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Document ofThe World Bank

Report No: 20209-YEM

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 22.4 MILLION (US$30.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF YEMEN

FOR A

CIVIL SERVICE MODERNIZATION PROJECT

MARCH 23,2000

Economic and Social Development UnitNliddle East and North Africa Regional Office

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CURRENCY EQUIVALENTS(Exchange Rate Effective February 29, 2000)

Currency Unit Yemeni Rial (YR)US$1 161 YR

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AFMIS Accounting and Financial Management Information SystemASYCUDA Automated System for Customs DocumentationCAS Country Assistance StrategyCQ Consultant QualificationsCSF Civil Service FundCSM Civil Service ModernizationDFID Department for International Development (United Kingdom)EDB Employee DatabaseGOY Government of YemenICB International Competitive BiddingIDF Institutional Development FundIMF International Monetary FundLACI Loan Administration Change InitiativeMOCSAR Ministry of Civil Service and Administrative ReformMOF Ministry of FinanceMOPD Ministry of Planning and DevelopmentN/A Not ApplicableNGO Non-Governmental OrganizationNIAS National Institute for Administrative SciencePFS Project Financial StatementPIP Project Implementation PlanPMR Project Management ReportPRS Poverty Reduction StrategyPSMAC Public Sector Management Adjustment CreditQBCB Quality-Based Cost-BasedQBS Quality Based SelectionRG Reform GroupSA Special AccountSC Supreme Council for Administrative ReformSOE Statement of ExpendituresTA Technical AssistanceTOR Terms of ReferenceTS Technical SecretariatUNDP United Nations Development Program

| Vice President: Kemal Dervi§I Country Director: Inder Sudl Sector Director: Mustapha Nabli

Team Leader: Linda Van Gelder

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Yemen, Republic ofCivil Service Modernization Project

Project Appraisal Document

Middle East and North Africa Regional OfficeMiddle East Department

Date: March 23, 2000 Team Leader: Linda Van GelderCountry Manager/Director: Inder Sud Sector Manager/Director: Mustapha NabliProject IlD: 50706 Sector: BA - Civil Service ReformLending Instrument: Technical Assistance Loan Theme(s): Public Sector

Poverty Targeted Intervention: [I Yes [XI No

Project Financing Data[ Loan [X] Credit [I Grant [] Guarantee [ Other

For Loans/Credits/Others:Amount (USSm): $30 million equivalentProposed terms: [x] Standard [ Multicurrency [ Single currency

[ Standard Variable [ Fixed [] LIBOR-basedGrace period (years): 10Years to maturity: 40Commitment fee: 0.50%Service charge: 0.75%

F¢iuacgplan (US$M):. :-- ... ;------- - ;

Government 3.0 0.0 3.0IDA 4.9 25.1 30.0Total: 7.9 25.1 33.0

Borrower: Government of Yemen

Responsible agencies: Ministry of Civil Service and Administrative Reform, Ministry of Finance, LineMinistries/agencies involved in restructuring

Estimated disbursements (Bank FY/US$M):FY 01 02 03 04 05Annual 5.0 7.8 8.3 5.8 3.1

Cumulative 5.0 12.8 21.1 26.9 30.0

Project implementation period: 5 years

Expected effectiveness date: September 1. 2000 Expected closing date: Auguist 31, 2005

Implementing agency: Ministry of Civil Service and Administrative Reform: Ministry of Finance

Contact person: H.E. Mohamad Al-Juneid. Minister of Civil Service and Administrative Reform. Chairman ofOversight Committee

Address: Ministry of Civil Service and Administrative Reform. Sana'as Republic of YemenTel: (967-1) 276-715 Fax: (967-1) 276-715 E-mail: mocsar(y.net.ye

OCS PAD Fonn: October 9. 1998

A: Project Development Objective

1. Project development objective: (see Annex I)

The Government of Yemen has adopted a comprehensive, longer-termr strategy for modernizingits civil service.' The vision of the Government is to have in place a civil service that efficiently andeffectively provides a reduced scope of government services; that encourages and supports the private andnon-government sector; that operates with transparency, where performance measurement serves as thekey management tool; and where a merit principle is applied to staff. The program is expected to take tenyears, although slippage is possible.

The proposed project is envisaged as the foundation of this longer-term reform strategy. Thespecific objectives of this Phase I operation is to create capacity, institutions and systems for improvedand sustained utilization of human and financial resources of the Yemen civil service. To this end, theproject would help put in place core personnel and financial management systems, establish a mechanismto reduce the number of unqualified civil servants, and initiate a restructuring process in individualministries. To make this foundation as solid as possible, another objective of the project is to upgrade themanagement capacity in the civil service.

2. Key performance indicators: (see Annex 1)

Progress towards the development objectives will be measured and monitored on the basis of thefollowing indicators: production of consolidated financial statements produced in timely manner andemployment based on positions and merit with transparent application of civil service law. Theseindicators would point to the better, more transparent utilization of the government's human and financialresources.

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I)

Document number: 19073-YEM Date of latest CAS discussion: 5/25/99

The priority in Yemen is to address, in a sustainable manner, the most binding constraints todevelopment and poverty alleviation. Towards this aim, the CAS focuses assistance on fourinterdependent objectives. This project supports one of these four pillars: "to create a modem' publicadministration that provides public services honestly and efficiently while encouraging privateenterprise." Activities financed under the project will assist the government meet country performanceindicators specified in the CAS, including introduction of a new personnel system, streamlining agencies,and reducing the number of persons on the payroll, thereby permitting a gradual revision in the salarystructure.

As described in the CAS, past Banlk efforts to build capacity failed to address systemicweaknesses in civil service incentives, structure and management, in the budgeting mechaiiism. and inrevenue generation. The country strategy makes these weakness its major immediate target. since thesustainability of Bank work on all other objectives depends on good public administration. As describedin the CAS, reform efforts in this area are under the umbrella of a planned series of Public SectorManagement Adjustment Credits (PSMACs).2 This project provides support for implementation of thepublic administration and financial management reforms.

Strategic Framework. Civil Serx ice Modernization. adopted by Cabinet Resolution 290 of 1998.

2 The first PSMAC wvas approved by the Board in March 1999. Report and Recommendation of the President on a ProposedPutblic Sector -.1fanagem?ien7t A4djlstnent n Credit: Report No. P-7291-YENI. The relex ant sections of the PSMAC policy matrix areprovided as an attachment to Annex 2.

2. Main sector issues and Government strategy:

Over the past several years, Yemen has taken significant steps to stabilize its economy and hasembarked on important structural reforms designed to generate growth and employment opportunities.But it is now widely recognized within Yemen that to sustain and strengthen recent achievements, it iscritical to reform the public administration system.

During the early 1990s, Yemen's civil service began to act as an employer of first resort and toserve as a central component in the government's social safety net. The first use had seriously adversegrowth consequences since resources that could have been allocated to investment, development, andoperations and maintenance were instead diverted to the wage bill. The negative impact on growth wasfurther exacerbated since an inflated civil service gave rise to unwarranted and excessive governmentinterference in private sector economic. The use of civil service employment as a safety net had equallyadverse consequences for social equity in government spending. While some civil service employmentwas directed to the unemployed or the poor, this was an ad hoc rather than equitable process.

The consequence of these policies has been a more than doubling of the civil service during the1990s, with most of the increase coming in the period 1990-1995 (see Table 1). Currently, the educationsector employees about two-thirds and the health sector ten percent of civil servants.

Table 1: Trends in Yemen's Civil Service Employment (thousands)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999e

Number 168 203 235 267 295 322 328 334 336 352

% growth 21% 16% 14% 1 0%/ 9% 2% 2% >00/, 5%

Civil administration, permanent and contract workersSource: .OCSAR and WVB staff calculations

By 1999, civil servants represented about two percent of the population (17.6 million) or eight percent ofthe labor force active population which in 1999 was estimated at 4.4 million. Additionally, employmentin public enterprises is over 83,100. ln aggregate, public sector employment accounts for four percent ofthe population or 14 percent of the labor force.

Due to the size of the civil service, the wage bill represents 14 percent of GDP and 35 percent oftotal government expenditures (see Table 2). This is high by any international standard (See Table 3).

Table 2: Wage Bill as a % of GDP and Expenditures

199-5 1996 199-~ 1998 1999 2000}r

Wage-asa°o (.DP 15°0 I 1% 11°n 14%' 1 5° 13°/o

Wages as a o total exp S5 5 32°o 27%> 2 99 36hko 3596

SoIrce: I) B siaof.fCcUcitionS

Table 3: Wage Bill as a % of GDP: International Comparitors

1}emell.41g .IE -I4fi-ica ~-Isia FSUZEE L.iC OECD1998-2'r000

1406 9.8°o 6.7%b 4.70o 3.80b 4.9°0 4.5%0

Source: An International Statistical Survey of Government Emplox mnt and Wk'ages. 11orldBank Polic! Researclh Wf orking Paper Number 180)6 199-.

Despite the growth in civil service, the wage bill (which as shown above is large) has been moreor less contained. However, this has come through the dramatic reduction in wages. By 1996, theaverage real wage was only 15 percent of the 1990 real wage level. Currently, the average civil servantsalary (including allowances) is about 22,700 YRlmonth which is about six times per capita GDP. This iscomparable to countries in Yemen's income' However, wages are seriously compressed, with seniormanagers earning only 2.5 times (3.0 including allowance) the lowest level civil servant (internationalbenchmarks place vertical compression at about six to seven' A comparison with salary data availablefrom a 1996 labor survey showed that in that year, senior civil servants earned only about I I percent ofthe wages of their private sector contemporaries. For the lowest skills position, public sector salarieswere about 34 percent of private formal sector wages. These low wages have led to inability to attracthigh quality workers, lack of effort of existing staff with many persons holding more than one job (eitherwithin the public or private sector), and an increase in reliance on petty corruption to top-off salaries. Ithas also reinforced the concept that wages paid to a civil servant are nothing more than a safety-net.

In termns of organization structure, there are 28 ministries divided into 15 sectors. There are wellover 80 "departments" which range in size from a ministry such as health (over 30,000 staff) or education(over 150,000 staff) to the Social Security Fund (8 staff) or the Central Authority for Scientific Research(15 staff). In addition, there are a large number of public enterprises. The organizational structures ofmany of these departments are a spider-web of complexity. And, despite the intricate structures, the chainof command generally passes upward with little ability of lower level managers to take decisions or beheld accountable for activities even as mundane as approval of staff's annual leave.

In sum, the current public administration system has major deficiencies in key areas: nearly allthe core systems are inadequate (ranging from personnel and financial management, to budgeting,procurement, and property management),5 organizational structures and work flows are duplicative andunnecessarily complex, and human resource-management is virtually absent. The result is a bloated civilservice with extremely low pay scales, low capacity, opaque hiring and promotion practices, and virtuallyabsent enforcement mechanisms. This impedes the government's ability to deliver essential publicservices.

To address some of the main causes of poor public sector performance, Yemen developed areform strategy that was debated at a national conference in August 1998. This conference, inauguratedby the President, was attended by a wide cross-section of Yemeni society. Subsequent to this conferencea Strategic Frameworkfor Civil Service Modernization was finalized by a working group on the basis ofconference recommendations. This Strategic Framework was approved by Cabinet Decree Number 290in 1998. The strategy calls for a reform program to:

* streamline government entities and eliminate duplication and non-essential services; increase thetransparency of procedures and the consistency with which they are applied;

i-improve budgeting and financial management systems to help ensure efficient, transparent. non-corrupt use of public funds;

* restructure the public employmenit system to establish and maintain professional standards bydeveloping a clear personnel managemenit system that governs hiring, promotion. salarydetermination, delineationi of duties, responsibility for results, and performance evaluation:

* institlte effective controls oni staffing levels, and re-deploy or terminate (through a fair process)redundant workers: and

A.4n International Statistical Sun7ev of Governzment Employment and 1IWages. Policy Research Working Paper No. 1806. TheWorld Bank. June 1997.4 Ibid.

The British Department for International Dev elopment (DFID) is financing the steam-lininig of the customs systems through theintroduction of ASYCtIDA. The European Uinion is assisting in enhancing the debt management s\ stem through the introductionof DNFAS.

improve compensation to motivate civil servants and to retain high quality staff.

The strategy also recognizes that training and substantial capacity building is the lynchpin forcarrying out and maintaining the reform program.

3. Sector issues to be addressed by the project and strategic choices:

With such a comprehensive refonn agenda, the government recognizes the danger of attemptingtoo much with too little result. The Government, in consultation with the World Bank, has therefore:

* developed a phased, longer-term reform process;

* adopted an incremental but integrated approach whereby three essential pillars -establishing coreservice systems; reducing overstaffing; and reengineering of selected entities - are addressedconcurrently but in a manner that is phased to create synergy; and

* focused on the need to complement all reform activities with requisite training programs.

Key policy decisions have already been taken under the framework of the Public SectorManagement Adjustment Credit (section B 1 and the attachment to Annex 2). The activities supportedunder the project will provide the technical support and training needed to move forward on these policydecisions and to sustain the reform program.

(1) Improve Core Systems: A well-functioning public administration relies on a number andvariety of core systems to assist in the effective management of its resources, both financial and human.While it would be useful to modernize all of the core government systems, there is insufficient capacityfor the administration to absorb such massive changes all at once. Therefore, improvements in coresystems have been phased as follows:

Personnel management Financial management Other systems

Phase I Verify personnel records and Develop and introduce basic Ensure consistency in existingestablish a count of civil servants accounting and financial payroll system and streamline

Establis a computerizedemploye management information system proceeduresEstablish a computerized employee (AFMIS) including budgetdatabase to keep up-to-date management, expenditure controls, Select priorities for reform ofinformation on staff to be used to and accounting framnework other core systemsensure accurate application of salarylevels, promotions and retirement Computerize system within MOF

Issue biometrics identification cards Roll-out to 3 large HQ unitsto limit fraud

Introduce transparency in hiring

Develop and implement jobclassification system

Bepin introduction of job descriptions

Dex clop and begai implementtigtraining programs for civil serx ants

Phanse 11 Complete job descriptions Roll-out of AFNIIS sx stemn Revise pa% roll sx stem and beminDevelop nex~ merit based throughout all budgetar\ units implementationl of neN% pax roll

Develop nes~ merit based_. se.Ti llorctcinemplo\ ment practices svstem. This \\ill force the link

bet\een the personnel andRe\ ise salary structures financial management s\ stems

Implemenit training programs Bemin rex ision of other cores\ stems

Phlase Ill Introduce merit based s\ stem of Introduce adN anced functions in the Continue reform of andand after employment AFMIS implementation of core systems

Implemenit trainirma programs

The project supports Phase I reforms that are designed as the first critical steps to: (i) increase thetransparency and efficiency with which public resources are used; and (ii) move towards a performancebased, professional civil service. The project will support development of clear processes, procedures,and policies for each aspect of the core system under reform. When core systems are computerized, therewill be a phase-in period during which manual systems will be maintained (particularly outside of themajor urban centers) until the computerized system has operated smoothly throughout an entire workcycle.

To encourage the use of the improved systems and ensure that they are used properly, the projectwill provide extensive on-the-job training. This will be provided through two vehicles. First,international (and when available local) technical assistance will be provided intensively in the beginningand gradually phased out over the reform program. The principal aim of this assistance is to mentor civilservice staff in the new skills that they need to acquire. Second, specific training programs (shortmodular courses with extensive on-the-job components) will be provided to staff working with the newcore systems.

(2) Rationalize Size and Capacity of Civil Service: Action is this area is critical as the currentcivil service is bloated yet lacking crucial skills. If nothing is done, resources will not be available toincrease salaries of productive civil servants. And without adjustments to the salary scale, it will bedifficult for the govemment to retain high quality staff. In addition to the large number of civil servantsand the lack of key skills, there are also imbalances in the geographical distribution of employees, and, inpositions (e.g., high administrator to teacher ratios). Further, the excessive staffing impedes thedevelopment of job descriptions and the streamlining of government as in tends to create pressure to make"\.work" for the surplus staff. Under the project, support is provided for several aspects of thegovernment's program to rationalize its labor force, including:

i. Enforcement of retirement rules (through the computerized employee database, Component I);

ii. Removal of payroll entries for persons that do not exist (ghost workers) and those collectingmultiple salaries (double-dippers) (through the computerized employee data base and biometricsidentification, Component 1);

iii. Identification of surplus workers and transfer of these workers to the civil service find (through therestructuring process with support from the civil service fund, Components 2 and 3);

iv. Design of assistance packages, taking into account targeting, the level and nature of compensation,and implementation regulations governing the payment of such compensation. Any training orother services provided to displaced workers will be subject to a market mechanism that allows theaffected worker to determine if training or a service is desired, the type of training or service, andthe provider (public, private, or NGO) (through support to the civil service fund, Component 2); and

v. Monitoring and evaluation of the impact of assistance packages, and feedback of information intoupdating of appropriate packages (throuoll support to the civil service fuLnd. Component 2).

IDA intends to provide additional support to other aspects of the labor force adjustmeiit (such asimbalances in location or position) not directly addressed in this project through sector specific projects.such as in education, as well as through its public expenditure analysis.

(3) Re-engineer Governmrent Agencies: The third pillar of reform focuses on the need toenhance the quality and efficiency of providino specific government services. The re-engineering processwill aim to: (i) streamline organizational structures, (ii) simplify business processes (work flow. policies.procedures, decision making, staffing requirements); and (iii) put in place basic information systems. Todo this, support will be provided in key areas including to:

critically review the mandates, responsibilities and operational objectives of the pilot agencies. basedon functional analysis;

• remove duplications and overlaps, develop new roles and missions, realign functions and developnew policies in line with the new mandates, including decentralization initiatives; and

analyze staff requirements, introduce job descriptions, and identify surplus staff.

Since the long-term objective is to improve service delivery and create a performance orientation basedon clearly defined output targets, baseline service delivery surveys will be conducted.

Under the project, the re-engineering process will be phased, starting with selected core ministriesand one or more pilots. In later phases, the restructuring effort will be gradually expanded to otheragencies building on the lessons of the pilots. During project preparation, it was agreed that selection ofthe pilots should be based on the following criteria:

* Reasonable size (starting with an agency that is too large could cause the process to be mired in longdelays and, if mistakes are made, create more difficulty than if lessons were first learned throughexperiences in re-engineering a smaller agency);

* Interface with either the general public or private sector (reform results are visible outside thegovernment); and

* Political willingness, commitment, and motivation to reform the particular agency.

After a Cabinet debate, the Ministries of Civil Service and Administrative Reform, Social Affairs,Labor, and Health, the Tax Authority, Central Office for Control and Audit, Civil Aviation Authority, andthe Prime Minister's office were selected as possible pilot agencies (decree number 291 of 1998). Re-engineering of the Ministry of Health and the Civil Aviation Authority is likely to proceed in tandem withthis project through financing by the European Union. The Prime Minister's office currently receivessupport -for restructuring through a UNDP Governance Program. The Ministry of Labor is supported byassistance from both the ILO as well as IDA (Vocational Training). Consequently, under this project,financing will be provided for pilot restructuring of the Ministry of Social Affairs (and its associatedagencies, if funding is not available from the EU) and the Tax Authority.6 The Ministry of Civil Serviceis also included as a core ministry.

The project also includes an Innovation Fund. Its objectives are three-fold: (i) to leave room forchanging circumstances and to opportunistically capture reform initiatives by other agencies; (ii) to testthe idea of creating a central fund by which donors funds for restructuring of specific ministries could bechanneled in a consistent manner so that overall reform program objectives are maintained.; and (iii) toprovide a facility that can support small, "quick-fixes" and potential early successes which will helpmaintain support for and momentum of the reform. The Innovation Fund will be managed by a memberof the TS responsible for the re-engineering component. Technical assistance will support the design ofthe criteria for selection and implementation procedures within the first quarter of the project. The TS isresponsible for monitoring and evaluating the activities undertaken with Innovation Fund financing, usingthe experiences to modify and strengthen operating procedures if needed. and sharing experiences gainedacross government-.

(4) Build Capacitp: The project supports two dimensionis of capacity building: (i) skills andactivities needed to generate capacity for sustaining and implemeniting a long-termn reformi program: and(ii) skill development to manage and administer a modern civil serxice. Under the first dimenision. theproject will provide support for managing, monitorinig and evaluating the overall reformi program. Thisalso includes support for public informationi and internal communLicationis programs. Under tlle seconddimension. traininig programiis will be supported in several critical areas:

Mid and high level management traininig to start developing an effective management cadre. Thiswill be done by twinning Yemeni's National Institute for Administrative Science (NIAS) with an

6 Support to thc ta\ authorit) is close!% coordiLatcd nk ith on-aoing techinical assistanicc funded b\ DFID on the introduction of aGeneral Sales Ta\ and tax administration.

internationally recognized school for public administration. The management training programs thatwill be developed will utilize a modular approach with limited class-room time and significantemphasis on on-the-job follow up after each module.

• Technical training program for users of new core systems (Component 1).

* A program of training in project management for teams within ministries to develop a cadre of staff tobetter able to manage both the civil service reformn program as well as government projects in general.

Areas excluded: This project does not tackle legal and judicial reform issues (a Legal andJudicial Development Project was approved by the Board in June 1999) nor reform/privatization of thepublic enterprise sector (a Privatization Support Project was approved in December 1999). Thegovernment is also embarking on a program of decentralization. However, since the decentralizationframework is still in an early stages, this project does not provide direct support for this effort.Nonetheless, an indirect benefit of the project will be to help build an appropriate foundation fordecentralization. Improvements to core systems, for instance, will provide the central government withthe tools that are required for effective monitoring of any decentralized system. Also, the re-engineeringprocess will help identify activities that may be better carried out at sub-national levels.

Finally, to maximize chances of success, this project focuses on the civilian sector and excludesdirect support for reforms in the security sectors. While such reforms may be needed, the approach willneed to be incremental and opportunistic. The Government, has, for instance, already demobilized sometroops and in time other reforms are likely to follow.

C: Project Description Summary

l. Project components: (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown)

1. Core Systems Improvement Public Financial Mgt 14.9 45.2 14.1 47.1Civil Service Reform

2. Civil Service Fund C') civil Service Reform 1.6 4.8 4.9 16.4

3. Streamline and Rationalize Public Sector Mgt 5.1 15.5 1.5 5.0

4. Building Capacity Institutional Development 4.3 13.0 3.9 13.0

5. Program Management and Institutional Development 3.8 11.5 2.5 8.4Administration

Project Preparationi Facility 2.0 6.1 2.0 6.7

Price and Cost Contingencies 1.3 3.9 1.1 3.7

Total Project Costs 33.0 100.0% 30.0 1 00.0%

I') Includes cost of setting up. administrating and monitoring fund. but not cost of severance or bu! -out packages. Buy-outpackages wvill be financed from government budget.

2. Key policy and institutional reforms supported by the project:

Policy

The program of reform will support significant policy reforms, most notably the decision topromote cost effective, efficient and transparenit civil service. The Government has taken a number ofpolicy decisions towards this objective (see attachmenit to Annex 2). Highlights include:

Decision to clean up the payroll to eliminate those whose employment is not in accordance with thecivil service act. To facilitate this, a civil service census has been completed and an employee database established. The next step is to retire all workers who are past retirement age and to implement abiometrics identification system to identify and remove ghost workers and double-dippers from thepayroll

Establishment of the legal framework for a civil service fund based on principles of (i) transparency;(ii) targeting reductions; (iii) providing training or other non-monetary support only through a marketmechanisms; and (iv) providing compensation packages that are not excessively costly. Legislationhas been passed, and the next step is to design specific operating procedures for the Civil ServiceFund, identify redundant workers, and transfer them into the Civil Service Fund.

* Agreement by Cabinet on pilot agencies for restructuring. The next step is to retain consultantservices to assist in the re-engineering process.

* Approval by Cabinet of a Strategic Framework for Civil Service Modernization that includesrationalization of public employment and salary structures.

* Agreement by Cabinet to develop an Accounting and Financial Management Information System to,among other things, more effectively control the budget and to unify the budget process resulting in aunified year 2000 budget.

Key policy agreements to enhance the implementation of this project include:

• Agreement to significantly reduce the size of the public sector during the project period.

* Adoption of a wage and employment policy June 2001 that is fiscally affordable and that permitsthe gradual decompression of wages.

* Agreement by September 2000 that should the government implement any decentralizationscheme, civil service staff will be redistributed to the district andgovemorate levels prior to anynew recruitment.

Institutional

The long term objectives of the reform program is to put in place a significantly different civilservice and public administration. To this end, major changes are required, including the reorganizationand restructuring of government agencies, a redefinition of the mandate of government, mechanisms tointernalize institutional and capacity building within the public administration, and further down thehorizon, introduction of performance based principles, increased customer orientation, transparency andaccountability. Further, to ensure the delivery of these changes, a major overhaul of the mechanisms tohelp train and build capacity within the public sector is needed.

As noted previously, in the first phase of the reform program, institutional reforms will focus on:(i) pilot ministries (restructuring); (ii) the National Institute for Administrative Science (delivery oftraining): and (iii) the Ministries of Finanice and Civil Service and Adminlistr-ative Reform (core systemns).In subsequenit phases, the coverage of entities Nvill be further broadened. and institutional reforms in thefirst phase entities will be deepened.

To help facilitate the reform program. the Government has put in place institutional arrangementsto ensure both high--level political involvement and commitment to the direction of the reform, supportedby an implemenitation structure that has sufficient autlhority and discretion to implement the program solong as it remains wvithin the broad parameters set at a political level. (See Section C4 on implementationarrangements).

3. Benefits and target population:

The proposed project will assist the governmenlt improve the management of its economy. With35 percent of the budget going to public sector salaries for less than mediocre performance. Yemencannlot afford to contintie xNitlt the currenlt system. The primary benefit will be to put in place the

foundation for a public sector that: (i) delivers services to the public in a timely and efficient manner and(ii) is more supportive of private sector development because of reduced red tape and rent seekingbehavior. Direct benefits of the project include effective postlposition controls, which are currently not inplace and more timely and accurate reporting on government expenditures. Eventually, in later stages ofthe reform, further benefits are expected for: (i) qualified civil servants who will be rewarded for goodperformance with higher salaries; (ii) the population which can expect higher quality, more efficientdelivery of public services.

4. Institutional and implementation arrangements:

To the extent possible, project implementation will rely on the existing structures. The SupremeCouncil for Administrative Reform (SC) will provide policy guidance and support for timelyimplementation. Its executive arm is the Oversight Committee. These bodies were agreed on and put inplace by the Government in the context of earlier discussions with the IMF on an Extended StructuralAdjustment Facility.

As shown in Figure 1, the day-to-day management and coordination of the project will be thecarried out by the Technical Secretariat (TS). The TS consists of the following positions:

• Project Coordinator, responsible for overall project implementation, excluding the Accounting andFinancial Management System (AFMIS) sub-component.

* AFMIS Coordinator, responsible for the AFMIS sub-component.

, Re-engineering Coordinator, responsible for streamlining, restructuring, and re-engineeringcomponent in general and the innovation fund in particular.

* Civil Service Fund Manager, responsible for operation of the civil service fund.

* Training Coordinator, responsible for sub-component dealing with provision of managerial training.

Up to two additional technical experts, on an as needed, rather than permanent, basis. Theseindividuals would be employed, if needed, to assist the Project Coordinator who also hasimplenmentation responsibilities for several sub-components including personnel management,payroll, and project management and change management training sub-components.

The TS will have broad implementation authority and operate under the operating principles andguidelines established and approved by the Supreme Council. Within this framework, The Ministry ofFinance will have has overall implementation responsibility for the AFMIS sub-component. TheMinistry of Civil Service has overall implementation responsibility for all other sub-components. For there-engineering components, individual pilot ministries will have direct implementation responsibility.However, to ensure consistency of approach, the Re-engineering Coordinator will play an active role.NIAS has direct implementation responsibility for managerial training.

The AFMIS Coordinator reports to th.e Minister of Finance. The Civil Service Fund Managerreports to a Board of Directors chaired by the Minister of Civil Service and Administrative Reform. fleProject Coordinator reports to the Minister of Civil Service and Administrative Reform. Other TS staffreport to the Minister of Civil Service and Administrative Reform througLh the Project Coordinator. Theteam is supported by a financial manager and a project secretary. The TS will be responsible for (i)coordination among the implementing units; (ii) assisting in the development and review of work plans toensure consistency within the overall objectives of the program; (iii) approvingTORs and handling allprocurement for the project in accordance with Bank guidelines; (iv) reviewing reports fromimplementation units and preparing quarterly progress reports for submission to the Bank; (v) reviewingwithdrawal applications and submitting them to the Bank; (vi) serving as the official liaison with theBank for the project; and (vii) preparing annual work programs and updated procurement plans forsubmission to the Bank and review by the SC. The performance of TS will be monitored on a regularbasis by the Minister of Civil Service (Minister of Finance in the case of the AFMIS Coordinator) and bythe SC during annlual work-programii reviews.

1

Figure 1: Implementation Framework

Supreme Councilchaired by Prime Minister

Oversight Committeechaired by Minister of Civil Service

Policy Level.......................................... ........... ........................... ................................................. ........................... ..........................................................................

Technical Secretariat

Position Responsibility Direct ReportProgram Coordinator Overall Project Implementation except for Minister of Civil Service

1.4; and components 1.1, 1.2 1.3; 4.2, 4.3

AFMIS Coordinator AFMIS (1.4) Minister of Finance

Restructuring Coordinator Streamlining, Rationalizing and Re- Program Coordinatorengineering (2)

Training Coordinator Strengthening training institutes (4.1) Program Coordinator

Civil Service Fund Coordinator Civil Service Fund (3) Board of Directors,chaired by Minister ofCivil Service

Technical staff, as needed (max 2) If needed, personnel management (I.1, Program Coordinator

1.2) payroll (1.3); other training (4.2, 4.3)Project Financial Manager Project financial management Program Coordinator

Project Secretary Logistical and secretarial support Program Coordinator

Management and Administrative Level.......... .................... ..............I.. ..........- ................... .................... .......... .................................................................... ......... .......... ... ........................... ................................................

MOCSAR ME S Pilot Ministry A Minisx BX |NIAS Civil Ser\ iceFund

i. Restructuring i. AFMIS i. restructuring i. Role out of AFNI1S i. Managcrial i. ILabor forceii. Personnel Mgt ii. Role out of Personnel MLt training reduction

ii. Innoxation Fund applicant

Implementation b! Reforn Groups k ithin AXgencics"Ministries that are carry iag out project actiz ities

Implenten tation Level

a. Ministrx A and B represent those ministries that ma! appl\ for resources under the innovation fund. or in Nshich the newk coresxsterns are implemented.

The TS will be housed in the existing facilities at the Ministry of Civil Service andAdministrative Reform. However, the AFMIS Coordinator will be based in adequate facilities at theMinistry of Finance. The training coordinator will be based at the National Institute of AdministrativeScience (NIAS) in existing facilities. The full TS will meet formally as a full team at least quarterly, andmore often by request of the Project Coordinator or AFMIS Coordinator. The quarterly meetings will beco-chaired by the Project Coordinator and the AFMIS Coordinator. The TS (excluding the AFMIScoordinator) will hold weekly staff meetings, chaired by the Project Coordinator, to review projectimplementation.

Expatriate technical advisors will provide long-term support and mentoring to the TechnicalSecretariat. The aim is to eventually move to a periodic approach to international assistance; this willhelp avoid the risk of drawing the expatriate experts too much into operational assignments and will putpressure on national counterparts to carry out the unit's functions. However, in the first phase supportedby this project, it is envisioned that in-country implementation assistance will be required on an on-goingbasis.

A Reform Group (RG) will be formed within each agency that is implementing project activities.This group will consist of civil servants from within the agencies, and they will be responsible forimplementation. The operating principles for the RG include the following: (i) duration of the RG willbe based not on the life of the IDA credit but solely on program requirements; (ii) selection of RGmembers will be on merit; (iii) there will be regular performance assessment and satisfactory performanceevaluation is required for continued membership in a RG; (ii) RG members will be given a meritallowance based on successful completion of specifically defined tasks; (iii) the merit bonuses will beprovided from the government budget as an interim measure until new salary structures can beintroduced. This approach will help (i) maintain ownership in the entities; and (ii) build capacitv in theentities. The merit allowance is permissible under the Civil Service Law No 19/91 and its operating by-laws (Republican Decree No 122/1992 and Prime Ministerial Decree No 276/1992). During projectpreparation, these costs were estimated to amount to no more than $240,000 per year (10 staff in 10implementing agencies on a sliding scale that averages $200 per month), averaging $200,000 per year forthe project period. Due to the essential nature of these payments to ensure implementation of the project,the Government has committed to their payment in its policy letter. These payments are 100 percentfinanced from the government budget.

Procurement. The project will require the procurement of goods and service needed to executethe sub-components. To facilitate project implementation, activities were grouped together as much aspossible so as to limit the number of transactions. The project contains fewer than 100 significanttransactions plus contracts for TS staff and international advisors. There are about 20 contracts(consultant services and goods) for which prior review is required (about 56 percent of project costs).Additionally, prior review will be required for all project staff and international advisors (26.5 percent ofproject costs). Furtlher details are provided in Ann1ex 6.

The procurement capacity of the TS was evaluated during appraisal and found to be inadequatefor both the AFMIS sub-component and the rest of the project. As a result, it was agreed the TS wouldrecruit a long-term. international technical advisor. familiar with IDA procurement requirements. Thisadvisor will assist in procurement activities and will remain in place until the capacity in the TS is judgedadequate. For the AFMIS sub-componenit, additional international technical assistance will also bebrought on-board as soon as possible to assist in procurement activities related to the purclhase andinstallation of the AFMIS system.

Monitoring and Evaluation. There are several mechanisms built into the project for monitorillgand evaluation. First, specific to the project, the TS has in place a basic. computerized monitoring svstemto track key indicators specified in the logical framework. Reports from thlis system will be appended tothe quarterly progress report to be submitted to IDA. Second, there will be annual performance audits of

all project activities, conducted by an independent, private consulting firm. These performance auditswill evaluate: (i) performance of the TS and Reform Groups; and (ii) quality of delivery on activitiesunder implementation. The audits will also provide specific recommendations to enhance perforEmarceand overcome problems that are identified. The aim of these audits is not punitive. Rather, they aredesigned to provide the project management team and the responsible Ministers with a tool that will allowthem to continually upgrade project implementation and provide early feedback to consultants. Theaudits will also provide input into the performance assessments of the TS and Reform Groups members.Third, the project also finances consultant services to assist the government design and begin toimplement a monitoring system to track government performance. This monitoring system will bebroader than that used to track performance under the Civil Service Modernization Project; it will formthe basis for longer-term evaluation of the entire civil service reform program.

IDA would carry out a mid-term performance review of the project and the TS, including thosecomponents managed by the AFMIS Coordinator and the Project Coordinator, and the findings andrecommendations would be discussed with IDA, TS, and concerned line ministries. During negotiations,it was agreed that the TS will (a) prepare quarterly progress reports, including performance indicators,and submit them to IDA for review within 30 days after the end of the reporting period; and (b)undertake annual performance reviews each year during January, with recommendations to be approvedby the Oversight Committee, or when needed the Supreme Council within one month.

Accounting, financial reporting and auditing arrangements. Project responsibility falls undertwo ministries. The Ministry of Civil Service and Administrative Reform is responsible for the entireproject with the exception of the AFMIS system which is under the Ministry of Finance. Each willmaintain separate accounting and financial management practices for their respective project sub-components.

The TS financial management unit has been operating for over two years and is staffed bypermanent personnel consisting of: a financial manager, an accountant, and a cashier. It is responsible forproject budgeting and accounting for the non-AFMIS components of the project. It currently maintainsbooks of accounts on the basis of double-entry book-keeping. Project accounts, which are up-to-date andof generally accepted standards, reflect project receipts and expenditures and clearly identify the goodsand services procured and works performed. A reasonable system of internal control and checks is inplace. For the AFMIS sub-component, separate accounts will be kept, and the line of reportingresponsibility is to the Ministry of Finance. However to facilitate overall financial management of theproject, a shared financial management unit for the TS will be used. An additional financial manager,responsible for the AFMIS sub-component, will be competitively selected prior to credit effectiveness.The accounting system for the AFMIS sub-component will replicate that for the rest of the project, and itwill be in place within one month of the appointment of financial manager for the AFMIS sub-component.

The budgeting and accouiting system was computerized to aliow for automated production ofProject Managemenit Reports. A Finanicial Managemnetnt Manual which documents the operation of theProjects needs to be prepared prior to credit effectiveness. This manual will cover the following aspects:(i) flow of funds: (ii) financial and accouLnting policies: (iii) accountinig system and internal controlmechlanisms; (iv) Chart of Accounts: (V) financial reports (including formats of financial managemelntreports: (vi) auditing arrangements: (vii) budgeting: and (viii) organizationi and staffing for financialmanagement functions.

The project's annual financial statements, including summaries of the Special Accounts activitiesand of SOE-based disbursements/PRM-based disbursements will be audited by independent, privateaudits acceptable to IDA. in accordance witlh internationial auditilg standards. Auditors will be appointedfor the duration of the project on the basis of terms of reference, to be agreed with IDA. prior to crediteffectiveness. The same auditor vill be used for the entire project includinig the AFMIS sub-componenit.

financial management and implementation of which is separate from the rest of the project. Annualaudited financial statements and audit reports will be submitted to IDA within six (6) months after the endof the Government fiscal year. The cost of the audit is incremental and will be financed out of theproceeds of the credit. Auditors acceptable to IDA will be appointed for the entire project period; annualaudit reports will be submitted within 6 months from the end of the reporting period.

Financial Management System. The Project financial management arrangements are detailed inAnnex 6. Initially the project will use the traditional disbursement system, and within one year from thedate of effectiveness, the project will convert to the PMR-based disbursement system under LACI. Asimplified disbursement of funds would be carried out largely through periodic advances to the SpecialAccount based on PMRs. These reports link eligible expenditures with actual physical progress madeunder the project. The TS installed the necessary computer software in February 2000 to produce reportscompatible with IDA's PMR-based disbursement system guidelines. A time-bound action plan to permitPMR-based disbursements within one year of credit effectiveness has been agreed with Government atnegotiations. The TS does not expect to handle too large of a volume of contracts so it is reasonable surethat it can execute the PMR-based disbursement system without difficulty. The World Bank Office,Sana'a is also staffed with personnel trained in the PMR-based disbursement system and is ready to assistthe TS as necessary. Further details of the financial management system are provided in Annex 6,including the time-bound action plan for enhancing the financial management system which is a conditionof effectivenss.

Completion of the project's financial management manual and appointment of the extemalauditor constitute a condition of credit effectiveness.

Special Accounts. To facilitate disbursements against eligible expenditures, two foreignexchange special accounts will be opened at the Central Bank of Yemen (one for the AFMIS slb-component, the other for the rest of the project). The Government will also open two local currencySpecial Accounts, to be used for the government's counterpart contribution including resources for meritallowances.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

Project Scope: There are numerous governance issues that could be tackled in a civil service andadministrative reform program. These include the areas identified in this project (core systems, re-engineering of ministries, and labor force adjustment within the civil service proper), and others that arenot (legal and judicial reform, security sectors, decentralization). Block B3 elaborates on the rationale forthese exclusions.

Still. the project scope remainis broad. - While considerationi was given to narrowing the focus.strong inter-connections among project elements warrant a unified program. Labor force adjustmelnt --leading to ability to reward highi performing staff with adequate compensatioll -- underpinis thesustainabilitv of reforms in improving core systems and streamlining and restructuring governmententities. These later two areas provide mutually reinforcing benefits. And finally, an adequate personnelmanagement system, coupled with a transparent re-engineerinig process, provides hard, transparent dataneeded to implement and fine-tune a labor adjustment program.

It is also. worth highlighlting at the outset that the comprehenisive reforn agenda set out by thegovernment is a long-tern program. The Bank's support under this project represents an initial step. Tothe extent that the "foundation" reforms supported In this project are successfully implemented, the Bankshould expect that its involvement must be sustained and long-term.

Instrument: The project is designed as technical assistance operation, which is supported on thepolicy front by a program of adjustment lending for public sector modernization.

Use of a stand-alone adjustment operation to elicit the reforms sought was considered. This wasrejected because technical assistance, substantial training, and equipment would be needed for thegovernment to meet any conceivable set of tranche conditions. In the absence of IDA resources for theserequirements, the government could use its own resources or grants from other agencies. However, therewould be a high risk that such resources would not be sufficient nor timely. Furthermore, coordinationwould be difficult. Finally, relying solely on quick disbursing funds would not provide the neededflexibility to adapt the program of support to changing conditions as the reforms unfold.

Use of an investmentltechnical assistance credit without complementary adjustment lending wasalso rejected. Under such an approach, it is unlikely that the government would be able to cover the one-time fiscal costs associated with implementing the reform program (e.g., from severance payments).

2. Major related projects financed by the Bank and/or other development agencies:

, . : - ' . .X.g,,su. p. n

Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financed

Public sector reform Inst. Development for Public Admin. Completed

Public Sector Management Adjustment S S

Judicial and legal reform Judicial and Legal Development LIC New New

Sector management reform Basic Education Expansion Project Planned

Family Health Project S S

National Agriculture Sector Mgt Support S S

Public enterprise reform Privatization Support Project New New

Other development agencies

Financial management IMF ESAF; UNDP/IMF TA; DFID

Public sector reform UNDP governance program

Sector management reform European Union (proposed - health)

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

3. Lessons learned and reflected in the project design:

Lessons from Projects in Yemen: The lessons of experience v, iti projects in Yemen reflect thelessons of experience witlh projects elsewlhere - weak oxNnership. poor project management. poor use ofteclhnical assistance. and weak moniitoringo and evaluation. These have been takeni into account in thedesign of the project. as explained below.

Lessons from Techlnical Assistance Projects: Projects with sionificant TA componenits have beenparticularly disappointincg when thev: are supply driven, lack commitmenit on part of target institutions.are insufficiently prepared or have short implementation times. are weak in monitoring. and/or place

excessive reliance on expatriate consultants. In designing the project, these lessons have been taken intoaccount:

* The commitment of the Government is noted in Section D4.

* All target institutions (MOCSAR, MOF, NIAS and pilot agencies) initiated the request for assistanceand inclusion in the CSM project.

* The project has been under preparation for 30 months, with the support of a project preparationfacility; and as Section D4 indicates, several actions have already been taken by the government;

* The likelihood of effective use of TA will be increased by using an incremental approach and relyingon technical audits (by an independent firm to be selected before the first six months of projectimplementation) on the quality of consulting services.

* Monitoring and evaluation arrangements have been designed and will be carried out internally by theTS and externally through the semi-annual technical audit.

Lessons from Public Sector Reform Projects. Projects supporting public sector modemizationhave tended to be more successful when they draw on specific but adaptable implementation plans andannual work programs for each component. Under the project:

. Implementation and annual work plans are focused on outputs, with evaluation critefia andperformance indicators.

• Periodic reviews are put in place to watch for early warning signals and make adjustments as needed;

* Staffing requiretnents for key positions and their accountabilities and responsibilities will be clearlydefined in performance contracts.

Lessons on Labor Force Adjustment Programs: The design of assistance packages in Yeinen --and the implementation of the program -- will draw on a review of international experience with laborforce adjustment programs that shows such programs often:

* Pay workers too much: More is paid more than would have been necessary to induce them to leave.These increased costs may bring a retrenchment program to a halt.

• Do not address the adverse selection problem: Often there is a poor of targeting redundant workers;the best ones accept the buyout, while the worst remain in the public sector.

* Rely on inefficient government training programs: Government provided training is often offered asan inducement; however such training is usually costly and unsuited to the needs of those leavingpublic employment.

Suffer from a revolving door: Workers accept severance pay but are later re-hired. The severancepackage is wasted and downsizing is not achieved.

Lessons from Preparation of the CSM Project: The key lesson drawn from the preparation processis the need to put in place implementation capacity.

* The project supports extensive menitorinig of project implementationl staff by interniatiolnal advisors.

* The project supports the design of project management courses that will be offered on an on-goingbasis throughout the project. This will benefit not only project staff, but also a wide range ofgovernment officials.

* Technical audits will also assess program management and make recommendations for continualimprovements.

4. Indications of borrower commitment and ownership:

A consistent series of actions have been taken to demonstrate government commitment to civilservice and administrative reform. These include the following:

. For the first time since unification, the government established a personnel count by linking thedistribution of each agency's payroll to the submission of its personnel list.

a A hiring freeze is being enforced (except for recruitment of teachers and healthcare workers).

* For the first time, in 1999 recruitment of all these staff was through open advertisement and based ontransparent selection criteria.

* A civil service census was conducted to form the base of infonnation which is being used as input intoa continually updated personnel record system.

* Action plans are being developed to remove from the payroll those who are illegally employed.

• Some order is being put into the process by which promotions are awarded.

• The Government has effectively used an IDF grant to develop a reform strategy and build consensusaround that strategy. It also completed an assessment of the existing organizational structure (firsttime this has been done). Recommendations to remove duplication and overlaps identified in thatstudy are being finalized.

* A Republican (Presidential) Decree designed to reinvigorate a Supreme Council for Civil Service andAdministrative Reform was issued; this Council has met regularly to discuss the reform strategy whichhas now been endorsed by Cabinet.

• The issue of surplus labor in the civil service is being widely debated and was the subject of an openworkshop that discussed the problem in Yemen as well as experiences of other countries in tacklingthe problem. A legal framework for the Civil Service Fund has been enacted.

* The government retained international consulting firms -- during the project preparation period -- toassist in the design of the business process re-engineering program and to begin improving coresystems.

* A unified budget for the year 2000 was prepared and cabinet decision reached to implement a newAFMIS system that will, among other things, improve budget control.

* A national conference on administrative reform was held with representatives of government,NGO's,political parties, and academics. Opened by the President and chaired by the Prime Minister, theoutcome of the conference has been the finalization of a Strategic Framework for Civil ServiceModernization that was endorsed by Cabinet.

5. Value added of Bank support in this project:

Thc size of the public sector. its Inefficiency and weak inhstitutiolnal capacity are major constraintsto Yemen's medium tern growth prospects. The Bank's support can be catalytic in getting thegovernment to take tough decisions, in helpinig to unify donor support under a consistent framework, andby providing the governmenit w-ith impartial advice on1 the quality of the program actions that are beingtaken. The Bank is involved in institutioni building throughout a wide range of sectors in Yemen. througha variety of instruments includinlg non-lendinig services, IDF grants, and projects. By building on this on-going support, the Bank can help increase momentum and realize economies of scale in the refornprogram. Furthermore, the GoNerniiient has specifically requested the Bank's involvement in order to useits wide interniationial experience and reduce the risk of program failure. Finally, the Government hasspecifically requested that the World Bank provide leadership amongst the donor community ^- includingclose coordination wvitlh the IMF w-hich is supporting civil service reforn through its Extended StructuralAdjustment Facility -- to ensure a well-integrated, focused reforn program.

8

E: Summary Project Analysis:(detailed assessments are in the project file, see Annex 8)

1. Economic: (see Annex 4)

No economic analysis of the entire project has been carried out as it consists largely of technicalassistance activities.

2. Financial: (see Annex 5)

The budgetary impact of the project during implementation and its operational phase is minimal.Incremental costs for merit-based salary supplements are estimated at between $180,000 and $240,000per year; however this is temporary until salary scales can be adjusted. The program is expected to have apositive medium-tenn fiscal impact. There will be substantial fiscal costs associated with the financing ofseverance payments for retrenched civil servants. These costs, however will be quickly compensated bywage savings (a portion of which are likely to be directed to increased salary scale). Further, this one-time burden on the budget will be off-set through the PSMAC adjustment lending.

3. Technical:

The project would finance international standards hardware and software for computerization ofcore system. This includes international standard platforms and relational data bases. In terms ofrestructuring, the reform of structures, organizations, systems and processes will correspond to publicsector management standards developed in similar projects around the world. The design also reflects theneed for a long-term transition process. It aims at reforming the core of government, concentrating onthose issues that are expected to have the biggest impact in terms of improving efficiency, effectivenessand quality of public service delivery, customer-oriented transparency and accountability.

4. Institutional:

The success of the program depends on the capacity to manage a comprehensive reform agendaand the ability to integrate the reforms into day-to-day operations. Significant manpower and appropriatemanagement capacity are essential for the integration of the different components into day-to-dayoperations. Previous experience has indicated that it might be difficult to identify sufficient qualify staff.Management in many public sector agencies, and its performance and motivation with regard to change isalso often weak, which would have a negative impact on the implementation of the reform. It will be ofcrucial importance to build up sufficient and adequate management capacity for the reform process. Theimplementation will be best carried out by small implementation teams that are responsible for specific(sub-) components and which have received adequate training. Therefore, significant training andorientation for both implementation teams and public sector managers are built into the program. It isalso necessary to give managers enough leeway for the integration of reform. Administrative regulationsand practices whichi might hamper- the reform process will therefore be addressed on a priority bases bythe TS as they arise. Implementation issues are discussed further in block C4 and in the Project Desig nSummarv (Annex 1).

5. Social:

There are social risks related to the fact that, de facto, the transfer of income to the generalpopulation throuah civil service wages and an extended family support structure currently funlctions as apart of a `welfare system." While the eventual impact of a streamlined, more efficient public service willinclude better services and the freeing-up of resources to tackle poverty alleviation in a more sustainiable,cost-effective manner, attentioni needs to be paid to direct, short-term impact of downsizing on thepotentially vulnerable. Also, in a country that has recently unified and is recovering from internalconflict, an additional dimension must be considered. This is the extent to which the burdens and benefitsof the reforn program are views as being shared equitably throughout reeiolls.

A social and institutional assessment looked at issues such as the impact of labor force reductionsand ways to mitigate potential negative impact, the civil service culture in the reform process, monitoringimprovements to service delivery, dealing with the regional sensitivities, and identifying areas of whereearly reforms can be taken with minimal difficulty to demonstrate to the public that a meaningful refornprogram is underway. Furthermore, the foundation for a public infonnation program has been developedto assist the Government in communicating its reform program and maintaining broad-based support forit.

Gender issues. There is potential for both positive and negative consequences for women fromthe reform program. On the negative side, women could be disproportionately targeted for lay-offs in thecivil service. This could be because of their over-representation in lower-level (more overstaffed) jobcategories or because they are viewed as easier to make redundant than a male counterpart. The targetingmechanism will need to build in protection against this possibility. On the positive side, the reformprogram provides a good opportunity to provide upward mobility to qualified women (as well as men) byopening up positions that have been filled with long-term staff that are not performing. By recognizingand rewarding performance of women in the civil service, the government can serve as a positive examplefor the private sector.

6. Environmental assessment: Environmental Category [] A [ B [x] C

7. Participatory approach:

During project preparation, all elements of the reform program were discussed with variousstakeholders including civil servants, ministers, parliamentarians, the business community, and otherdonors. Civil servants at all levels, private businesses, and poorer communities were involved throughinteraction during the social and institutional assessment. The Social and Instilutional Assessment (asmentioned above in Section E5) included qualitative focus groups discussions (8 communities in 4governorates) and a quantitative household survey (6 urban and 6 rural communities, each with arepresentative sample of at least 50 households). The aim was an indicative assessment of citizen accessto and satisfaction with service delivery, reasons for dissatisfaction, and identification of improvements toservice delivery that could show rapid results. It was found that many of the common causes ofdissatisfaction can be addressed through better management of limited resources, adequate funding foroperations and maintenance, more careful attention to local needs in the planning process, and serviceprovided by appropriately motivated, accountable, honest civil servants.

The Social and Institutional Assessment also conducted focus group interviews and a survey ofabout 400 civil servants in 5 ministries in 2 different locations. Their views were sought on the mainconstraints to an effective and efficient civil service and the main problems within their own ministries.Numerous factors were identified which can be classified in the following nexus:

ILack of appropriate managemiient (poor dialogue within the civil service. inability to in atchl policydecisions with implementationi. lack- of adequate supervision. insufficient operations and maintenanceresources):

* Lack of application of existing lawvs (n1o penalties for misbehav ior. corruptioni. non-enforcernent ofretirement rules):

* Over centralized and duplicative administrative procedures:

Lack of training opportunities: and

Poor salaries and insufficient incentives for civil servants to perforn well.

In addition. thie Government developed its Strategy for Civil Service Modernization tlhrough aparticipative process. A national vsorkshop xNas held to discuss var-ious reform-l topics. For each topic.

several papers were prepared, by academics, government officials, and political opposition. Internationalexperts were brought to the workshop to help facilitate discussions. The workshop was opened by thePresident. At the end of the workshop, recommendations that emerged were incorporated into a draftreform strategy, which was eventually endorsed by the Cabinet and which forns the basis for defining thefirst stages of reform to be supported through by this project.

F: Sustainability and Risks

1. Sustainability:

Key issues for sustainability of the reform program include: (i) ability to implement a labor-forcerestructuring program to free up resources to adequately compensate and motivate employees, (ii)effective design and implementation of assistance packages to redundant workers that do not target highproductivity workers and that guard against re-hiring -- which in turn will require growth of incomeearning opportunities outside of the public sector, (iii) continued political and public pressure for andsupport of reform through a long program, (iv) ability to initiate massive training to "retool" civil servantswith skills needed to run a modern administration, and (v) developing systems that provide incentives foreffective, continued reform and good performance. And to keep the reform spirit alive, it will be essentialfor the Government to periodically update the public on the progress realized. To this end, the projectsupports a public information program to disseminate information about reform program.

2. Critical Risks: (reflecting assumptions in the fourth column of Annex 1)

This project carries high risk (see detailed risk assessment below), in particular because ofpolitical circumstances which might hamper the reform process, and lack of capacity to implement acomprehensive reform program. The design of the project reflects this overall risk assessment. Theproject lays the foundation for carrying out the longer-term program. It will test the commitment ofgovernment and its implementation capacity. The success of this project would pave the way forimplementation of more comprehensive reforms and considerably reduce later risk.

During project management, it will be important to keep control of the gap between whatgovernment desires to do in its reform program and what is feasible to successfilly accomplish in a giventime period. If this gap is large, there is a danger that systemic program implementation will fallwayward to crisis management as implementation staff rush to meet unrealistic goals. In the annualimplementation plan of the CSM program, careful attention will be given to capacity limitations.

Substantial technical assistance is required in all aspects of the project, from project management,to technical input, to institution building. This, however, must be balanced against the relatively limitedcapacity to effectively absorb external assistance. Capacity needs to be developed so that TA can be usedto transfer skills rather than build dependency.

Furthermore, it will be essential to limit turf conflicts and to promote cooperation andcoordination across government. The CSM program needs to be viewed as a broad responsibility acrossgovernment and not as the domain of a single ministry or agency.

ii ,. , . . -i.iinization Me4sui_

From Outputs to Objective _ ,,_-_,,_ ,,,_,, ___

New systems used by agencies M Extensive training in use of new systemsincluded in project, introduction of newsystems to be phased, authorization forsalary decompression within restructuredministries linked to use of new systems,development of new systems to draw oninput from users

New policies motivate staff S Consultation with civil service groups toidentify priorities and concerns

Implementation process is fair and transparent H Use of public groups to monitor andcontinually press for transparentimplementation through public informationprogram

Restructured agencies are "significant" M Restructuring framework to set conditions tohelp target entry of core ministries and thosethat deal closely with private sector

Constituent concerns adequately identified in the S Re-engineering process to includere-engineering process comprehensive consultation with "clients"

(can include users of services in the generalpublic and within the public administration)

From Components to OutputsPolitical willingness to implement labor force H Release of funds for labor force adjustmentadjustment program (alternative income earning programs linked to actual implementation ofopportunities available) the program, social assessment to help

identify potential productive activities forgroups of workers likely to be most effected

Political willingness to implement actions S Institutional set-up relies on Prime Ministeridentified in re-engineering process and adequate to provide overall guidance to the programinter-ministerial cooperation as the chairman of the Supreme Council for

Administrative ReformInnovation Fund is utilized S Pilot approach; careful monitoring and

evaluation of effectiveness of sub-component.

Sufficient implementation capacity H Project implementation unit to consist of fulltime staff seconded to the unit andadequately compensated, implementation todraw on skilled staff throughout the civilservice as well as in the private sector.extensive international technical supportprovided to the implementation unit

Consultants will have necessary skills M Close supervision of consultant work as wellas regular audits of consultant performance

Support from key constituent groups developed H Social assessment to identify concerns of keyand maintained constituent groups within civil service.

public information program included as partof project

Overall Risk Rating HRisk Rating - H (High Risk). S (Substantial Risk), M (Modest Risk). N (Negligible or Low Risk)

3. Possible Controversial Aspects:

Risk Type of Risk Risk Risk MinimizationRating Measure

Labor force adjustment program creates Social High Transparent program, wellnegative reaction because of changed income designed-assistancefor civil servants packages, social assessment

Regional conflict emerges Social Modest Transparent process, socialassessment

Vested interests oppose increased Governance High Public informationtransparency supported by project activities campaign to increase public

pressure for refonn,strategic targeting of firstactions to build positivemomentum and support

Implementing agency does not have Management Substantial Implementationadequate capacity or commitment to ensure arrangements that draw onproper handling of the above issues the authority of the prime

minister, tight supervisionarrangements to rapidlyidentify emerging problems

Type of Risk - S (Social), E (Ecological), P (Pollution), G (Governance), M (Management Capacity), 0 (Other)Risk Rating -H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

G: Main Loan Conditions

1. Effectiveness Condition:

Acceptable financial management arrangements in place, as described in Annex 6, which requires theimplementation of a time-bound action plan.

2. Disbursement Condition:

For the AFMIS sub-component of the project, bidding documents acceptable to IDA concerning theinstallation and customization of the AFMIS prepared and issued

3. Other: (classify according to covenant types used in the Legal Agreements)

Annual performance audits to be carried out by an independent entity acceptable to IDA.

H: Readiness for Implementation

[ ] 1. a) The engineering design documents for the first year's activities are complete and ready for thestart of project implementation.[x ] 1. b) Not applicable.

[x] 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

[x] 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

[x ] 4. The following items are lacking and are discussed under loan conditions (Section G):Request for Proposal for AFMIS system needs to be finalized and issued.

I: Compliance with Bank Policies

[x] 1. This project complies with all applicable Bank policies.[ ] 2. The following exceptions to Bank policies are recommended for approval. The project complieswith all her applicable Bank policies.

Te Gelder

Sector Director: Mustapha Nabli

Co r er/Director: Inder K Sud

Annex 1: Project Design Summary

ProjectrDrevatelopd entObeiv Ou Sector IndicatorsP Sector / Country Reports: (from Goal to Bank Mission)

To create a modem public administration Incaeased productivity of public Service delivery reports . political willingnessfothat provides public services honestly and expenditures (at the same Human development indicators fundaientally alter system ofefficiently while encouraging private axpenditure level quality of Private investment andjob dart public administration away fromenterprise. services improved and/or patronagl towards rnent and

quantity provided increased). efficiency.

Project Development Objective: Outcome I Impact Project Reports: (from Obiective to Goal)

andicatorasparent applicationof annl a program of judicial reform isTo create capacity, institutions and Consolidated financial Quarterly MOF financial reports designed and implementedsystems for improved and sustained statements for budget execution based on accurate reports byutilization of human and financial produced in timely manner budget units, annual progress . financil sector reforms areresources in Yemen's civil service. reports successfully implemented

Employment based on positions Analysis of employee database, . privatization progam continuesand transparent application of annual progrcss reports and regulatory capacity iscivil service lawi strengahened

s investors perceive govedmentcommitenrmnt to sustainind itsreform program

. internal security situation is

adequate for private investors

. inadequate land registrationsystem is codeected

poli.ical environment is conduciveto eventually tacking reforms in the

a asecurity and military sectorsOutput from each component: Output Indicators: Project Reports: (from Outpults to Objective)

1. Core systems improved. 1. Operating manuals written 1. Annual progress reports on .new systems used by agenciesand approved by cabinet EDB and AFMIS. New systemsresolution. Computerized fiunctioning in selected ministrics. .new policies moetivate staffsystems in place where .implementation process is fairappropriate. and trarksparent

2. Workforce streamlined and becoming 2. Number of civil servants on 2. Payroll and personnel data restructured agencies aremore efficient. the payroll reduced. High quality base. monitoring system for staff "significant'

workers retained. receiving severance packages.annual progress reports. .constituent concems adequatelyannual progress rePorts.identified in the re-eng-ineering-

3. Operating procedures wsithin selected 3. Work flow delivery is 3. Work flow surveys that are processagencies streamlined. improved against service part of restrLcturing process.

standards in restructured annual progress reports.agencies.

4 Capacity to sustaini refornis and 4. Eflectixe program plan ftr 4. Submission of phase 11 reformadminister the public administration follovN-on reformis developed, program plan: aniual progressenhanced, civil sers ice training program reports on training program.

implemented wN ith agreednuniber of cix il servants trainedin management of the publicadministration and specialistx_ork sk_ills fIr operat____I core

Sy stemis.

Project Components/Sub- Inputs: (budget for each Project Reports: (from Components tocomponents: component) Outputs)

Quarterly progress and . political situation conducive to1. Core Systems Improvement 15.90 (14.60) disbursement reports for each implementationHR Management Framework 0.79 (0.76) component - willingness to implement laborPersonnel Information Management 6.06 (5.50) force adjustment programPayroll System 0.09 (0.09) (alternative income earningFinancial Mgt Information System 8.86 (8.24) opportunities available)

- willingness to implement2. Civil Service Fund (*) 1.61 (1.54) actions identified in re-

engineering process,3. Rationalize Government 5.19 (4.99) - inter-ministertial co-operationTechnical Support 0.99 (0.96) . sufficient implementationMandate of govemment, consensus 0.11 (0.10) capacityStreamline and Rationalize 1.70 (1.66)Innovation Fund 2.34 (2.26) . consultants will have necessary

skills4. Capacity Building and Change Mgt 4.35 (4.02) . support from key constituent

5. Program Mgt and Administration 5.03 (2.76) groups developed and maintained

6. PPF 2.00 (2.00)

* 2. Civil Service Fund supports the administration, monitoring and evaluation of the civil service fund. The funding for retrenchment or relocationpackages will be provided through the govemment budget, with resources made available to the Govemment of Yemen through adjustment lending(PSMAC I and follow-up PSMAC operations) to enable the government to meet, through the budget, the one-time fiscal costs associated with the laborforce adjustment. Input includes price contingencies. Figures in parentheses represent the amount of IDA financing.

Annex 2: Project Description

The CSM Project supports four strategic aims of the Government's administrative reform program:

* Put in place systems that strengthens the capacity of the core ministries to effectively plan, monitorand control the deployment of the human and financial resources of the Govemment of Yemen(GOY).

* Build and develop institutional capacity for better management at the top, middle and lower levels ofthe government bureaucracy.

* Streamline and rationalize government operations through restructuring and redeployment of civilservants within the public and/or the private sector.

• Effect permanent and lasting change by improving the efficiency of govemment operations andprograms through re-engineering of administrative and service delivery processes.

The project has five components. The first component supports improvements to core systemsincluding personnel management and financial management. The design, implementation, monitoring andevaluation of the labor force adjustment program within the public administration is supported under thesecond component. The third focuses on rationalization of government structures, supporting streamliningof selected pilot agencies and an innovation fund. The fourth component focuses on capacity buildingand change management. The last component deals with implementation support and projectadministration.

Project Component 1 - US$ 15.8 (14.6) million7

IMPROVE CORE SYSTEMS

A well-functioning public administration relies on a number and variety of core systems to assistin the effective management of its resources, both financial and human. While it would be useful tomodernize all of the core government systems, there is insufficient capacity for the administration toabsorb such massive changes all at once. Therefore, improvements in cores systems have been phased asfollows.

The project supports Phase I reforms that are designed as the first critical steps to: (i) increase thetransparency and efficiency with which public resources are used and (ii) move towards a performancebased, professional civil service. It also provides assistance in selecting priorities reforms for phase IIand preparing them for implementation.

The project will support development of clear processes, procedures, and policies for each aspectof the core system under reform. Wheni core systems are computerized it will be phased and manualsystems will be maintained for some tine (particularly outside of the major urbani centers) ulltil thecomputerized system has operated smoothly througilouLt an entire work cycle.

To encourage the use of the improved systems and ensure that they are used properly. the projectwill provide extensive on-the-job training. This will be provided througlh two vehicles. First international(and when available local) techniical assistance will be provided intenisively in the beginning andgradually phased out over the reform program. The principal aim of this assistance is to mentor civilservice staff in the new skills that they need to acquire. Second. specific training programs (short.modular courses withl extensive on-the-job componenits) will be provided to staff working with the newcore systems.

7 Figures in parentheses represent IDA financing

1.1 Human Resources Management Framework. This sub-component will finance consultantservices and training related to enhancing employment policies and practices, with an aim to revise themin line with establishing a merit-based civil service. Through adoption of modem human resourcemanagement policies and practices, the government plans to develop and use the human resourcepotential of its employees while increasing the efficiency and effectiveness of government institutions andagencies. This component finances technical assistance packages that help to: review existing policiesand identify shortfalls, develop a human resource management strategy, develop and implement policesand practices in line with this strategy, develop and implement a new job classification system, andinstitute a program of training designed to help effectively implement human resource managementpolices. The output of these TA packages include:

Review existing policies and identify shortfalls.* Report on shortfalls in existing Human Resources (HR) Management System accepted by the SC.

Develop a human resource management strategy.* Report on strategic objectives of HR management accepted by the SC.* Report on HR Management Policy Guidelines accepted by the SC.

Develop and implement polices and practices in line with the strategy.* Report and recommendations on: (i) staffing policy; (ii) position description policy; (iii) training

policy; (iv) staff relations; (v) HR personnel information management policy; and (vi) interimcompensation and benefits policy accepted by the SC.

• Action plan for introduction of revised HR management policies accepted by the SC.* Report identifying enabling legislation/decrees required to introduce new/revised HR policies.* Enabling legislation/decrees drafted.* Enabling laws/decrees to introduce new/revised HR policies in place.* Report identify changes to rules and regulations needed to introduce new practices.* New/revised rules and regulations drafted.

Develop and implement a new job classification system.* Report on new job classification system and action plan for its implementation approved by SC.* Implementation of new job classification system on-going.

Build capacity for effective HR management.Training plan and courses prepared.

* Training delivered to HR staff.

1.2 Personnel Information Management. Until recently, there was no systematic collection andretention of basic personnel data on civil servants. While manual files were kept, the location and thesefiles and their content were uncertain. Civil servants were frequently required to produce documentationfrom their own files to establish their eligibility for benefits or promotions. The opportunities for fraud.in termis of false qualifications. chaniged entry date or vears of services, and age (and hence retirementrequiremenits) swere enormiious. Because of lack of informationi. the gov-ernimlenit had no abilitv to assess itshumanl resources base. including its qualifications and distribution of its civil servants. Furtier, theexisting system did little to prev-ent persons from collecting multiple salaries. salar\ payments to continueafter death. or a proliferation of phantoin wNorkers. This sub-componenit supports the compilation andverificationi of personiel records and their redistributed to the appropriate phvsical location. con,ductilloan employee census. and developing and implementilig an employee database (EDB) and a forms basedsystem for updating the EDB. MucIh of this workl has already been completed duringa project preparation.Additionally, permanent employee identification cards are to be issued thirough a biometrics identificationsystem which will be financed under this sub-componenit. This identificationi will help to eliminateperson duplicates or aliases.

The project provides support for technical assistance, computerization, and training related toverify personnel records and establishing a count of civil servants; establishing a computerized employeedatabase to keep up-to-date information on staff to be used to ensure accurate application of salary levels,promotions and retirement; and issuance of biometrics identification cards to limit fraud. The output ofthese assistance packages include:

Verify Personnel Records and establish a count of civil servants.

* Policy on content of personnel files established.

* Personnel files verified and missing documentation completed.

* Personnel count and information collected and computerized from personnel files to serve as the basisfor an employee database.

Develop a computerized employee data base.

* Forms based employee database system implemented so that information is accurate on a monthlybasis.

* Transfer of responsibility of managing and updating the EBD to regional information centers.

* Implementation of civil service staffing regulations (such as salaries, promotions, and retirements)liked automatically to the data contained in the EBD.

Biometrics system for employee identification.

- Employee identification cards issued to all civilian public sector employees.

* All ghost workers and double dippers removed from the payroll.

* New empioyment continually verified against existing staff to prevent reemergence of double-dipperproblem.

* Report and recommendation on additional usage of the biometrics system within the publicadministration (e.g., for pensions, payroll linkages, extension to the security sector )

1.3 Payroll. Eventually, the GOY will seek to introduce a computerized payroll system that linksthe financial management and personnel management systems. However, during the first phase supportedby this project, the payroll procedure will simply be standardized and streamlined. The following outputsfrom this technical assistance will lead to a payroll system that is streamlined and standardized:

* Review of existing payroll preparation practices and workflow completed.

* New practices and workflow developed to use EDB for payroll list preparation.

* New practices and workflow piloted and rolled-out.

* Project plan for computerization of panroll system to link with EBD and AFMIS completed.

1.4 Accounting and Financial Management Information Systenm. This sub-component providesresources to assist the government develop an AccouLntinig and Financial Management InformationSystem (AFMIS) that will that will allow for better payment and accounting systems, and improvedfinancial management so that timely' informationi is available for budget and cash management. Theexisting procedures for the release of funds to spending agencies and the control over expenditLures fromthe budget are problematic, absorbing much time and effort to administer without commensurate benefits.The system of reallocation of appropriations inhlibit the managerial function of making bona fide shifts inexpenditure to attain specified objectives, while the ad hoc procedures for supplementary appropriationsdo not permit proper priority planning. Cash management is difficult since budgetary units do not reportin a timely. accurate manner.

As part of its reform of the accounting and financial management system, the Ministry of Finance(MOF), with IMF-supported technical assistance has introduced a four-level economic classificationconsistent with GFS. This new classification will be implemented from the beginning of FY 2000.Starting then, the approved budget, original budget allocations, and changes proposed in budgetallocations will be registered manually in the MOF in accordance with the revised classification. Thechecks presented for payments by the budgetary units should also carry the revised classification. In thisway, nominal changes to the existing Central Bank of Yemen software should allow the MOF to monitorand report on budget execution by sub-chapters while the longer process of developing and rolling-out theAFMIS takes places.

Implementation of the AFMIS will be phased, starting with core systems development in theMOF, linking this to three head quarter budgetary units, and eventually expanding the system throughoutthe country. The sub-component will support further development of the financial managementframework, acquisition and implementation of core functions in the AFMIS, initially at a pilot site, andsubsequently within three headquarter units; and build capacity to use the new financial managementsystem. A condition of disbursement for this sub-component is the preparation of bidding documentsacceptable to IDA (utilizing funds from the Project Preparation Advance Facility) and issuing them. TheAFMIS will allow for a more timely, accurate and detailed posting of government revenues andexpenditures, both in terms of budgetary estimates as well as the actuals. In addition, the system willoptimize the use of the Government financial resources and will provide fiscal transparency. Eventually,the AFMIS will facilitate the following government business functions: (a) budget preparation at thebeginning of the fiscal year; (b) budget modification during the fiscal year; (c) budget execution (i.e., thecomparison of each budgetary unit's actual revenues and expenditures against the revenues andexpenditures forecasted in the budget); (d) accounting/general ledgers; (e) accounts payable; (f)commitment/expenditure accounting; (g) receipts and cash management; and (h) government fixed assets.

The technical assistance, computerization and training provided will have the followingoutcomes:

Financial management framework refined.

* Report accepted and shortfalls of policies and practices.

* Policies for financial management (including policies on fiduciary responsibility; budgeting andcontrol policy; auditing policy; financial reporting policy revised if needed.

* Enabling legislation drafted for to support and new/revised financial policies.

* New Chart of Account developed and implemented.

* Budgetary control system developed and implemented.

Implemiientationi of AFMIS x, ithin MOF.

* AFMIS functioning in the MOF with paper based system to allow for manual based inputs to inputtedinto the computerized AFMIS system.

T Timely and accurate finanicial reporting of government financial accounts.

lInplementation of AFMIS within three large headquarter budgetary units.

* AFMIS functioning in tlhree large headquarter ullits.

Development of full-scale project plan for full-scale roll-out.

* Project plan for full scale roll-out developed and approved by SC.

Build Capacity

* Training plan and courses prepared.

* Training provided to users of the new AFMIS system.

Project Component 2 - US$ 1.6 (1.5) millionCIVIL SERVICE FUND

The current civil service is both bloated and lacking crucial skills. Difficult actions are requiredto correct this imbalance. Unqualified and surplus civil servants need to be removed from the payroll inorder to free up resources that can be used in part to increase the salaries of productive civil servants.Without such wage adjustments, the government will not be able to recruit, retain, nor motivate highquality staff. While dismissal of workers will be both politically and socially difficult, it is critical to theentire reform program. Without it, the reform program is unsustainable.

As a first step, the Government's focus is on removing illegal employees from the payroll (softreductions). Once this is done, in conjunction with data from the EDB, the Govemnment will assess themagnitude of further reductions that are required. However, even now, it is clear that hard reductions willbe necessary. To handle these reductions, the Government has established a Civil Service Fund (CSF).Surplus staff, identified through a scrupulously transparent process, will be transferred to the CSF. For aninitial period of time, such staff will continue to receive their wages. As the reform progresses, theGovernment will offer a variety of buy-out packages to encourage exit from the CSF. This will releaseresources for augmenting budgetary outlays on operations and maintenance and increasing the salaries oftargeted, highly qualified civil servants

The purpose of this component is to provide resources to assist the GOY in the design,development, implementation, and monitoring of a CSF that is charged with the responsibility of dealingwith surplus staff within the public administration. Technical assistance will be provided to further refineand test the design of policies, guidelines, operating practices and procedures, rules and regulations andoversight mechanisms to ensure transparent operation of the CSF, assist for the design of a menu ofoptions to encourage exit of individuals from the civil service fund. Assistant packages (which thegovernment will finance with own resources or possibly those leveraged from adjustment lending) will bedesigned to take into account targeting, the level and nature of compensation, implementation regulationsgoverning the payment of such compensation, and monitoring, evaluation and adjustment mechanisms.Any training or other services provided to displaced workers will be subject to a market mechanism thatallows the affected worker to determine if training or a service is desired, the type of training or service,and the provider (public, private, or NGO). Resources are also provided for technical assistance andfollow-up surveys to periodically review and assess the CSF's operation with a view to improving itseffectiveness in identifyilg and transferrinig staff to the civil service fund, and implementing theseverance options.

The outputs of the technical assistance packages include the following:

* CSF policies, rules and procedures fully documenited in Operations Manual.

* Menu of severance packages and early retirement options developed taking into account targeting. thelevel and nature of compensationi, and implementation regulations governing the payment of suchcompensation. Any training or other services provided to displaced workers will be subject to amarket mechaniism that allows the affected worker to determine if trainin1g or a service is desired, thetype of training or service, and the provider (public, private, or NGO).

* Redundant staff identified throuoh transparent procedures and transferred to the CSF.

* Severance program monitored, evaluated, and revised based on operational experiences.

Project Component 3 - US$ 5.2 (5.0) millionSTREAMLINE AND RATIONALIZE

The third pillar of reform focuses on the need to enhance the quality and efficiency of providingspecific government services. The re-engineering process will aim to: (i) streamline organizationalstructures, (ii) simplify business processes (work flow, policies, procedures, decision making, staffingrequirements); and (iii) put in place basic information systems. To do this, support will be provided in keyareas including to:* critically review the mandates, responsibilities and operational objectives of the pilot agencies, based

on functional analysis;

* remove duplications and overlaps, develop new roles and missions, realign functions and developnew policies in line with the new mandates, including decentralization initiatives; and

* analyze staff requirements, introduce job descriptions, and identify surplus staff.

Since the long-term objective is to improve service delivery and create a performance orientation basedon clearly defined output targets, baseline service deliver surveys will be conducted.

Under the project, the re-engineering process will be phased, starting with selected core ministriesand a couple of pilots. In later phases, the restructuring effort will be gradually expanded to otheragencies building on the lessons of the pilots. During project preparation, it was agreed that selection ofthe pilots should be based on the following criteria:

* Reasonable size (starting with an agency that is too large could cause the process to be mired in !ongdelays and, if mistakes are made, create more difficulty than if lessons were first learned throughexperiences in re-engineering a smaller agency);

• Interface with either the general public or private sector (reform results are visible outside thegovernment); and

e Political willingness, commitment, and motivation to reform the particular agency.

After a Cabinet debate, the Ministries of Civil Service and Administrative Reform, Social Affairs,Labor, and Health, the Tax Authority, Central Office for Control and Audit, and Civil Aviation Authority,and the Prime Minister's office were selected as possible pilot agencies (decree number 291 of 1998).Re-engineering of the Ministry of Health is likely to proceed in tandem with this project throughfinancing by the European Union. The Prime Minister's office currently receives support forrestructuring through a UNDP Governance Program. The Ministry of Labor is supported by assistancefrom both the lLO as well as IDA (Vocational Training). Consequently, under this project, financing willbe provided for pilot restructurinlg of the Ministry of Social Affairs (and its associated agencies) and theTax Authoritv.' The Ministr-y of Civil Service is also included as a core ministry.

The project also includes an Innovation Fund. It is possible that the pilot approach outlined abovemay preclude acting opportullistically to take advantage of strong reform initiatives in other agencies oropportullities for quick-hits that could show a clear benefit to the general population. This sub-component seeks to redress this shortcoming by provided a vehicle to support such activ ities designed toresult in a public institutioni becoming more effective and efficient in meeting its mandate. TheInnovation Fund (IF) is intended to promote and encourage initiatives from within the public sector. TheIF will complement and add to the portfolio of reform initiatives takling place to streamline, rationalize

Support to the tax authorit\ is closel\ coordinated \ith on-going technical assistance funded by DFID on the introduction of aGeneral Sales Tax and tax administration.

and re-engineer government operations. Also, it will be possible to apply a uniform standard set ofeligibility and qualifying criteria for selection of reform initiatives. For this reason, the govemment hasalso indicated that it may wish to use the IF to harness and channel resources from donors interested inproviding technical assistance to support similar reform initiatives, thereby ensuring a broad, overallconsistency in the reform efforts, with less chance of duplicate efforts, and within a framework whereactivities and results are monitored, controlled and reported using a common yardstick.

The sub-component will finance technical assistance to set up the Innovation Fund; technicalassistance to design and develop the policies, guidelines, operating practices and procedures, appropriaterules and regulations and oversight mechanisms to ensure transparent operation of the IF; and technicalassistance for periodic review and assessment of the fund's operation with a view to improving itseffectiveness in promoting and encouraging innovation within the public service. Further, there areprovisions for short term technical assistance for proposal evaluation/implementation of specific IFfunded initiatives. Finally, there are modest provisions for office/IT equipment to efficient and effectiveoperational support for IF operations, and training to IF management/support staff in order to develop thehuman resources for effective management of IF activities. The sub-component will provide seed moneyto finance an initial selection of IF initiatives.

Finally, the project supports technical assistance to define the mandate of government. There arewell over 80 "departments" which range in size from a ministry such as health (over 30,000 staff) oreducation (over 150,000 staff) to the Social Security Fund (8 staff) or the Central Authority for ScientificResearch (15 staff). In addition, there are a large number of public enterprises. The organizationalstructures of many of these departments are a spider-web of complexity. And, despite the intricatesiructures, the chain of command generally passes upward with little ability of lower level managers totake decisions or be held accountable for activities even as mundane as approval of staffs annual leave.Instead, the complexity seems to derive from a need for a rather large number of important sounding,high-level positions without attention to the job content and need for those positions. The same rationalealso seems to apply to the establishment of some of the authorities. Ideally, there would be an agreementon the mandate and functions of government, and the re-mapping of responsibilities into a consolidatednumber of ministries and agencies. These consolidated departments could then be set up (streamlined) toeffectively carry out their specific mandates. Such a holistic approach, however, is politically difficult.As a consequence, a strategic decision was taken to tackle the situation vertically during the first round,focusing on the structure and organization of particular departments rather than the government as awhole. The component does, however, provide for a study addressing the mandate and functions ofgovernment, and possible approaches to mapping these functions into a consolidated governmentstructure.

Project Component 4 - US$4.4 (4.0) millionBUILDING CAPACITY, CHANGE MANAGEMENT

The project supports two dimensions of capacity building: (i) skills and activities needed togenerate capacity for sustaining and implementing a long-term reform program; and (ii) skill developmentto manage and administer a modern civil service. Under the first dimensioni, the project will providesupport for managing. monitoring and evaluating the overall reform program. This also includes supportfor public information and internal communications programs. Under the second dimension, trainingprograms will be supported in several critical areas:

Mid and high level management training to start developing an effective management cadre. Thiswill be done by twinning Yemen's National Institute for Administrative Science (NIAS) with aninternationally recognized school for public administration. The management training programs that

will be developed will utilize a modular approach with limited class-room time and significantemphasis on on-the-job follow up after each module.

* Technical training program for users of new core systems (component 1).

* A program of training in project management for teams within ministries to develop a cadre of staff tobetter able to manage both the civil service reform program as well as government projects in general.

Project Component 5 - US$4.0 (2.7) millionPROGRAM MANAGEMENT AND ADMINISTRATION

The CSM Program is actually a complex reform program that comprises numerous "projects" thatare described above as components or sub-components. The objective of this component is to provide theresources needed to set-up and operate a fully functioning program management structure that is basedon: (a) a clear chain of command and reporting structures, (b) clearjob descriptions, (c) clear performanceevaluation criteria for individual managers and implementation staff, and (d) a well-defined, functioningprogram monitoring and evaluation system. On-going technical support for program management(procurement, auditing, project management) will also be provided. In addition to standard supervision ofthe disbursement of financial resources, this component supports annual performance audits whichincludes review of items such as the overall integrity of the program, the integrity of the processes,consistency of implementation methodology, and effectiveness of consultant services.

Purpose ActioIs tk prior tB if So ° M .t

1. Streamline governmenl

Reetlfine ie Io/c stUite, clar/i/b Compile description of current roles and On the basis of study. and taking into Clear definition of the role of the state inrees/polsihli/ies responsibilities of each ministry and main account re-engineering recommendations, Yemen.

agencies in the public administration outline new functions of ministries/Reduce the size atii im)i/ove organ ua/ioii (inicluding laws, organizational structure agencies.Of mninistries, ilhoriliews, agen'ies. eic and/or membership).

.tn'slenlatize LU1

Sn(/OIa/akli:e gonverilmeln/t Initiate study on organizational structure ofprocedures government (TOR agreed, consultant

selection initiated).

Agree on re-engineering framework andscope of consulting services required forrc-cnginccring.

Agree on 4 sectors, ministries, agencies, or Re-engineering process initiated in 4 Efficient and effective delivery of publicauthorities in which a re-engineering sectors, ministries, agencies, or authorities; services in 4 re-engineered ministries;process will be initiated; appoint re- progress satisfactory as defmned in re- robust program to expand re-engineeringcngineering teams in each; and retain engineering work plans. framework throughout government.consultant services for preliminary work ineach.

Streamlined interface between the public/Implement process simplification for at Processes simplified and made more private sector and the civil service.least 2 public processes (e.g., small transparent in original 2 -plus at least 3business licensing, drivers licenses, additional service areas. Identification ofpassports, request for utility connection) remaining areas to which the methodology

can be applied.

Purpose Actions taken prior to Board for Second Phase Measures End $tatePSMAC (Indicative) .6dicativeO

2. Enhance human resource management

.'ySWeiniltc millUii4CIIiet olpu,f,rsotow/ 100% of the civil servants with personnel Operational personnel managementr (ec or/s files that are complete with core documents database.

and in a known location.AMlovem'ent/ toii rds (i nicrit'I hased C i\ il

.erv,ice Complete at least 95% of the civil servants Issue permanent, personnel identificationwitb personiel files with core documents cards based on biometric identification.

.4 tition to tracil ds iiwe itlih ill hei c'i 'i/ and in a known location.service

Complete computerization of civil service Core personnel management databasecensus records to form the core personnel maintained and up-to-date.manlagement database.

Operational systems in place to continually Link personnel database to computerized Satisfactory use of computerized payroll.update the core personnel management payroll system.database.

Establish regional personnel managementiniormation centers, including the Agree on revised job and grade Revised job, grade and wage systems beingdefinition of responsibilities, identification classification systems, action plans for their successfully implemented according toof staff and initiation of training. implementation, and initial implementation agreed action plans.

according to action plans.Establish a ministerial committeeresponsible for developing a revised, Agree on revised target wage structure.fiscally sustainable, merit-based salarystructure by June 1999, and implemented afreeze on previously unspecified salaryincreases until the new structure isimplemented.

Develop a training plan for civil servants Civil servants receiving appropriateand initiate training in accordance with that training in line with agreed training plan.plan.

Identify changes required in civil service Satisfactory implementation of new legallaws and regulations to support a framework.professional, merit-based civil service.Necessary legal changes approved bycabinet and submitted to Parliament.

Purpose Actions ta rort _r Seond e Mer .j

3. Implement liborforce adjustment

ncriease procuicviiv oY civil Service and Agree on and begin to remove ghost Remove from the payroll, on a permanent No double dippers or ghost workers on the/peril adequote comp?enOsalimi levels workers and double dippers from the basis, all ghost workers and double dippers, payroll.

payrolls on basis of census results. based on unique biometric identification ofall staff.

Aided by census results, begin to enforce Retirement rules strictly enforced. Workers meeting or exceeding retirementretirement rules. criteria moved from the civil service to the

pension system.D)cvelop action plans to remove from thepayroll groups that are not employed inaccordance with the current civil servicelaw.

Establish the legal basis for a civil service Civil service fund operating satisfactorily Civil service fund operating satisfactorily,fund. including: (i) transfer to the fund of and sustained net reductions in the size of

surplus staff within restructured agencies civil service (over census results).Agree on TOR and select consultant for and transparently identified surplus orassistance in developing operating rules unqualified staff, and (iii) agreement onand regulations for civil service fund. buy-out packages.

Any new recruitment, including contractemployment, limited to highly skilled Continued progress. Recruitment of staff based onworkers, linked to identification of needs qualifications.based on re-engineering process.

Annex 3: Estimated Project Costs

Component 1 Improve Core Systems 2.55 12.35 1490HR management framework 0.12 0.67 0.79Personnel information management system 1.00 4.61 5.61Payroll system 0.01 0.08 0.88Accounting and financial management info system 1.42 6.99 8.42

Component 2 - Civil Service Fund 0.29 1.28 1.57Component 3 - Streamline and Rationalize 0.89 4.23 5.12

Technical support 0.09 0.87 0.97Defining mandate of gv't and building consensus 0.04 0.07 0.11Streamlining and rationalizing 0.20 1.49 1.70Innovation fund 0.56 1.79 2.34

Component 4 - Capacity Building 1.62 2.72 435Strengthen training institutions and provide training 1.24 2.16 3.41Build program management capacity 0.19 0.28 0.47Build change management capacity 0.19 0.28 0.47

Component 5 - Program Coordination, Mgt, Admin. 2.10 1.69 2.79PPF Refinancing 2.00 2.00

Total Baseline Cost 7.45 24.27 30.72Physical Contingencies 0.15 0.78 0.93Price Contingencies 0.31 0.01 0.33

Total Project Costs 7.93 25.07 33.00

ProjectCtb;Ctgr

Services 1.96 11.77 13.73Training 1.77 2.65 4.42Goods 1.34 7.61 8.96Operating Costs 2.38 0.24 2.61Total Contingencies 0.46 0.79 1.26Total Project Costs 7.93 25.07 33.00

Annex 4: Economic Analysis

Not applicable for this project.

Annex 5: Financial Summary

Not applicable for this project.

Annex 6: Procurement and Disbursement Arrangements

Procurement

The Credit would finance the procurement of:

(a) goods, primarily consisting of computer hardware and software estimated to cost about US$9.0 million; and

(b) services, consisting of: (i) technical assistance, (ii) training, (iii) provision of studies and reports, etc.estimated to cost about US$17.0 million.

Procurement of all goods and services will be carried out in accordance with 'Procurement underIBRD Loans and IDA Credits" (January 1995, revised in January and August 1996, and September 1997 andJanuary 1999). The Bank's Standard Bidding Documents (SBD) would be used for all procurement underInternational Competitive Bidding (ICB) and, with modifications acceptable to IDA and in Arabic language, forNational Competitive Bidding (NCB). Consultants will be hired following the World Bank's Guidelines for the"Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised in September1997 and January 1999). The Bank's "Standard Requestfor Proposal: Selection of Consultants (April 1998)'will be used for all consulting services selected through the quality and cost based selection method (QCBS).

A General Procurement Notice (GPN) will be prepared by the Borrower for the project and will bepublished by IDA in the Development Business (UNDB) immediately after negotiations; the notice will containinformnation concerning the Borrower, amount and purpose of the Credit, scope of procurement under ICB, andthe name and address of the Borrower's agency responsible for procurement. The GPN will be updatedannually for all outstanding procurement. Invitations to Bid will be advertised in one national newspaper and inthe UNDB for all procurements subject to ICB, including the Accounting and Financial ManagementInformation System (AFMIS), as well as for all consulting contract with an estimated value above US$200,000.

Procurement methods (Table A)

Goods: The AFMIS will be procured under ICB procedures, using the Bank's SBD for the Supply andInformation of IT Systems in two stages. Furthermnore, all other goods procurement with an estimated contractvalue above US$200,000 will be procured under ICB procedures. For contracts valued at less thanUS$200,000, goods will be procured through NCB procedures. National Shopping (NS) procedures, in amanner acceptable to IDA, will applied for off-the-shelf goods costing less than US$50,000 up to an aggregateamount of US$200,000. Such procurement would be on the basis of a comparison of quotations from at leastthree eligible national suppliers. If these goods are not available in the local market, lnternational Shopping(IS) procedures would be followed.

Services: Services will primarily include provision of Consulting Services for preparing necessarystudies, reports. bidding documents for AFMIS. other technical assistance. training, and for arrangingworkshops and study tours, as appropriate, for various components. Selection and appointment of consultantsand training to support the program execution will be carried out in accordance with the Consultant Guidelinesreferred to above. Quality and Cost Based (QCBS) selection will be used for all assignments with a contractvalue of above US$100,000. In exceptional cases and with IDA's prior concurrence, single-source selection(SS) may be used for specialized assignments. Contracts estimated at less than USS100.000 will be based on1consultants' qualifications.

Prior review thresholds (Table B)

All ICB procurement of goods and all other procurement with an estimated contract value of aboveUS$200,000 will be subject to IDA's prior review. Likewise, contracts for the provision of services byconsulting firms estimated to cost more than US$100,000 equivalent and contracts for the provision of servicesby individual consultants costing more than US$50,000 equivalent will be subject to IDA's prior review inaccord with Appendix I of the Guidelines. For service contracts with firms valued at less than US$100,000,prior review of the terns of reference (TOR) by IDA will be required. Contracts for all Project ManagementUnit (PMU) staff will be subject to prior review in accordance with the agreements reached during the CountryPortfolio Performance Review-1998. All other contracts will be subject to selective post review. Theprocurement arrangements are summarized in Table B. Training within the country and travel abroad, includingworkshops and study tours, will be carried out on the basis of IDA approved programs which would identify thenature of training, personnel to be trained, the duration of the training, institutions where training would beconducted, cost estimates, and contents of course. Necessary plans will be submitted to IDA on a quarterlybasis for review and approval.

In total, the project consists of 19 contracts for which prior review will be required (55.8 percent ofproject costs). Additionally, prior review is required for appointment of all project staff and internationaladvisors (26.5 percent to project costs). Further, for training activities (not under intemational competitivebidding), prior review of a quarterly training plan is required (7.2 percent of project costs). Finally, prior reviewof terms of reference will be required in about 15 cases (5.2 percent of project costs).

Procurement Responsibilities

The PMU will have primary responsibility for procurement under the project. The PMU will beassisted by the International Advisor in all aspects of procurement and implementation. Additional technicalassistance will be obtained by the TS for the procurement of the AFMIS estimated to cost approximatelyUS$9.0 million. Part of the TA services provided by the advisors will involve on-the-job training inprocurement of the TS staff. Details of procurement responsibilities are covered in a briefing note"Procurement Capacity of the Technical Secretariat for the CSM Project" which can be found in the Proiectfiles.

Procurement Planning (Table C)

The initial procurement plan as included in Table C will be updated periodically by the PMU forreview during IDA supervision mission.

Disbursement and Financial Management

Allocation of credit proceeds

The Project will be implemented over a four and half year period from the estimated date ofcredit effectiveness. wnith a target completioni date of June 30. 2005. The Closing Date of the IDA creditis Decem ber 31. 2005 six montlhs after the project completion date. The proposed credit would bedisbursed against the project componenits as shown in Table D.

Use of statements of expenses (SOEs)

Disbursemenits out of the Special Accounat for contracts below the prior review threslhold Wouldbe made oni the basis of SOEs. Documentatioll to support expenditures finaniced under SOEs xNould bemaintained by the Borrower and made available for review by the auditors and IDA supervision missions.

Special accounts

To facilitate disbursements against eligible expenditures, two Special Accounts (SA) would beestablished by the B0rrower in the Central Bank of Yemen on terms and conditions satisfactory to theAssociation. One Special Account is for the implementation of the AFMIS sub-component, the other isfor the rest of the Project. The SAs will be maintained by the TS as a separate identifiable account to beused exclusively for Project expenditures. IDA would, upon request, make an authorized allocation ofUS$500,000 for each special account. Replenishment applications would be submitted on a monthlybasis. The replenishment applications would be supported by the necessary documentation; i.e., a bankstatement of the SA and a reconciliation bank statement of the SA against IDA records. The SA andStatements of Expenditures would be audited annually by independent auditors acceptable to IDA, andtheir report would be submitted to IDA within six months after the end of each fiscal year. In managingthe SA, the TS will maintain separate accounting records, by Project component, to facilitatedisbursement, monitoring and reconciliation of the use of funds. The Government will also open two localcurrency accounts (one for the AFMIS sub-component, the other for the remainder of the Project), fundedby the Government, to be used for the Government's counterpart contribution including resources formerit allowances.

Financial Management

Assessment of Financial Management System. The main implementing agency of the CivilService Modernization Project is the Technical Secretariat (TS), which is a non-revenue earning entity. Itwas created in 1997 by the Cabinet Resolution No. 74 of 1997, to carry out the day-to-day management,implementation and coordination of the Project activities under the authoritv of the Supreme Council forAdministration Reform, chaired by the Prime Minister.

The TS is responsible for procurement and financial management of all the Project's componentsand sub-components, as agreed by both MOCSAR and MOF. It is headed by a Project Coordinator whoreports directly to the MOCSAR and is responsible for the implementation of the entire Project except theAFMIS sub-component. The AFMIS sub-component is the responsibility of the AFMIS Coordinator,who is a member of the TS and reports to the MOF. The Financial Management Unit-TS is headed by aFinance Manager-TS; the Financial Management Unit-AFMIS is headed by a Finance Manager-AFMIS.Both Financial managers will share the support of an assistant accountant, a purchasing officer and acashier. The Financial Manager-AFMIS reports to the AFMIS coordinator for the AFMIS sub-component and the Financial Manager-TS reports to TS Project Coordinator for all other sub-components.

The TS has an established accounting system and maintains Project accounts in accordance withsound and internationally recognized accounting practices, including acceptable internal controlaccounting system. The TS is also in the process of upgrading its financial management system.

The TS will ensure that all Project-related activities are reflected in the Project accounts andfinancial statements and related documentation of operation maintained in the computerized system. withproper controls over data. The TS is currently working towards computerizationi of the accountillgsystem with a good information technology support which will have the facility to generate variousfinancial reports, including PMR. in line with the IDA LACI requirements. Currelntl, finalncialinformationi from the manual accountin'g system is used to prepare managemenit reports on a limited basis.

A Financial Accounting Management Manual ("Manual") will be prepared accordilg to thenewly designed computerized accounting system, in order to document the various accounting systemsand procedures. The Manual will be prepared in Arabic and English to document the operation of theProject Financial and Accounting Management System. This Manual would be formally adopted by the

Project as the document that would govern its financial accounting management system. The Manual willcover the flow of funds, financial and accounting policies, accounting system and internal controlmechanisms, Chart of Accounts, financial reporting (including formats of Project financial managementreports), auditing arrangements, budgeting, and organization and staffing for financial managementfunctions. The Manual would be periodically updated and improved based on implementationexperience. A firm of Certified Public Accountant will audit the system of transaction as an addedineal control mechanism.

Flow of Funds. The Govermment of Yemen (GOY) would pass on the IDA funds to the Ministryof Finance (MOF), for purposes of the AFMIS sub-component (the MOF component of the Project) andto the Ministry of Civil Service and Administrative Refonn (MOSCAR), for purposes of the remainder ofthe Project (the MOSCAR components of the Project). GOY will bear the foreign exchange risk. GOYwould provide counterpart funds for the Project through budgetary allocations to both MOSCAR andMOF under two identifiable items: one item for the MOF component of the Project and the other item forthe MOSCAR components of the Project. Budgetary allocations would be based on the annual budget forProject activities prepared by the Project Coordinator within TS (for the MOSCAR components of theProject) and the AFMIS Coordinator within TS (for the MOF component for the Project). The TS woulddisburse Project funds to finance eligible expenditures under the Project.

Financial and Accounting Policies. Financial and accounting policies for the Project will bedeveloped and included in the Manual to ensure transparency and uniformity, provide clarity regardingfinancial aspects to the various interested parties, and to enforce accountability. These policies, inter-alia,cover the following aspects: (i) expenditures which would be treated as Project expenditures includingtheir classification; (ii) expenditures which would be eligible for reimbursement under the IDA Credit;(iii) Project accounting policies; and (iv) provision and accounting of funds provided as advances to TS.These policies would include aspects such as efficient management and deployment of funds, internalcontrol policies, etc.

Project Accounting System. The TS would be responsible for its own Project financialmanagement, including budgeting and accounting. It would maintain separate books of accounts for eachof the MOSCAR components of the Project and the MOF component of the Project. It would alsoprepare and disseminate financial statements and financial management reports, and ensure timely auditof the financial statements. The TS currently maintains books of accounts on the basis of double-entrybookkeeping and Project accounts. Project records and accounts reflect the Project receipts andexpenditures and clearly identify the goods and services procured and works performed. Funds receivedfrom different resources are identified separately and reflected in the Project accounts and financialstatements. The trial balance shows all Project-related receipts, expenditures, and other payments, as wellas the TS operational costs. Project financial statements and financial reports are fully based on theProject books of accounts and substanitially generated from the financial accountino system. The TS will2zenerate and maintaill separate vouchers and supporting documilentation for expenditures relating to eachof the MOSCAR components and the MOF component.

Although disbursements are initially to be made usinlg traditional disbursement procedures. TSWill submit quarterly Project Manaaemenit Reports to IDA. In this respect, the TS has already startedinstallationi of accountinag software with PMR-based disbursemenit capabilities and ilcorporated N"ithinternal control and checks. Physical information on key performance indicators that can be readily linkiedto finanicial costs would be maintainied as part of the Project finanicial maniagemenit system. Initially thiswould be maintained for some high cost items, whichl account for a significant portion of Project cost, andfor items for which data on physical activities can be easily captured. These items will be identified andwill be indicated in the Manual. This list would be gradually expanded during imiplemenitation. Thesefinanicial accountinig activities will be replicated for purposes of the MOF componlenlt.

Internal Controls. Current policies and procedures have been set in the TS to providereasonable assurance of (a) a proper authorization of transactions; (b) access to and use of assets andrecords; and (c) separation of custody of cash from authorization and record keeping, and separation ofauthorization from record keeping.

Specifically, the Project financial, accounting management system includes the following internalcontrol mechanisms: (i) operation of a budgeting system, and regular monitoring of actual financialperformance with budgets and targets; (ii) adoption and operation of simple, clear and transparentfinancial and accounting policies which would govern financial management of and accounting for theProject (as described earlier); (iii) at the transaction level, establishment and operation of policies,procedures and systems for ensuring standard internal controls such as checking of expenditures,appropriate documentation, levels of authorization, bifurcation of duties, periodic reconciliation, physicalverification, etc; and (iv) establishment and operation of a comprehensive audit mechanism, to includeconcurrent audit (as described below). These policies and procedures described in this paragraph areprovided for in the existing Manual and would be reviewed and updated periodically;

Financial Management Reports. Quarterly financial management reports for the Project wouldbe generated from the TS computerized financial management system. These reports would bemanagement-oriented (ie., summaries, rather than transactional details) and would be used for Projectmanagement by TS. The reports would include: (i) a comparison of budgeted and actual expenditure andanalysis of major variances, including sources and application of funds (by components and expenditurecategories), and on physical parameters and unit rates for selected key items; (ii) expenditures bydisbursement categories; (iii) forecasts for the next two quarters. Formats of the reports will be set out inthe Manual.

Audited Project Financial Statements (PFS) would be submitted to IDA on an annual basis. PFSwould include: (i) a statement on the sources and utilization of funds or balance sheet, indicating fundsreceived from various sources, Project expenditures, and assets and liabilities of the Project. This wouldalso include appropriate schedules classifying Project expenditures by components, and expenditurecategories; (ii) a Special Account reconciliation statement; and (iii) a statement of withdrawals from theIDA Credit made on the basis of Statements of Expenditure (SOEs). Audited PFS would be submitted tothe IDA not later than 6 months after the end of the fiscal year (ie., not later than June 30 for the fiscalyear ended on December 31 of each year).

Auditing Arrangements. A firm of certified public accountants would be retained to audit theaccounts and financial statements of the Project. The annual audited Project financial statements wouldbe submitted to IDA within 6 months of the close of the GOY fiscal year. The terms of reference (TOR)and qualifications of the firm of certified public accountants will be included in the Manual and reviewedby IDA. The cost of the audit would be eligible for financillg under the IDA Credit. IDA's Guidelinles forselection of consultants would apply to the engagement of the firm of certified public accounitants.

The audit referred to above would be comprehensive and would cover all aspects of the Project(i.e., all sources and uses of funlds). The audit would be carried out in accordance with internationalstandards of auditing. The terms of reference of the auditor include both the obligation to audit financialtransactions, and the obligation to carry out an assessment of the operation of the financial managementsystem per se, including a review of internial control mechanisms. The audit would also cover aw, cost-based consultancy or other contracts for whichl no supporting documentation is provided to TS. Thiswould strengthen internal controls, and would also facilitate early completion of the annual audit. Theauditing firm would be appointed before the start of the Project. The auditing firn would initially beappointed for one year. Depending on satisfactory performance, the contract would be extended for a

maximum period of two (2) additional years. To ensure rotation of auditors, a different firm may beappointed subsequently.

Key Staffing. Currently, the TS has a Project Coordinator with overall responsibilities forplanning, implementation and reporting on the MOSCAR components of the Project, a financial manager,an accountant, a purchasing officer, a cashier, and an administration assistant. The TS also employ twoexperts in information technology. All staff are recruited according to IDA guidelines, employed on afull-time basis and on renewable annual contracts. An AFMIS Coordinator, responsible for overallplanning, implementation and reporting of the MOF component of the Project will be recruited on acompetitive basis. Reporting to the AFMIS coordinator is the AFMIS financial manager. The AFMISfinancial manager would be recruited on a competitive basis without delay. Salaries of the TS staff arepaid under the credit, except the cashier whose salary is borne by the Government.

Areas for Improvement. Overall, the manual accounting system is working but theimplementation of the computerized accounting system will provide for an efficient, more accurateaccounting of Project transactions. Areas where for improvement is warranted include: (i) training for theTS professional staff in financial planning and management, operation of system-based internal controls,and financial policies; (ii) training of the TS financial staff in basic computer operations (spreadsheets,word processors. databases, operation of the computerized financial management system, etc.); (iii)ensuring better linkages between physical and financial activities, including expanding the items forwhich physical data is captured in the financial management system; (iv) developing better linkagesbetween physical and financial functions in the TS; and (v) development and implementation of internalservice standards for all finance and accounting functions. These, as well as other improvements, wouldbe tackled on a continual basis during Project implementation.

Readiness for Implementation and Next Steps. The design of the TS financial, accountingmanagement system is expected to be completed by March, 2000. A financial accounting managementmanual of procedures, documenting the financial accounting management system, will be prepared and befinalized shortly after July, 2000. Draft terms of reference for the Project's financial audit have beenprepared. The process of recruitment of a firm of certified public accountants will start in June, 2000.The auditors are expected to be appointed by July 31, 2000. The time bound financial management actionplan presents the key actions required prior to project effectiveness.

Risks. The main risk related to the financial management aspects of the Project are possibledelays in preparation of Project management reports and that the quality of the reports may be of variableor unsatisfactory quality, especially given that the TS staff have not previously prepared Project financialstatements based on PMR-disbursement system. Timely preparation and use of the Project managementreports, and satisfactory quality of these reports, are essential to facilitate effective Project management.The risk-mitieation factors are the substantial up front actions wvhich have been taken/will be takeninclUding: (i) designi of a comprehensive finanicial maniagemiienit system (w,hiclh is noxN being augmentedthrough the engagemenet of consultanit services to prepare the financial. accounting management manual);(ii) computerization of the financial management system: (iii) recruitment of key financial andtechnology staff: and (iv) trainingo of staff on1 the preparation of Project management reports (PMRs)through Project managemllent trial reportiln USillg the prerious quarters Project activities and financialtransactionis. This training \ill begin in August 2000. Pendingo satisfactorN generation of PMRs.disbursements from the IDA Credit will be not be made on the basis of PMRs. but will rather be made onthe traditional disbursemenit procedures. Disbursements will be converted to the PMR-based method.after the financial managnement system is satisfactorily operated for at least three quarters.

TS FINANICAL MANAGEMENT ACTION PLAN

Action Responsible Entity Completion Date

Upgrade computerized accounting TS and Consultant March 31, 2000system.

Revise and update Financial Accounting TS and Consultant July 31, 2000Management Manual of Procedures andPolicies (Chart of Accounts, JobDescriptions, etc.)

Recruit additional staff (AFMIS MOF July 31, 2000Coordinator and AFMIS FinancialManager)

Test PMRs using data of 2000 Quarter I TS and IDA Quarterly startingDecember, 2000

Appoint private auditors (prior to and as TS July 31, 2000a condition of effectiveness)

Open two Special Accounts TS July 31, 2000

Complete the MOF component financial TS June 30,2000accounting system set-up

Annex 6, Table A: Project Costs by Procurement Arrangements'(in US$ million equivalent)

1. Services including training 18.15 18.15workshops and study tours (17.4) (17.41)

2. Goods and Equipment 8.80 0.85 0.20 9.85(8.15) (0.57) (0.18) (8.87)

3. Operating Costs 1.97 1.00 2.97(1.63) (0.00) (1.63)

PPF refinancing 2.00 2.00(2.00) (2.00)

Total 8.80 0.85 22.32 1.00 33.00(8.15) (0.57) (21.22) (0.00) (30.00)

Note: ICB = International Competitive BiddingNCB = National Competitive BiddingOther = As described in textN.B.F. = Not Bank-financed are merit allowance.Figures in parenthesis are the amounts to be financed by the Credit, balance amount is to be financed by theGovernment

For details on presentation of'Procurement Methods refer to ODI 1.02. "Procurement ArranEements for lnrestnient Operations."Details on Consultant Serx ices can be shown more easily in the Table Al formiat ladditional to T'able A. where applicable).

Annex 6, Table Al: Consultant and Training ServicesSelection Arrangements

(in US$ million equivalent)

Coiistdtaf.trcz*es Selection Meth.Total o

QCBS QBS SFB LCS CQ Other N.B.F.

A. Firms 6.9 2.0 1.5 10.4

B. Individuals 6.7 1.0 7.7

Total 6.9 8.7 2.0 18.2

NOTE:

QCBS = Quality- and Cost-Based SelectionQBS = Quality Based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines), CommercialPractices, etc.N.B.F. = Not Bank-financed.

Annex 6, Table B:Thresholds for Procurement Methods and Prior Review

US $ thousands US $ millions1. Goods

200 or above ICB All(8.8)

50- 200 NCB All(0.9)

50 or less Shopping None

2. Consultant Servicesincluding training(a) Firms 100 or above QCBS All

(3.6)100 or less CQ TORs

(b) Individuals 100 or more CQ All(International (6.7)advisors)

50 - 100 Individual All(0.6)

50 or less Individual None(0.3)

(c) Training 200 or above QCBS All(3.3)

200 or less Q training plan(1.5)

Total value of contracts subject to prior review: (23.9)

OVERALL PROCUREMENT RISK ASSESSMENT:

HighAverageLow

Frequency of procurement supervision missions proposed: One every 6 monith (includes special procurementsupervision for post-review.'audits )

Annex 6, Table C: Initial Procurement Plan and Estimated Schedule

Sc*hedulet(Caklendar Year')~

st. Aount Dvittion Bid Cobtract Delivery

Package UISV:; to Bid, Sige Cmleted

HR Management Framework Development

TA For Review existing and QCBS 232,000 Q4,2000 Q4,2000 Q4,2000 Q2,2001develop HR ( strategy, policiesand practices)TA For Design and develop new CQ 48,000 Ql,2001 Ql,2001 Q2,2001 Q4,2001job classification systemTA TO Implement new job QCBS 106,000 Ql ,2002 Q2,2002 Q2,2002 Q2,2004classification system &HRManagement TrainingInternational TA to provide HR QCBS 399,000 Ql,2001 Q2,2001 Q2,2001 Q3,2004training capacity I I _I I I

Personnel Information Management System (I)

TA For Develop and implement QCBS 221,000 Q3,2000 Q3,2000 Q3,2000 I Q2,2002Employee Database and Updatesystem I

Biometrics System for Employees (1)TA For Finalize Technical QCBS 125,000 Q3,2000 Q3,2000 Q3,2000 Q4,2000Specifications and ProcedureBiometrics SystemBiometrics System Provisioning & ICB 5,065,000 Q3,2000 Q1,2001 Q2,2001 Q1,2002Support ( Hard & Software &SupportNational TA For User Support CQ 90,000 Ql,2001 Ql,2001 Q2,2001 Q3,2002

National TA For Operations CQ 87,000 Q 1,2001 Q1,2001 Q2,2001 Q3,2001Support I _ I I I I

Payroll System (I)

TA For Streamline and CQ 88,000| Ql,2003 Ql,2003 Q2,2003 Q4,2003Standardize Payroll Preparation I

AFMIS SYSTEM

National TA For Review CQ 62,000 Q4,2000 Q4,2000 Q1,2001 Q4,2002/Develop/ Implement /DesignAFMIS SystemilWtemational TA For Review QCBS 248,000 Q4,2000 Q4,2000 Q].2001 Q4.2002/Develop/ Implement /DesignAFMIS SystemOffice Equipment For AFMIIS ICB 3.736,000 Ql.2001 Q3.2001 Q4,2001 Q3.2002Provisioning -MOF pilot and threelarge headquaner budget unitsTA For Develop AFMIS 11 CQ 62,000 Q4,2000 Q4,2000 Q1.2001 Q3.2004lmptementation PlanTA For Build Financial CQ 70,000 Q4,2000 Q4,2000 Ql,2001 Q3.2004Management Capacity (1)Provide Financial Management QCBS 400,000 Q4.2000 Q2,2001 Q2,2001 Q3.2004Training _

Schedule (Calendar Year)

Est. Amountl Invitation Bid Contract DeliveryPackage Procedure J USD to Bid Opening Signed Completed

Streamline Rationalize and Reengineer Govt.

Intemational TA (175) (Technical CQ 875,0001 Q4,2000 |Q2,2001 I Q2,2001 Q4,2004Support) I I)

MANDATE OF GOVERNMENT AND CONSENSUS

TA For Define new structure, rolesi QCBS 113,0001 Q1,2001 j Q 1,2001 Q2,2001 I Q4,2002and major processes I I

STREAMLINE AND RATIONALIZE

TA For High level Reengineering QCBS 1,700,000i Q2,2001 |Q4,2001 Q4,2001 Q4,2003of Core Ministries

INNOVATION FUND

TA To Set up the IF I QCBS | 186,000| Q4,2000 |Q4,2000 |QI,20011 Q3,2001

Operate and Administer IF (I) Funds (all contracts <$300,000)Local TA Unit CQ 300,000 Q1,2001 |Q2,2001 Q2,2001 Q4,2004

|International TA Unit CQ/QCBS 1,300,000 Ql,2001 I Q3,2001 I Q4,2001 Q4,2004I. I ___ .1.~~~ ~~ ~ I _ _ I _ _

CIVIL SERVICE FUND

International TA (175) CQ 875,000 Q2,2000 Q2,2000 Q2,2000 Q4,2004

ITA For Design & Develop &Set QCBS 296,000 Q2,2000 Q2,2000 Q2,2000 Q4,2004up & Evaluate

Workforce Adjustment Program Support (I)National TA For Design/Develop CQ 55,000 Q2,2001 Q2,2001 Q3,2001 Q2,2003criteria for wvorkforce reductionInternational TA For QCBS 147,000 Q2,2001 Q2,2001 Q3,2001 Q2,2003Design/Develop criteria forworkforce reduction

Strengthen Training CapacityStrengthen Training Institutions (1)

National TA For Update overall CQ 18,000 Q1,2001 Ql,2001 Q2,2001 Q4,2002Civil Service training needsInternational TA For Update overall QCBS 164.000 Q1.2001 QI.2001 Q2.2001 Q4.2002Civil Service training needsAugment InStitUtions capacity to QCBS 3I097.000 Q4.2000 Q2.2001 Q2.2001I Q4,2004|meet CS training needs ( Training )TA For Design'Develop programs QCBS 126.000| Q4,2000 Q4.2000 QI12001 Q4,2004,for specific areas I _ _ _ _ _ _

Schedule (Calendar Year)Est. Amount Invitation Bid | Contract Delivery

Package Procedure USD to Bid Opening Signed Completed

Build Project Management Capacity (I)

TA For Prepare and plan for CQ 70,000 QI,2001 Ql,2001 Q2,2001 Q4,2004Project Management TrainingTraining QCBS 400,000 Q1,2001 Ql,2001 Q2,2001 Q4,2004

Build Change Management Capacity (I)

TA For Prepare and Plan for CQ 70,000 Q4,2000 Q4,2000 Q4,2000 | Q2,2003Change Management TrainingTraining QCBS 400,000 Ql,2001 Q2,2001 Q2,2001 | Q2,2004

PROGRAM MANAGEMENT

TA For Phase 11 Project Planning CQ 82,000 Q4,2000 Q4,2000 QI,2001 Q4,2004

Computer Equipment NS 110,000 Q4,2000 Q4,2000 Q 1,2001 Q2,2001

Q4,2000 Q4,2000 Q4,2000TA For External Semi-annual CQ 200,000 Q4,2000 Q4,2000 Q 1,2001 Q4,2004Technical and procedural auditsTA For Design/Develop QCBS 179,000 Q4,2000 Q4,2000 Q4,2000P:anning/Deployment/MonitoringSystem

tStaff in -place or as needed CPPR

__ _______ 21,754,0001

QCBS = Quality and cost based SelectionQC = Quaiifications basedICB = International Competitive biddingNS = National ShoppingCPPR = Country Portfolio Performance Review - 1999

Annex 6, Table D: Allocation of Loan Proceeds

g ~~~~~~~~~~~~~~~~~~~I~uiI P.cttg

Goods 4.02 4.85 100% of foreign expenditures100% of localexpenditures (ex-factory cost);and 80% of local expenditures

Services (including training) 4.05 13.35 100% of foreign expendituresand 80% of local expenditures

Operating costs 0.17 1.45 80%

TOTAL 8.24 19.65

PPF -refinancing 2.00

Total 30.00

Includes price contingencies

Annex 7: Project Processing Budget and Schedule

Time taken to prepare the project (months) 13 months 30 monthsFirst Bank mission (identification) 09/14/1997 09/14/1997Appraisal mission departure 07/1511998 01/20/2000Negotiations 10/15/1998 03/06/2000Planned Date of Effectiveness 03/01/1998 09/31/2000

Prepared by: Ministry of Civil Service and Administrative Reform, Ministry of Finance, concernedline-ministries

Preparation assistance: Project Preparation Facility

Bank staff who worked on the project included:

Linda Van Gelder Task Team LeaderGiulio de Tommaso Public Sector ManagementLucie Tran Project CostingHarjit Singh Consultant, Public Sector Management, Project

Planning and CostingJaccques Dusseault Consultant, Public Sector ManagementMartin Rama Labor Force RestructuringGloria La Cava Social and Institutional AssessmentJeannie Yamine Public Information StrategyJosephine Masanque LACI SpecialistsAfif Al-SaqqafSomin Mukherji Senior Financial Analyst, PAS at the Field Office

Annex 8: Documents in the Project File*

A. Project Implementation Plan

Project implementation manualIncludes detailed costs and financing plan; implementation arrangements; implementation plan; key indicators formonitoring progress in the physical implementation and reaching project objectives.

B. Bank Staff Assessments

Procurement and Finanical Management Capacity of the Technical Secretariatfor the CSMproject.

The Civil Service Fund and the Modernization of the Public Sector in YemenDescribes the extent of overstaffing, the main principles for the CSF, and the operating steps for implementing thelabor force adjustment program.

Developing a Public Information Strategyfor Reform Management under Yemen's CSMProjectDescribes the current information/media environment and suggestions for enhancing the effectiveness of publicoutreach.

Social and Institutional AssessmentDescribes the needs of the poor and their expectations of government, characteristics of the civil service, and potentialof small and micro-business as vehicles for job creation and easing transition of civil servants into the private sector.

Public Sector Management: Comprehensive Development Review Phase ISynthesizes information on performance problems, financial management system, civil service staffing andadministration, and decentralization initiatives.

C. Other

Conference Proceedings and Papers (Arabic)A volume with about 25 papers presented at a national conference on administrative reform

Strategic Framework: Civil Service Modemnization (English version)Document developed on the basis of National Workshop on administrative reform in which around 70 papers werepresented).

Employment Staffing and Retirement Plan (Arabic - Preliminary Draft)Provides an initial cut at an employment, retirement and wage plan through the year 2008. Further work is needed.however. on the sustainability aspect.

Reports lo Cabinet oni Civil Service Reform Progra-77 (Arabic)

Reports to Oversight Committee on Civil Service Reform Program (Arabic}

Censls Resuilts and Variozus Anialy tical Reports (Arabic)

Laws and Decrees

*Includin- electronic files.

Annex 9: Statement of Loans and Credits

Yemen, Republic ofStatus of Bank Group Operations (Operations Portfolio)

As of February 29, 2000Closed Projects 89

DifferenceLast PSR Between Expected

and ActualBoard Supervision Rating Original Amt US$ Mln Disbursements aDateFiscalYear Active Projects DO bl IP b/ IDA Cancel. Undisb. Ori. Frm

Rev'd

1991 P005806 Multi-Mode Transport S S 35.80 0.00 5.25 -3.07 2.331992 P005836 Land and Water Conservation S S 32.80 5.55 2.00 6.01 1.091992 P005810 National Agriculture Sector Mgt. S S 14.40 6.00 1.55 6.60 1.011993 P005904 Basic Education S S 19.70 0.00 4.66 4.35 1.001993 P005910 Family Health S S 26.60 0.00 15.07 15.48 11.471994 P005911 Education Sector S S 33.00 0.00 20.99 16.83 2.571996 P043109 Public Works S S 25.00 0.00 1.18 0.36 0.001996 P041267 Transport Rehabilitation S S 37.00 0.00 21.43 22.62 6.761996 P005912 Vocational Training S U 24.30 0.00 16.53 13.52 0.001997 P048522 Flood Emergency S S 30.00 0.00 8.09 7.05 0.001997 P043367 Taiz W.S. Supply Pilot S U 10.20 0.00 4.86 5.45 4.071997 P041199 Social Fund Development HS HS 30.00 0.00 6.60 -11.26 0.001998 P005902 S.Governorates Ag. Privatization S U 24.70 0.00 22.01 9.78 0.001998 P039171 Seeds & Agricultural Services S S 12.50 0.00 8.85 3.07 0.001999 P057915 Legal & Judicial Development S S 2.50 0.00 2.42 0.17 0.001999 P060132 Public Works II S S 50.00 0.00 43.12 7.87 0.001999 P050530 Sana'a Emergency Power S S 54.00 0.00 37.99 9.37 0.001999 P005907 Sana'a WS/Sanitation S S 25.00 0.00 20.33 1.14 0.002000 P049735 Privatization Support S S 10.90 0.00 10.89 0.00 0.00

a. Intended disbursements to date minus actual disbursements to date as projected at appraisalb. DO - Development Objective, IP - Implementation Progress

Statement of IFC'sHeld and Disbursed Portfolio

As of 12/31/99(In US Dollars Millions)

Held Disbursed

FY Company Loan Equity Quasi Partic Loan Equity QuasiApproval

1999 ACSM 12.0 0.0 0.0 0.0 0.0 0.0 0.01998 Radfan 3.8 0.0 0.0 0.0 3.8 0.0 0.0

Total Portfolio: 15.8 0.0 0.0 0.0 3.8 0.0 0.0

Approvals Pending CommitmentLoan Equity Quasi Partic

None

Annex 10: Country at a Glance9/22199

M. EastPOVERTY and SOCIAL & North Low-

Yemen Africa income Development diamond1998Population, mid-year (millions) 16.5 285 3,515 Ulfe expexncyGNP per capita (Atlas method, US$) 300 2,050 520GNP (Atlas method, USS billions) 4.9 586 1,844 --

Average annual growth, 1992-98

Pqulation (X) 2.9 2.2 1.7 ALabor force (%) 3.4 3.0 1.9 GNP Gross

~~~~~~~~~~~~~~ ~~~~~~~~~~~~~per primaryMostrecentsamte(latest yearavailable,1992-98) capita enrollment

Poverty (% of population below national poverty line) 19Urban populabon (% oftotalpopulation) 36 58 31life expectancy at birth (years) 54 67 83Infant mortality (per 1,000 live births) 96 49 69Child malnutrition (% of children under 5) 29 14 Access to safe wabrAccess to safe water (% of population) 39 81 74Illiteracy (% of population age 15+) 58 38 32Gross primary enrollment (% of school-age population) 70 96 108 Yemen Rep.

Male 100 103 113 ----- Low-income groupFemale 40 89 103

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998Economic ratlos

GDP (USS billions) 5.7 5.4Gross domestic investmenUGDP 21.2 21.5Exports of goods and serviceslGDP , 44.0 34.5 TradeGross domestic savingslGDP 12.8 2.4Gross natonal savings/GDP 23.6 17.5

Current account balance/GDP 2.4 -4 0 DInterest payments/GDP 0.5 0o9 Domestc _- - InTotal debtVGDP 67.3Total debt servicelexports 2.6Present value of debttGDP 52 52.5Present value of debt/exports 80.8

Indebtedness1977-87 1988-98 1997 1998 1999-03

(average annual growth)GDP ,, 3.8 5.4 3.8 5.1 -Yemen, Rep.GNP per capita -1.0 -0.5 4.6 2.3 - - Low-income groupExports of goods and services 6.9 7.1 -9.2 3.8

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and investment {Y)

(%6 of GDP) 30Agriculture 16.2 16.2Industry 44.9 44.9 20

Manufacturing 10.5 10 5 10Services 38 9 38.9

Private consumption 685 757 -10 93 94 e 96 97 98General government consumption 18 7 219 GDI 0 GDPImports of goods and services 52 4 53 6

1977-87 1988.98 1997 1998 Growth rates of exports and imports (%)(average annual growth)Agriculture 4 3 2 2 07 60Industry 6 4 34 38 40

Manufacturing 1 6 34 3 8Services 1 7 9 6 61 20

Private consumption 1 9 -3 0 60 00General government consumption 3 0 49 1 12 1 93 4 93 97Gross domestic investment 8.8 6 8 -27 .20

Imports of goods and services 3.0 6 1 -0 7 - Expors 0 ImportsGross national product 2 6 2 0 7 3

Note 1998 data are preliminary estimates

- The diamonds show four key indicators in the country (in bold) compared with its income-group average If data are missing the diamond wiltbe mcomplete

Yemen, Rep.

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998 lnatiou (#)

Domestic prices(% change) so -Consumer prices .. .. 6.3 8.5 50 1Implicit GDP deflator .. .. 7.0 -4.6 40 -

Government finance 20(% of GDP, includes cuwrent grants) 0 _____

Current revenue .. .. 37.7 29.8 -20- 53 99 Ss 9 97 SsCurrent budget balance .. .. 6.0 1.4 G GDP defator -o-CPIOverall surplus/deficit .. .. -1.8 -5.0

TRADE

(US$ millions) 1977 1987 1997 1998 Eportanlmpa4t .ves (USS miolns)Total exports (fob) .. .. 2,262 1,632 3 M -

Crude oil (government share) .. 1,004 599Crude oil (companies' share) .. 935 743 2 -_Manufactures *- 199 142

Total imports (cf) . 2,601 2,553Food 916 881 l o -nILFuel and energy .. .. 185 133Capital goods .. .. 85 73 _.

S 52 93 9¢ as r96 7 96Export price index (1995=100) -- *- 114 91Import price index (1995= 100) .. .. 76 75 I Exports r ImportsTerms of trade (1995=100) .. .. 149 121

BALANCE of PAYMENTS

(US$ millions) 1977 1987 1997 1998 Current account balance to GOP ratio (%)Exports of goods and services . . 2,522 1,874 20 .Imports of goods and services .. .. 3,005 2,915Resource balance .. .. -483 -1.041 10' -

Net income .. .. -636 -467 0- - - -- -Netcurrenttransfers .. .. 1,254 1.289 92 93 94 95 go 97 -ce-

.10.

Current account balance .. .. 135 -219

Financing items (net) .. .. 162 56Changes in net reserves .. .. -297 163 _3 -

Memo:Reserves including gold (US$ millions) .. .. 1,227 1,094Conversion rate (DEC, local/US$) .. .. 129.3 135.0

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(US$ millions)Total debt outstanding and disbursed 723 4,585 3,856

IBRD 0 0 0 0 G 158IDA 59 473 934 1,075

B 934Total debt service 22 269 98 Compcgion or total debt, 1997 1US$ milions)

IBRD 0 0 0 0IDA 6 16 18

Composition of net resource flowsOfficial grants 287 242 c 250Official creditors 80 94Private creditors 13 174Foreign direct investment 0 1 . D: 456Portfolio equity 0 0 E 1 191

World Bank programCommitments 16 66 149 60Disbursements 21 41 89 121 A -IBRO E - BilateralPrincpal repayments 2 10 11 B - IDA D -Other multilateral F -PrivateNetflows 21 40 79 111 _

Interest payments 4 7 7Net transfers 21 35 72 104

Development Economics 9122/99

Annex 11: Policy Letter

3/~~~~~~~~~~~~~~~~~~-

MVr. James D. WolfensohnPresidentThe World Bank1818 H Street, D. C. 20433U.S.A

Dear Mr. Wolfensohn,

The Republic of Yemen has adopted a strategy for modernizing its civilservice.' This strategy is comprehensive and long term. At the end. the governmentdecided to have in place a civil service that efficiently and effectivel provides areduced scope of government services, that encourages and supports the private andnougovernment sector, that operates with transparency, where performancemeasurement serves as the key management tool, andwhereameritprincipitisapplied to staff.

This project is envisaged as the first phase of this longer-term reform: designedto make Yemen's civil service more cost efficient, effective and transparent.. Theobjective of this project is to lay the foundation for such a reform by putting inplace core personnel and financial management systems. to establish a mechanism

ruduce the number of unqualified civil servants. and to initiate a restructuringprocess in individual ministries. To makle this foundation as solid as possible.another objective of the project is to upgrade the management capacity in the ci%ilsenrice.

A. Recent Achievements

In 1995 Yemen introduced a comprehensive macroeconomic adjustment andstructural reform program that signaled a sharp break from past policies. Underthis strategy, which was subsequently supported by both the LIF and the WorldBank. fiscal discipline was established and structural reforms were initiated tocreate a market environment conducive to investment and growth in the non-oilsector. Interest rate liberalization. tariff and tax reform. exchange rate unification.and price increases in subsidized goods began to shift the economv to a more

....... .. .,,:yo fjA_

market-oriented footing. Official debt relief agreements in 1996 and 1997 with theParis Club creditors further substantially improved Yemen's external prospects. Bylate 1997. a considerable degree of macroeconomic adjustment had been achievedand a first wave of fundamental structural reforms were introduced.

In 1998, the sharp drop in world oil prices had an adverse impact across allsectors of the economy. Yemen lost almost 10 percentage points of GDP in oilrevenue in 1998 compared to 1997. But the government moved quickly to offset theeffect of this loss by significantly curtailing government and developmentexpenditure and further reducing untargeted subsidies. By taking these correctivemeasures, the fiscal deficit in 1998 was contained to 6.1 percent of GDP. At thesame time, real GDP growth slowed to under 2.7 percent in 1998 and the externalaccounts shifted back into deficit as government oil exports receipts were halved.The inflation rate picked up to about 11 percent on average in 1998 spurred also bythe impact of heavy late summer floods on agricultural goods and hence increasedprices. However, despite the difficult external environment, our efforts to maintain2 sound macroeconomic setting were successful.

In 1999, with the improved outlook for oil prices and a tight expenditurestance, the fiscal deficits declined to one percent of GD?. The exchange rate hasmoved in line with market conditions, with the Central Bank maintaining adequatelevels of foreign reserves. Inflation continued its downward trend, falling to 7.9percent. Structural improvements along with continued macroeconomic policieshelped to accelerate non-oil GDP growth to 2 percent in 1999.

This year, the fiscal deficit is expected to decline to 2.99 percent of GDP. Andthe Inflation to continue its downward trend to 7 percent. The non-oil GDP growth*, expected to increase to 3.9 percent.

B. The Need for Enhanced Public Sector Performance

While we have achieved good results with our macroeconomic stabilizationprogram. we recognize that this is just one ofthe necessary ingredients for us toachieve our development objectives of accelerating private sector led growth andemployment creation, enhancing the quality and quantity of essential publicservices, and reducing poverty. It is well understood that to achieve the types ofgrowth that we are targeting and to better provided public services within ourlimited resouzces, the public sector must make more effective use of its limitedfinancial and human resources. To underscore this point, it is important torecognize that while *'emen's social indicators have improved in the last fewdecades. the challenges ahead remain immense. Life expectancy has risen from only36.5 lears in 1960 to 57 years today. Infant mortality rates, a good indicator of

'......... ''' .s ................ .... ............:i1.18 j:~f-

general health conditions, declined from 220 per 1,000 live births in 1960 to 93 per1,000 live births in the mid-1990s. Literacy rates have improved from 27% to 38%over the last two decades, and school enrollment rates at the primary level haveincreased four-fold. But still, only 80% of boys and 39% of girls are enrolled inprimary school. Yemen's achievements notwithstanding, basic social indicatorsremain low, and continued efforts to improve the quality and coverage of essentialservices need urgent attention. To do this, we need to make the best possible use ofYemen's scarce public resources, which is a primary aim of our public sectormodernization program. We also believe that public sector reform is essential tocreating an environment that is truly supportive of increased private sector activitywhich is key for employment creation.

C. Current Problems in the Public Administration

Civil service currently faces difficult circumstances. The publicadministration was severely impacted by aseriesofeventssince1990:theYemenunification re'ouired the merger of two different systems; the return of some 800,000Yemenis from the Gulf following the Gulf war, further exacerbating the problem ofover-staffing; and the economic turmoil throughout 1990-95 caused civil servicewages to decline substantially in real terms. The overall result now is a very large,poorly trained and poorly paid public administration, and the absence ofenforcement of civil service processes and proceedures. At the root of the problem,public employment has come to serve two purposes: (i) employment for carryingout specific responsibilities of the public sector; and (ii) "a social safety net" toguarantee a small salary to a large number of people who are not needed to carryout the functions of government. As a result, the public administration is bloatedwith about 441,000 employees in the civil administration and mixed/publicenterprise sectors in a country of about 17 million people. And with the twof-netions intertwined. neither is performed well. Few people are held accountableior specific work. 'While these problenms can not be solved in one sweep. as a majorobjective of our reform. the Government is committed to disentangling the tmocurrent roles that public employment plays and to make significant improvementsin each function.

Despite the size of the public administration, the civil service suffers from alack of capacity and expertise in skilled areas. Coupled with the weak capacity,inadequate remuneration and incentives has, led to poor performance,unsatisfactory delivery of services in terms of quantity, quality and timeliness, andinefficiencies in the use of public resources, Other deficiencies relate to duplicationof functions and unclear roles and mandates of public sector agencies. There is oftenorganizational duplication. rules and proceeduial overlaps. and unclearresponsibilities. And existing rules and regulations are not alw ays enforced nor

. .. ..................... ..... .. -91-g4e~*

applied in a uniform. transparent manner. Furthermore, the basic systems throughwhich the government manages its personnel and financial resources are noteffective, nor effectively implemented

All in all, as an end result, investors complain about bureaucracy; and thepopulation complain that key services - such as basic healthcare and education -are inadequate. For these reasons, Yemen modernization of the public sector is nowa high priority.

D. The Lona Term Vision of the Yemeni Civil Service

In response to the widely recognized need for the reform of the public sector, anational debate was conducted to develop a long-term vision for the public sector.This resulted in a public sector modernization strategy that was vetted and modifiedat a national conference and later endorsed by the Cabinet. This strategy endorse avision of the public sector as one that efficiently and effectively provides a reducedscope of government services, that encourages and supports private and non-governmental sector, that operates with transparency, where performancemeasurement services are the key management tool, and where a merit princple isapplied to staff. This lays out a long-term reform agenda for Yemen The manaelements of this reform agenda include:

* streamline government entities and eliminate duplication and nonessential services;increase the transparency of procedures and the consistency with which they areapplied;

- improve budgeting and financial management systems to help ensure efficient,transparent, non-corrupt use of public funds;re5tructure the public employment system to establish and maintain professionalstandards bv developing a clear personnel management system that governs hiring,promotion, salary determination, delineation of duties, responsibility for results, andperformance evaluation;

institute effective controls on staffing levels, and re-deploy or terminate (through a fairprocess) redundant workers; and

Improve compensation to motivate civil servants and to retain high quality staff.

We have asked for World Bank support of our efforts with a Civil SericeMlodernization Credit that will assist us in implementing certain priority actions.Furthermore, we are simultaneously moving forward with implementing reforms ina number of other complementary areas identifred in our strategy, including judicialreform and privatization.

E. PRIORITY REFORMS TO BE SUPPORTED BY THE CREDIT

The Civil Service Modernization Project will support priority areas ofthegovernment's long-term program. The priority reform areas were selected becausethey: (i) lay the foundations for a sustained reform program in the long-term, (ii)provide for significant early improvement in some less sensitive areas, and (iii) allowus to experiment in areas that are more socially and politically sensitive and difficultbut that are critical to long-term success. By working with the World Bank todesign a package of support that focuses on capacity building and trainingthroughout the implementation process, we hope to also benefit by building thecapability within the public administration to manage our long-term change processand to technically implement the policy decisions that are being taken.

Recognizing that a well-functioning public administration relies on coresystems to assist in the effective management of its resources, both financial andhuman, the government is committed to priority reform of the systems of personneland financial management systems, including the payrolL In the area of personnelmanagement, we have already validated personnel records and established a censuscount of civil servants. We are committed to continue this process by issuingemployee identification cards through a system of unique, biometric verification ofeach individual employee, linking computerized personnel records to an automaticpayroll system, and redesigning human resource management policies to re-professionalize the civil service through attention to training needs, accountabilityfor performance, and hiring and promotion based on merit. We are also committedto implementing a new accounting and financial management system that willestablish budgeting and accounting systems that are consistent with GFS. Towardstfit aim. we have already introduced a much more detailed, GFS-consistent budgetclassification. and this new classification will be incorporated in the Ministry ofFinance chart of accounts for budget accounting and control starting with theFY2000 budget. The government also plans to use the new AFNIIS system to helpincrease fiscai transparency by posting approved budgets, allocations and monthly,quarterlv and annual budget execution reports on a Government web-site.

The government is committed to a sequenced path of implementing changes tothese systems. As a first step, we will redesign the system and implement it withinthe MOF ministry and three pilots ministries in Sana'a. The second step We willthen pilot the use of the new system at the headquarters of several other ministriesand at the sub-national level in a selected number of administrative units in agovernorate near to Sana'a. After we have established the eOTectiveness andfeasibility of linking the headquarters and sub-national administrative units, we will

..... ............. ..-------- ................ -D-z

...................... ....,.......R uJfC........... ...... ...I.........:>9 ii;

begin a process of rolling out the new systems throughout all of the administrativeunits.

To address the problem of overlap and duplication within and acrossgovernment agencies, the government is committed to a process of rethinking whatis the appropriate role of government in each sector. Once a new vision andmandate for a government agency is defined, then work flow, policies andprocedures, decision making, staffing requirements, organizational structures, andinformation systems will all be redesigned to better meet that new mandate.Unnecessary "red-tape" will be cut; duplication across ministries will be lessened;and government involvement will be reduced in areas that local councils and theprivate sector can better handle. In the first instance, we will undertake thisexercise in a group of pilot ministries. After a Cabinet debate, the Ministries of CivilService and Administrative Reform , Social Affairs, Labor, and Health, the Tax Authority,and the Prime Minister's office, Civil Aviation Authority, and COCA were chosen forrestructuring as a first group.

Another key issue that the government is .committed to addressing is the sizeand composition of the government's staff.. The cucrent civil service is large innumber, concentrated in only a few locations, and lacking in critical skills. Theseimbalances will be addressed in the reform program, as it is essential before we canbegin to deliver quality services throughout the entire country, and to raise wages -in a manner that the country can afford - in order to motivate and attract a highlyqualified, professional, civil service. This is critical because even at the low salarylevels, wage and salary payments to civil staff absorb about 35.4% of the budget. Ifnothing is done, resources will not be available to increase salaries of productivecivil servants. And without adjustments the salary scale, it will be difficult for thegovernment to retain high quality staff.

Consequently. as an essential complement to reforms described above. theGovernment intends to address its surplus labor problem. This will be donethrough a variety of measures that relate to the faithful application of the conditionsfor end of service as set forth in Article 119 of the Civil Service Law 18/1991(including retirement), and removing from the payroll ghost workers and personscollecting multiple salaries.

Furthermore, the government is committed to identify surplus workersthrough its restructuring process. These surplus workers, on an agency by agencybasis, will be moved to the Civil Service Fund that has already been legallyestablished. The Government undertakes to continue to pay, in a timely mannerand out of the Government's own resources, the wages of surplus civil servants.identified as such in accordance with a process agreed upon with the Association, bytransferring the bill covering the wages of such civil servants from the respective

~ ~ ~ ~ ~ ' 2or :ilw, . *. ....... .. .......... .... _t,a '- 55

line ministry or agency to the Civil Service Fund. Furthermore, theGovernment undertakes to provide, promptly as necded all the funds, racilities andservices required to enable the Civil Service Fund, at all times, to make promptpaymenit under buy-out packages offered to the redundant civil servants toencourage their exit from the Civil Service Fund. Furthermore, any sueb by-outpackages will take into account targeting (so that the most skilled employees are notlost), the level anid nature of compensation, implementation regulations governingthe payment of such compensation, and monitoring, evaluation and adjustmentmechanisms. Any training or other services provided to displaced workers will besubject to a market mechanismn that requires worker contribution in order to betterallow the affected worker to determine i training or a service is desired, the type oftraining or service. and the provider (public, private, or NlGO.

F. Ex.oected Results and Target

As a result of the civil service modernizationi program, by the end oftheproject or sooner, the governmenit expects to have acihieved the following specificresults:

* Rfemoval 12000 thousands of overdu¢ pensioners within 9 months Dec.2000.

. Removal from the payroll of all double dippers and ghost workers within 4month of their identification through the bionmetrics system.

* Transfer to the civil service fund of workers Who are identified, through therestructuring process.

* Significant overall reduictioni in the number of civil servants over the projectp)eriodL,

* *\(iflpjiUfl of a wage and emploJllelt polity by .june 2001. thMt is hscally:1 ft riP:1,Ieand t11at perinits the grra:dial decolnipressiot oif maues.

I rvsttirucwtIriin of 4 :aaeicirs lhy D)cc.2OOI arIld 4 :W-elikies b! svp.2(it I illcludingttie Clear deliiit iml of its uii;ite, lo C;atr t 1 ii 'a pro1raminet. tkheimlriodtict ion of joob descriptiolls anld MoSitiOTs. tile idelititicatiil1 of humtilan* rcllce T(ILliretlemet . :a11nd thtI n-a isfer of S1 plul)ls st:0l3T to 1w (*il- it S'Cl iCe

lun I )ti I)e 1)t)t) :id Seb.201D I. :iiid ; time lt iI pNl:ir to role out thiiS }|ess11 8InJiunolt thl rveainder of governinden 1wv Dec.2(013l.

.1wrodultiont 10 o)f re'viseld. conipl)Iitriized personnel numa gemnent, p:ay'roll. andAFM IS ssstcIs withinlll S:3inaa'.. 1il1(l ifJll)JCllplJlt:tiOll oll track 10o CNald111 th1eserev isedl s stemis ti nrotuighnlit all admiliistral hi e units.D)esiall :almd c;lt rlV out traillill- inslob personnelwho il illetlithe rectnritc tre(d dtIpal tllellts.

~~...... ..... .... . .O .J ..... .......

................. ..jlS ..............

G. Proiect ImDlementation Issues

The Government is committed to placing the implementation responsibility forthe Civil Service Modernization Project squarely on the public administration. Thetechnical assistance provided through the credit will be used to build up the capacitywith in the public administration to carry out both the functions of government aswell as further reforms. To manage the process, the Government is committed to theimplementation of the project by civil servants, with appropriate technicalassistance, and supported by a small technical secretariat that will provide overallproject management support.

As an incentive for civil servants substantively involved in the implementationof one or more key components of the Project, the Government undertakes tofaithfully apply the provisions of Article 21 of the Yemeni Civil Service Law No.19/1991 governing the granting of incentive bonuses to civil servants. Theseincentives will be paid from the government budget, outside of the usualcounterpart contributions for the Project. The Government views this arrangementas an interim measure (until a new salary structures can be introduced) so that staffcharged with implementing important change responsibilities will be awarded abonus allowance based on the successful completion of specifically defined tasks.The number of persons involved in managing and implementing the program, andhence receiving the special allowance, will vary depending on the specific activitiesthat are on-going at a given time.

SINCERELY YOUTRS,

DR. ABDULKARIM AL-IR.

TH£ FRI R