the implementing agency has recommended that the frequency o f the procurement supervision mission to visit the field to carry out post review o f procurement actions should be conducted once every six months. The size o f the sample for post-reviews will not be less than one in five contracts.

L. Details o f the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

26. List o f contract packages to be procured fol lowing I C B and direct contracting:

78

ANNEX 13

Review Expected

Contract cost Proc. Preference (Prior/ Opening Estimated Domestic By Bank Bid-

(Description) USS(m) Method P-Q (Yes/no) Post) Date Comments 1 FABS-I 5.25 ICB No Yes Prior June 7, 05 First o f three

Hardware contracts. 2 FABS Software - 0.500 ICB No Yes Prior Jan. 5, 08

Data Warehousing 3 OAGP Hardware 1.60 ICB No Yes Prior Mar. 29,05 90% o f contract

- Organizational price to be Restructuring reimbursed under

PIFRA I 4 OAGP Hardware 0.400 ICB No Yes Prior Mar 29, 05 90% o f contract

- Tr. Facilities price to be reimbursed under PIFRA I

5 OAGP ICGAIPM 1.57 ICB N o Yes Prior July 15, 05 Vehicles

2. Consulting Services

(a) List o f consulting assignments with short-list o f international f i rms.

Review Expected Estimated By Bank Proposals

Contract Description of Cost Selection (Prior/ Submission No. Assignment US$m Method Post) Date Comments 11 Implementing ,10.830 QCBS Prior See Negotiate contract for the remaining

Services for comments 75 PIFRA I sites under an existing FABS sites contract by May 15,2005 (est. cost

US$2.0 million). Rest o f services to be provided under separate contract. ................................... ............................................................... . ............................................................................. ..................................................... ......................... ................. ........................ ........

13 Studies to 0.700 QCBS Prior Jan. 15, 07 Extend New Accounting

(b) Consultancy services estimated to cost above $ 100,000 per contract and individual consultants for assignments estimated to cost above $ 50,000 would be subject to prior review by the Bank.

(c) services estimated to cost less than $ 500,000 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.

Short l i s t s composed entirely o f national consultants: Short lists o f consultants for

79

ANNEX 14. SAFEGUARD POLICY ISSUES

There are no safeguard policy issues involved in this project in light o f the following:

1. Environment: that this i s a Category C project and does not require an environment assessment to be carried out;

2. Social: that there i s no major land acquisition involved albeit small piece(s) o f land required, if needed, for construction o f Government buildings, which will be purchased by the GOP through commercial means. There i s no involuntary resettlement envisaged. As such, no implication on indigenous people is envisaged and therefore those policies are not triggered; and

3. Safeguard: For the purpose o f OP 7.60 since AJK i s a disputed territory, the standard disclaimer has been included in the project documentation.

80

ANNEX 15. PROJECT PREPARATION AND SUPERVISION

Planned Actual PCN review February 7,2002 July 10,2002

Initial PID to PIC March 05,2002 July 15, 2002 ............................................................................................................................................ ...........................................................................................................................................................................

Initial ISDS to PIC March 05,2002 July 15,2002 Appraisal April 10,2002 December 20,2004

Negotiations January 29,2003 June 2,2005 Board/RVP approval September 6,2005 Planned date o f effectiveness November 1,2005

Planned date o f mid-term review Planned closing date June 30,2010

March 2007 ......................................................................................................................................................................................................................................................... ..................................................................................

Key institutions responsible for preparation o f the project: Office o f the Auditor General, Office o f the Controller General o f Accounts, and the PIFRA Directorate.

Bank staff and consultants who worked on the project included:

Name Title Unit Anthony Graeme Lee Task Leader/Sr. Municipal Finance Specialist SASE1 Ismaila B. Ceesay Co-Task Leader&. Financial Management Specialist SARFM P.K. Subramanian Lead Financial Management SDecialist SARFM

................................................................................................................................................................................................................................................................~�

................................................................................................................................................................................................................................................................‰�

Hanid Mukhtar Sr. Economist SASPR Akhtar Hamid Lead Counsel LEGMS Sheila Braka-Musiime Counsel LEGMS Hasan Saqib Sr. Financial Management Specialist SARFM Asif A l i Sr. Procurement Specialist SAWS Masud Mozammel Communications Officer EXTCD

Riaz Mahmood Finance Analyst SACPK Altaf Ahmad Program Assistant SARFM Al i Hashim Bank Consultant - Informatics SARFM Riyaz Bokhari Bank Consultant SARF Altaf Iqbal Bank Consultant SARFM Michael Jacobs Bank Consultant SARFM Hasan Masood Mirza Bank Consultant SARPS

................................................................................................................................................................................................................................................................�� .............................................................................................

................................................................................................................................................................................................................................................................)� .............................................................

................................................................................................................................................................................................................................................................y�

................................................................................................................................................................................................................................................................‘�

................................................................................................................................................................................................................................................................•�

Estimated approval and supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost:

U S $ 25,000 US$ 185,000

81

ANNEX 16. DOCUMENTS IN THE PROJECT FILE

GOP Documents:

1. 2.

3.

Planning Commission document (PC-l), dated May 10,2005. Project Procurement Plan for f i rs t 18 months duly agreed with PIFRA Directorate on June 1,2005. Project Results Framework, Monitoring, and Output Indicators agreed with PIFRA Directorate on June 1, 2005.

Other Documents:

4. 5. 6.

PIFRA I1 Aide Memoire No. 4, 5 & 6 along with Management Letters. Detailed Project Cost Tables and Implementation Schedules/Charts. Bank’s standard disclaimer concerning the disputed territory o f AJK.

82

ANNEX 17. STATEMENT OF LOANS AND CREDITS

I

, Original Amount in US$ millions I , disbursements

i / Difference between 1 expected and actual

Project ID FY Purpose i IBRD IDA SF GEF 1 Cancel. Undisb. I Orig. Frin Rev'd

PO78997 2004 Sindh On-Farm Water I 0.00 61.14 0.00 0.00 I 0.00 59.28 I 0.00 0.00 Management Project !

PO82621 2004 NWFP Community j 0.00 37.10 0.00 0.00 I 0.00 36.58 I 0.00 0.00

I 50.00 150.00 0.00 0.00 1 0.00 206.49 4.73 0.00

PO82977 2004 Second Poverty Alleviation ! 0.00 238.00 0.00 0.00 , 0.00 244.78 I 41.16 0.00

Infrastructure 11 ( CIP2) I j .............................................................................................................................................................................. ~ .............................................................................................................................................. < .............................................................................. /.. .......................................................................................

........................................................................................................................................................................... i ................................................................................................................................................ ........................................I ......... ................................... PO10556 2004 HIGHWAYS REHAB

Fund Project PO83370 2004 PK Public Sect Capacity / 0.00 55.00 0.00 0.00 I 0.00 53.72 I 0.00 0.00

Building Project ! j

PO71454 2003 AJK Community i 0.00 20.00 0.00 0.00 , 0.00 19.98 1 5.38 0.00 Infrastructure & Services 1 I

........................................................................................................................................................................... i ........................................................................................................................................... 1 ............................................................................ .j .........................................................................................

PO74856 2003 HIV/AIDS Prevention 1 0.00 27.83 0.00 0.00 , 0.00 38.70 I 7.32 0.00

PO77288 2003 National Education i 0.00 3.63 0.00 0.00 j 0.00 3.80 1 0.18 0.00

j i ................................................................................................................................................................................................................................................................�� Project j .............................................................................. I ..................................................................

Assessment System I

PO74797 2003 Banking Sector Technical 000 2650 000 0 0 0 i 0 0 0 25 12 ' 1537 0 00 Assistance I

0.00 0.00 , 0.00 0.01 I 0.19 0.00

PO55292 2002 BSRPP 1 0.00 300.00 0.00 0.00 i 0.00 111.37 I -204.62 0.00

j i 0.00 20.00 j

PO81909 2003 Partnership for Polio Eradication i i ................................................................................................................................................................................... ...................................................................................................................................................... .................................................................................................................

PO71092 2001 NWFP ON-FARM WATER 0 0 0 2135 000 0 0 0 j 0 0 0 2086 -342 -0 60 MANAGEMENT PROJECT I

PO56213 2001 TRADE&TRANSPORT ' 000 300 000 000 ' 000 0 8 0 049 0 00

PO35823 2001 GEF-Protected Areas ~ 0.00 0.00 0.00 10.08 I 0.00 10.80 , 1.44 0.00

PO49791 1999 POVERTY ALLEVIATION I 0.00 90.00 0.00 0.00 i 0.00 2.33 I 0.20 0.00 .................................................................................................................................................................................. i ...................................................................................................................................................... + ........................................................................... 4 ............................... ................................... Management Project

FUND I PO10500 1998 Natl Drainage Prog 0 0 0 28500 000 0 0 0 , 024 6991 1 7603 3867

PO36015 1997 IMPR FIN REP &AUDIT 1 0.00 28.80 0.00 0.00 1 0.00 14.23 / 14.35 14.49

Total: 50.00 1,367.35 0.00 10.08 I 0.24 918.76 ' - 41.20 52.56

83

ANNEX 17

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions o f U S Dollars

FY Approval

Committed Disbursed I F C I F C

Company Loan Equiiy Quasi Partic Loan Equity Quasi Partic ABN AMRO PAK 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00

1995 A E S La1 Pir 23,73 9.50 0.00 0.00 23.73 9.50 0.00 0.00 1996 A E S Pak Gen 12.68 9.50 0.00 16.10 12.68 9.50 0.00 16.10

................................................................................................................................................................................................................................................................Ý�

1995 Abamco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00 ................................................................................................................................................................................................................................................................ã� Askari Bank 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00

1991 BRRIM 0.00 0.76 0.00 0.00 0.00 0.76 0.00 0.00 1995104 BSJS Fund 0.00 0.60 0.00 0.00 1993 CDCPL 0.00 0.16 0.00 0.00 0.00 0.16 0.00 0.00

................................................................................................................................................................................................................................................................c� ................................................

................................................................................................................................................................................................................................................................2� ..........................................................................................................................................

199319710 1 Crescent Bahuman 7.50 0.00 0.00 1.50 6.99 0.00 0.00 1.50 2004 Dewan SME 0.00 1.02 0.00 0.00 0.00 0.00 0.00 0.00

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

2003104 Dewan Salman 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 Engro Chemical 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.00

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

2001 Eni Pakistan 24.00 0.00 0.00 0.00 24.00 0.00 0.00 0.00 1990192196 FlIB 0.58 0.00 0.00 0.00 0.58 0.00 0.00 0.00 2002 Fauii Cement 15.59 0.00 0.00 0.00 15.19 0.00 0.00 0.00

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

1995104 First UDL 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Gul Ahmed 13.50 4.10 0.00 12.92 13.50 4.10 0.00 12.92

................................................................................................................................................................................................................................................................Ò�

2003 KCT 7.75 0.00 1.50 0.00 7.75 0.00 1.50 0.00 ................................................................................................................................................................................................................................................................*� .................................................................................................................. Kohinoor 11.25 6.30 0.00 10.17 11. 6.30 0.00 10.17

1994197100 Maple Leaf 11.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ................................................................................................................................................................................................................................................................Â�

Metropolitan Bnk 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2002 Micro Bank 0.00 2.71 0.00 0.00 0.00 2.71 0.00 0.00

................................................................................................................................................................................................................................................................Ù�

2002 Network Leasing 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Orix Finance 0.00 0.58 0.00 0.00 0.00 0 .oo 0.00

1994 PI&CL 0.20 0.00 0.00 0.00 0.20 0.00 0.00 0.00

................................................................................................................................................................................................................................................................•� .............................................................

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

1983102 PPL 0.00 6.63 0.00 0.00 0.00 6.63 0.00 0.00 1965187191194195 Packages 0.00 0.26 0.00 0.00 0.00 0.26 0.00 0.00

................................................................................................................................................................................................................................................................ã�

1994 Regent Knitwear 8.33 0.00 0.00 2.80 8.33 0.00 0.00 2.80 2001 Sarah Textiles 1.73 0.00 0.00 0.00 1.73 0.00 0.00 0.00

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

Soneri Bank 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00

2004 TRG Pakistan 1996 Uch Power

0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 44.58 0.00 0.00 15.03 34.49 0.00 0.00 0.00

................................................................................................................................................................................................................................................................>�

Union Bank - PAK 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 Total portfolio: 25 1.02 5 1.3 1 1.50 58.52 189.42 45.29 1.50 43.49

Approvals Pending Commitmeni FY Approval Company Loan Equity Quasi Partic. 2004 Dewan SME 0.00 0.00 0.00 0.00 2004 NBFI Credit 0.04 0.00 0.00 0.00

Total pending commitment: 0.04 0.00 0.00 0.00 ................................................................................................................................................................................................................................................................j�

84

ANNEX 18. COUNTRY AT A GLANCE

lgS3 1g93 2002 2003

30.3 25.0 23.2 23.3

POVERTY and SOCIAL Pakistan

Growth of investment and GDP (%)

* O T I

2003 Population, mid-year (miliions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billionsl

Average annual growth, 1997-03

Population (%) Labor force (%)

Most recent estimate (latest year available, 1997-03)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% ofchildren under 5) Access to an improved water source (% ofpopulation) illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1983

GDP (US$ billions) 28.7 Gross domestic investmenffGDP 18.8 Exports of goods and services/GDP 11.9 Gross domestic savings/GDP 7.7 Gross national savings/GDP 17.0

Current account balance/GDP -0.6 interest payments/GDP (on external debt) 1.1 Total external debffGDP 41.9 Total debt service/exports 20.9 Present value of debffGDP Present value of debffexports

1983-93 1993-03 (average annual growth) GDP 5.8 3.4 GDP per capita 3.1 0.9

148.4 470 69.2

2.4 3.2

33 34 64 84

90 54 74 93 54

1993

51.7 20.8 18.3 14.7 20.6

-6.4 1.4

45.0 30.8

2002

2.8 0.4

South Asia

1,401 460 640

1.8 2.3

26 63 71

84 44 97

108 89

2002

59.2 14.7 18.7 14.4 22.6

2.7 1.7

55.3 32.2 42.6

228.5

2003

5.8

LOW- income

2,495 430

1,072

1.9 2.3

30 59 81

78 37 95

103 87

2003

68.8 15.5 20.5 15.6 29.9

6.1 0.9

47.4 25.8 38.4

193.3

2003-07

5.6 3.3 3.1

STRUCTURE of the ECONOMY

(% of GDPJ Agriculture Industry

Services

Private consumption General government consumption imports of goods and services

Manufacturing

(average annual growth) Agriculture industry

Services

Private consumption General government consumption Gross domestic investment imports of goods and services

Manufacturing

DeveloDment diamond'

Life expectancy

T GNI per +--- capita

.L

Access to improved water source

I- Pakistan Low-income group

Economic ratios'

Trade

T Investment Domestic -

savings

1

Indebtedness

-.--Pakistan Low-income aroun

I 22 1 2 4 7 2 3 3 2 3 5 l o 1 5 3 1 8 7 1 6 1 1 6 4 i o 4 7 7 5 0 3 5 3 5 5 3 2

80.8 72.2 74.4 72.7 -20 1 11.4 13.1 11.3 11.7 23.0 22.4 19.0 20.4

--GDI - O - G D P

1983-93

4.4 7.1 6.6 5.7

4.3 6.6 4.9 3.2

1993-03 2o02 2003

4 1

Growth of exports and imports ( X ) 40 3 5 -0 1

3 6 5 4 5 4 30

4 1 5 0 7 7 20 4 1 4 1 5 3 10

3 5 1 4 -06 O 1 3 1 3 5 1 0 4 10

0 7 - 3 0 1 0 5 ---E~orts -0-lmports 0 0 4 5 1 3 9

* m e diamonds show four key indicators in the country (in bold) compared With its income-group average t i data are mtssing, the dlamond will be incomplete

85

ANNEX 18

Pakistan PRICES and GOVERNMENT F I N A N C E

D o m e s t i c p r ices (%change) Consumer prices Implicit GDP deflator 5 3

1983

Government f inance (%of GDP, includes current granfs) Current revenue Current budget balance Overall sumlusldeficit

T R A D E

(US$ millions) Total exqorts (fob)

Cotton Rice Manufactures

Total imports (cif) Food Fuel and energy Capital goods

m o r t price index(895=W0) Import price index (895=WO) Terms of trade (895=WO)

1983

2,694

1,881

B A L A N C E o f P A Y M E N T S 1983

(US$ millions) Exqorts of goods and services 3,420 Imports of goods and services 6,593 Resource balance -3.173

Net income Net current transfers

-421 3.48

Current account balance -I78

Financing items (net) Changes in net reserves

M e m o : Reserves including gold (US$ millions) 2,758

a .7 Conversion rate (DEC, IocaWSS)

EXTERNAL D E B T and RESOURCE FLOWS

(US$ millions) 1983

P.026 IBRD 351 IDA 1.145

Total debt service 1343 IBRD 63 IDA 14

Total debt outstanding and disbursed

Compositionof net resourceflows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

0 350 -87 26 0

255 144 34 lx) 42 68

1993

9 8 8 7

181 -2.4 -8 1

1993

6,782 27 1 317

3,723 'lJP49 1290 1,578 3,409

88 96 92

1993

8,339 12,856 -4,517

-1,498 2,686

-3.326

2,682 644

1,369 25 8

1993

23.7P 2,557 2,585

2.383 325

43

0 1011 7x) 306 270

429 537 166 37 1 202 158

2002

2.7 3.1

8.5 0.2

-4.4

2002

9,140 B

448 5,368 9,432

4?3 2,664 2,594

80 90 89

2002

11056 11646 -590

-2,3?3 4,500

1,591

1685 -3.276

4,997 61.3

2002

32,769 2,943 5,097

3,755 367 x)1

0 758

-389 368 -491

800 869 3x) 559 159 400

2003

3.1 4.6

20.8 -0.4 -1.7

2003

'0,889 49

555 6,653 11333

587 3,098 3,392

89 a 1 88

2003

U,686 14,047

-361

-2,210 6.775

4,204

1475 -5.679

9,630 58.4

2003

32,608 2,8?3 5,604

3,621 367 P 2

0

612 -394

297 356 335

21 154

4 4

1 I n f la t ion (oh) I

I sa 99 00 01 02

-GDPd&lator &CpI

Expor t and i m p o r t leve ls (US$ mill.)

10.000

5,000

91 98 09 00 01 02 03

is Exports miworts

Cur ren t a c c o u n t balance to GDP (K)

:ompos i t ion o f 2003 debt (US$ mill.)

A . 2 B B G: 1.468

4 . i8RD E - Bilateral 3 ~ IDA D - 0 t h multilateral F . Private 3 - IMF G - Short-term

86

MAP SECTION