Document ofThe World Bank

Report No: 23815-MOZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 19.4 MILLION(US$25.6 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MOZAMBIQUE

FOR A

PUBLIC SECTOR RE FORM PROJECT

IN SUPPORT OF THE FIRST PHASE OF THE

PUBLIC SECTOR REFORM PROGRAM

February 13, 2003

Public Sector Reform and Capacity Building UnitCountry Department 2Africa Region

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CURRENCY EQUIVALENTS(Exchange Rate Effective January 31, 2003)

Currency Unit = MeticaisUS$1.0 = MZM 23,300MZM 1 = US$0.000043

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACCRONYMS

APL Adaptable Program LoanAT Administrative TribunalCAS Country Assistance StrategyCFAA Country Financial Accountability AssessmentCG Consultative GroupCIRESP Inter-ministerial Conrmission for the Reform of the Public SectorCM Council of MinistersCPAR Country Procurement Assessment ReviewCPIA Country Policy Institutional AssessmentCQ Consultant's QualificationsDANIDA Danish AidDFID Department for International DevelopmentEGFE General Statutes of Civil ServantsEU European UnionFMR Financial Monitoring ReportsFMS Financial Management SystemFMU Financial Management UnitGOM Government of MozambiqueGOVNET Government NetworkGOVSYS Electronic Documentation CenterGPM Prime Minister's OfficeGPN General Procurement NoticesHIPC Heavily-Indebted Poor CountriesHRM Human Resources ManagementIAPSO Inter-Agency Procurement Services Office of the UNDPIAS International Accounting StandardsIBRD International Bank For Reconstruction and DevelopmentIDA International Development AgencySISTAFE Integrated Financial Management SystemIGF Government Audit UnitLC Least Cost SelectionM & E Monitoring And EvaluationMADER Ministry of Agriculture and Rural DevelopmentMAE Ministry of State AdministrationMPF Ministry of Planning and FinanceMINED Ministry of Education

MS Ministry of HealthMTC Ministry of Transport and CommnunicationMTEF Medium Term Expenditure FrameworkNBER National Bureau Of Economic ResearchNCB National Competitive BiddingNGO Non Governmental OrganizationNORAD Norwegian AidPARPA Action Plan for the Reduction of Absolute PovertyPER Public Expenditure ReviewPHRD Policy and Human Resources Development FundPIF Fundo de Melhoramento do Desempenho (Performance Improvement

Facility)PS Permanent SecretaryPPF Project Preparation FundPR PresidencyPRSC Poverty Reduction Strategy CreditsQCBS Quality- and Cost-Based SelectionRFP Request for ProposalsSCR Compensation and Remuneration SystemSIDA Swedish International Development Cooperation AgencySIFAP Public Service Training SystemSIP Personnel Information SystemSOE Statement of ExpenditureTOR Terms of ReferenceUNDP United Nations Development ProgramUTRAFE Technical Unit for the Reform of the Administration of State FinancesUTRESP Technical Unit for the Reform of the Public Sector

Vice President Callisto MadavoCountry Director Darius Mans

Sector Manager Brian LevyTask Team Leader Harry Gamett

MOZAMBIQUEPUBLIC SECTOR REFORM PROJECT

CONTENTS

A. Program Purpose and Project Development Objective ................................................. 11. Program purpose and program phasing ............................................................ 12. Project development objective ............................................................ 23. Key performance indicators ............................................................ 2

B. Strategic Context ............................................................ 31. Sector-related Country Assistance Strategy (CAS) goal supported by the project . . 32. Main sector issues and Government strategy .......................................................... 43. Sector issues to be addressed by the project and strategic choices . . . 14. Program description and performance triggers for subsequent grants . . 11

C. Program and Project Description Summary ....................................... 121. Project components ........................................................... 122. Key policy and institutional reforms supported by the project . ....................................... 153. Benefits and target population ........................................................... 1 54. Institutional and implementation arrangements ........................................................... 16

D. Project Rationale ........................................................... 201. Project alternatives considered and reasons for rejection ................................................ 202. Major related projects financed by the Bank and/or other development agencies ... 223. Lessons learned and reflected in the project design ........................................................ 254. Indications of recipient commitment and ownership ...................................................... 275. Value added of Bank support in this project ........................................................... 28

E. Summary Project Analysis ........................................................... 281. Economic ........................................................... 282. Financial ........................................................... 283. Technical ........................................................... 284. Institutional ........................................................... 295. Environmental ........................................................... 306. Social ........................................................... 307. Safeguard Policies ........................................................... 31

F. Sustainability and Risks ........................................................... 321. Sustainability ........................................................... 322. Critical Risks ........................................................... 323. Possible Controversial Aspects ........................................................... 33

G. Main Grant Conditions ........................................................... 331. Effectiveness Condition ........................................................... 33

H. Readiness for Implementation ........................................................... 33I. Compliance with Bank Policies ........................................................... 34

Annex 1: Project Design Summary ........................................................... 35Annex 2: Detailed Project Description ........................................... 40Annex 3: Estimated Project Costs ........................................................... 48Annex 4: Cost Benefit Analysis Summary ........................................ 49Annex 5: Financial Summary ........................................................... 50Annex 5a: Financial Management Assessment Report . .............................................. 51

Annex 6: Procurement and Disbursement Arrangements ............................................ 57Annex 7: Project Processing Schedule .............................................. 64Annex 8: Documents in the Project File .............................................. 65Annex 9: Statement of Loans and Credits ................. ............................. 66Annex 10: Country at a Glance .............................................. 68Annex 11: President Chissano's Speech on Public Sector Reform .................. ........... 70Annex 12: Letter of Sectoral Policy .............................................. 72Annex 13: Performance Improvement Facility: An Outline ....................................... 78Annex 14: CPAR 2002, Executive Summary .............................................. 84Annex 15: Ministerial Restructuring .............................................. 92

MAP(S)IBRD No. 29996

MOZAMBIQUEPublic Sector Reform Project

Project Appraisal DocumentAfrica Regional Office

AFTPR

Date: February 13, 2003 Team Leader: Harry C. GarnettCountry Director: Darius Mans Sector Manager: Brian D. LevyProject ID: P072080 Sector(s): Central Government AdministrationLending Instrument: APL (Grant) Theme(s): Public Sector

Poverty Targeted Intervention: Y

EstimatedAIPL Indicative Financing Plan Implementation Period lBank FY) Recipient

IDA Others Total Commitment ClosingUS$ m % US$ m US$ m Date Date

APL 1 25.6 57% 19.4 45.0 2003 2006 Govt. ofLoan/ MozambiqueG rant _ _ _ _ __ _ _ _ _ _ _ _ _ _

APL 2 30.0 42% 40.0 70.0 2006 2013 Govt. ofLoan/ MozambiqueG rant _ _ _ _ _ _ _ __ _ _ _ _ _ _

Total 55.6 59.4 115.0[ ] Loan [ l Credit [X I Grant [ Guarantee [ 1 Other:

For Loans/Grants/Others:Total Bank Financing (US$m): 25.6

Proposed Terms (IDA): Standard Grant

RECIPIENT 2.6 1.4 4.0IDA _ _ _ _ _ _ _ __ _ _ __12.6 13.0 25.6Others 6.0 9.4 15.4Total: 21.2 23.8 45.0Recipient: GOVERNMENT OF MOZAMBIQUEResponsible agency: GOVERNMENT OF MOZAMBIQUE, UNIT FOR THE REFORM OF THEPUBLIC SECTOR (UTRESP)Address: Ave. Guerra Popular, 20-7, Predio CPD, MaputoContact Person: Adelino da Cruz, DirectorTel: 258-1-310620 Fax: 258-1-307674 Email: dacruz@zebra.uem.mzEstimated disbursements (Bank FY/US$m):

Annual 5.8 9.5 7.4 2.8Cumulative 5.8 15.3 22.8 25.6

Project implementation period: Phase 1: 3 years; Phase 2: 7 yearsExpected effectiveness date: April 30, 2003 Expected closing date: June 30, 2006

A. Program Purpose and Project Development Objective

1. Program purpose and program phasingThe development objective of the ten-year program is:

To provide capacity building support to the Government of Mozambique's Action Plan for theReduction of Absolute Poverty (PARPA) by transforming the public service so that the poorthroughout Mozambique receive the services they need and the economy can afford, andentrepreneurs throughout Mozambique are encouraged to invest.

The ten-year program will assist in bringing about a transformation of the public service so thatby the end of the program, poor as well as rich citizens in all parts of the country will have muchbetter access to public services and businesses will have to deal with less red tape as they investto provide the basis for sustainable economic growth.

Services will be provided by the citizen's own local governments, via partnerships between thepublic and private sector, the private sector, and executive agencies, all accountable to citizens. Itwill be a citizen's right rather than privilege to have access to services.

A much slimmer center of government will focus on formulating and monitoring policy. Publicresources will be allocated in accordance with the priority needs of citizens and businesses, butalso in ways that foster sustainable economic growth and social development.

The Bank's program is part of a larger multi-donor program that will support the Government ofMozambique's Public Sector Reform Program, launched by the President in June, 2001. Theprogram as a whole will lay the foundations for greater donor reliance on budget support, in thecase of the Bank, through Poverty Reduction Strategy Credits (PRSC) planned for FY2004 andbeyond. By supporting the implementation recommendations of the 2001 Country FinancialAccountability Assessment (CFAA), the 2001 Public Expenditure Review (PER) and the 2002Country Procurement Assessment Review (CPAR), the program will help to make publicservants much more accountable to the public for the services they provide.

Public sector reform is defined as reform of the crosscutting issues, common to all sectors, suchas restructuring government for decentralized service delivery, accountability, wages, and humanresources management. Thus the public sector reform program will support improvements inservice delivery carried out by the sectors. Public sector reform also deals with fundamentalissues such as the role, structure and processes of government.

Phasing

There will be two phases to the program.

Phase 1. The basic conditions for the transformation will be established in the three-year firstphase (the project). In-country capacity for change management support will be developed tohelp ministries improve service delivery. With support from the Performance ImprovementFacility, service delivery processes will be reengineered through the Quick Wins Program andrestructuring plans will be prepared in key ministries. Capacity will be developed to establisheffective linkages between PARPA, MTEF, and sector programs. A public sector accountingprofession will be established. Staff will be trained in the basics of expenditure management andaccounting. New systems of expenditure management and accountability will be introduced withsupport from donors, in line with CFAA, PER, CPAR, and HPIC Assessment and Action Plan

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recommendations agreed by the Government. Taken together, these improvements inaccountability will assist in reducing corruption. Salary incentives will be introduced to make iteasier to recruit, motivate and retain key staff. Support will continue for improved humanresources management, including decentralization of the function. There will be substantialtraining capacity development during this phase.

Phase 2. On the basis of, and depending on, progress in phase 1, a process of restructuring,reengineering, and decentralization, and monitoring and adjustment will take place in the second,seven-year phase as the reforms in the processes and structures of government are rolled outthroughout the public sector with funding from the Performance Improvement Facility. Theintegrated financial management system will become progressively fully operational in centraland local government resulting in a much stronger linkage being established between MTEF-based budget allocations in line with PARPA targets and expenditure tracking. Local and centralgovernment will develop the capacity to adhere to international accounting standards.Accountability to citizens will improve as audit capacity is decentralized and more servicedelivery functions devolved to local government. An increasing number of key staff will havesalaries that will be competitive with the private sector as more budgetary resources can be madeavailable from the budget.

2. Project development objective(see Annex 1)

To support the Govemment to restructure the public service for decentralized service delivery,professionalize the public service, and improve govemance.

3. Key performance indicators(see Annex 1)The ten-year program:

Access to basic services by the poor in rural areas is significantly improved. Data on this wouldbe collected via poverty assessments.

The three-year project:

* At least six reengineering "quick wins" will have been implemented that will berecognized by the Ministries' clients (through service delivery surveys) as improving thequality of its services;

* Three ministries will have begun to implement their plans to reengineer, restructure anddecentralize the delivery of services (implementation to mean: structures have beenrevised and staffing changes made);

* The regulations required to establish a professional accounting body will have beenapproved by the Council of Ministers;

* A process will have begun under which key technical and professional staff will havetheir salaries increased in line with the Salary Reform Strategy and the restructuring plans(the number to be impacted, and thus the exact indicator, will be determined during thefirst year of the project in accordance with the Strategy, once it has been approved by theCouncil of Ministers);

* The new policy process by which policies are formulated and submitted to the Council ofMinisters, and which will link policy to resources and involve widespread consultation,will have been designed and have begun to be implemented.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project(see Annex 1)

Document number: 20521 MOZ Date of latest CAS discussion: June 1, 2000

1.1. Country Assistance Strategy goals supported by the project:

The 2000 CAS for Mozambique has three pillars:

1) increasing economic opportunities through private sector led growth;2) improving governance and citizen empowerment; and3) improving human capabilities.

This project mainly supports the second pillar. There is a strong focus on improvingaccountability for the use of public resources, and involving citizens and businesses both inpolicy formulation and in monitoring service delivery performance.

This project will also have an impact on the other two pillars of the CAS strategy. By makinggovernment more responsive to business needs, it will promote private sector growth. (Anindicator covering this objective is one of the program indicators). Improved delivery of socialand economnic services will help citizens reach their full productive potential. In addition, theproject will provide substantial funding for training of those providing public services.

Mozambique has particularly weak public institutions and human resources. The project willcomplement both a future Poverty Reduction Strategy Credit (PRSC) and the Government'sPoverty Reduction Strategy Paper (PARPA) on which it is based, since in essence the project isproviding the multi-sectoral capacity building support, through technical assistance and training,needed to achieve the reforms required to reduce poverty. The proposed project will also supportthe improvements in fiduciary responsibility that will be required to track the impacts of thebudgetary support given under a PRSC. It will provide funding for the sectors to re-structure inpreparation for the budget support under the forthcomning PRSC.

The project will also support the implementation selected recommendations of the 2001 CFAAand PER, both of which highlight severe accountability problems. The 2002 CPAR identifiesserious procurement problems, which will also be addressed by the project. The ExecutiveDirectors discussed the PRSP (IDA/SecM2001-0550) on September 25, 2001.

Rationale for the use of the IDA grant:

As an IDA-only country with a GNI per capita of less than $360 per annum, Mozambique hasbeen allocated IDA grants of SDR 19.8 million for FY03. The full amount is proposed to beapplied to the Mozambique Public Sector Reform Project. (An additional SDR 41.4 million inIDA grants was allocated to Mozambique for HIV/AIDS and will be fully utilized to support anupcoming HIV/AIDS project being developed under the framework of the Multi-country AIDSProgram.).

Of the three projects proposed in FY03 in the Mozambique program, this project was selected forgrant financing in the "other poor countries" category for the following five reasons:

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* Strong human development impact. The proposed project will support restructuring in keyPARPA ministries, including health and education. The objective of this restructuring is todecentralize the delivery of basic services to the poor. Thus this operation will helpMozambique to accelerate progress towards achieving the Millennium Development Goals(MDGs) for human development.

* Centrality of public sector reform to all poverty-reducing activities. Mozambique's PublicSector Reform program, which the proposed project would support, is central toMozambique's medium- and long-term development strategy and central to the Bank's CAS.As donors continue to move towards higher levels of financing in the form of budget supportin Mozambique, an increasing percentage of poverty-reduction activities will be channeledthrough the public sector. Improving the public sector's ability to deliver services in a cost-effective manner will therefore have a multiplicative effect. By improving accountability,rationalizing wages and human resource management, and modernizing the structure andprocesses of government, the Public Sector Reform program will make a crucial contributionto improved public service delivery and so to poverty reduction.

* Better collaboration between IDA and other donors supporting the Government's PublicSector Reform Program. The use of an IDA grant to support the Government's Public SectorReform Program will facilitate closer collaboration between IDA and the other donors thatare supporting program implementation. Many donors have participated in the preparationand appraisal of the project and have, together with the Bank, been funding the Government'sPublic Sector Reform Secretariat (UTRESP). These donors are putting together a multi-donor pool to support the Government program through UTRESP. Having the funds in thesame form will facilitate their management by UTRESP.

* Stronger public support. The use of grant resources will also help to secure popular supportfor a reform program which is ambitious and which challenges vested interests, who mighttend to use the fact that the government has had to borrow to implement this povertyreduction focused program to oppose its implementation.

* The impact of the grant funds on poverty reduction will be monitored and evaluated. AMonitoring and Evaluation Manager will be appointed to UTRESP prior to effectiveness.That manager will not only be responsible for monitoring against the indicators in the logicalframework (such a system is already in place in UTRESP) but also for studying the relativeimpact of a grant versus a credit. A baseline survey will be carried out by senior officials inthe key ministries' and other stakeholders' expectations as to the relative impacts, with afollow up survey at the time of the midterm review.

Government preference. The Government has shown strong ownership of this program and hasexplicitly requested grant financing for this project. It sees significant benefit in the popularsupport for this program and seeks to boost the momentum for country-wide results.

2. Main sector issues and Government strategy

Although Mozambique's policy performance has been good (the overall CPIA rating for 2000was above the average for Africa), starting from a very low base following the civil war, there aresubstantial concerns about the sustainability of that performance. The critical problems are asfollows:

* quality of civil servants: civil servants in Mozambique are among the most poorly educatedin Africa, they are also poorly paid, technical and professional staff are particularly poorlypaid compared to their counterparts in the private sector and parastatals;

* weak accountability: there is no accounting profession in Mozambique, and not a singleMozambican qualified to international accounting standards; weak internal and externalauditing capacity hence weak oversight by the National Assembly and citizens; and almostno follow-up on the implementation of policies;

* complex service delivery processes: centralized, complicated and confusing.

2.1 Main sector issues

"We want a public sector that transmits efficiency... a new culture for the public service shouldbe developed as we advance toward a market system", the Prime Minister.

In this quotation, the Prime Minister admits that the public service is inefficient and not wellorganized to support Mozambique's transformation from a centrally planned to a marketeconomy.

From its independence in 1975 to the mid-1980s, Mozambique followed a central planningmodel. The civil war from the mid-1970s to the Peace accord in 1992 destroyed social andeconomic infrastructure.

Market-oriented economic reforms in place since 1987 have reduced inflation and attractedforeign investment. A new constitution was enacted in 1990. Since the signing of the peaceagreement in 1992, the country has successfully held two democratic elections. In this relativelystable political environment, economic growth has been impressive, exceeding 10 percent onaverage in the past few years.

However, the challenges of development remain daunting. The public sector is staffed withpoorly qualified, badly paid civil servants. Not surprisingly, corruption is a problem. A highproportion, especially of the better educated, are based in Maputo. Many citizens do not receiveany public services at all. The rest suffer from very poor service delivery. Public servants, manyof whom are still directly involved in service delivery still treat the receipt of public service as aprivilege not a right.

Processes need profound restructuring. Over-regulation exemplifies the situation. A 1996 WorldBank study, "Mozambique, Administrative Barriers to Investment: the Red Tape Analysis",describes the lengthy, unpredictable and highly complicated administrative processes forinvestment, leading to significant costs at the outset and during the life of the business, leading tolost output and employment. An outdated legal and regulatory framework, uncertainties ofchanging legal rules, lack of transparency and poor training of public servants in theimplementation of the rules make life difficult for businesses as well as citizens. New researchconfirms that the situation did not improve much since that study. Rated with 74 other countrieson the time and cost of entry of a start-up firm, Mozambique comes second to last (Djankov, LaPorta, Lopez-de-Silanes and Schleifer, NBER Working paper 7982, 2000).

The public sector is still very much functioning on the basis of a self-centered paradigm. Neitherthe culture nor the practice of the executive branch of government being effectively accountableto the legislative branch has taken root. Furthermore, the notion of accountability of the publicservant to the users and citizens is still relatively new, and participation of citizen groups or the

5

private sector in the oversight of public administration, as well as in information sharing, is stillpoorly developed. This is also because civil society is still relatively poorly organized.

The issues discussed below are based upon the studies and workshops undertaken over the past 3years. These are listed in Box 1.

Service delivery is sti1l highly centralized

The Mozambican State still functions in a paradigm of centralism and hierarchy. A process ofgradual deconcentration is ongoing but suffers under dual subordination to the center, through thesector ministries and governors and provincial administrations. The traditional practice of treatingprovincial services as extensions of central programs has done little to encourage the staffing oflocal administration with well-qualified staff. Similarly, equipment and infrastructures are verylimited outside the capital, and working conditions generally very poor.

Following a constitutional change in 1996, 33 municipalities were created in 1997. However,many of the enabling regulations that need to accompany the decentralization law remain to beenacted. There is the potential for conflict between the municipalities and the deconcentratedadministrations of the sector ministries. This first step towards genuine decentralization (locallybased service delivery, with accountability to local citizens) needs to be accompanied bystructured policies of transfer of powers and resources, which obviously must be gradual, in viewof the extremely low capacities at the municipal level. In particular the capacity of municipalitiesand the local office of ministries to manage finances is very weak. Although there is a widespreadappreciation that gradualism is required, there is no clear timetable for the reforms.

The move of key public sector functions down to different sub-national tiers of government mustoccur in parallel with a change of the role of the center, from provider to facilitator. Functions ofstate organizations at the center should be reoriented towards formulating, monitoring andfacilitating the implementation of policies.

To assist in the design of the project, a study on the administrative constraints to service deliverywas undertaken ("Note on Administrative Constraints to Service Delivery with a Focus on theSub-National Level"). This study compared the formal and informal service delivery systems inkey sectors, through interviews with Bank's team leaders in the key sectors and analysis of thefindings of the PER. It provides pointers for reforming key public sector rnanagement systems(personnel, finance).

Civil servants lack the skills and incentives to serve citizens and businesses well

Despite continuing efforts to improve the educational level of its population, Mozambique is stillfacing an acute shortage of higher-educated people. In 1999, total enrollment in higher educationwas 11,600, but the total number of new higher education graduates in Mozambique was only483 in 1998.

The result is that out of over 100,000 civil servants (excluding the armed forces), only about 3percent have a degree, almost all of whom are based in Maputo. Furthermore, 52 per cent ofmanagers do not have the academic qualifications required for their jobs.

On the demand side poor working conditions and low pay levels compared to the "internationaldonor sector" and even to the private sector impede the public sector from attracting enoughskilled staff. Absence of a sound human resources management policy, and of links between

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recruitment and promotion and perfornance are aggravated by the complexity of the rules andlack of clarity of the mandates. A recent study has shown that only 13 per cent of civil servantsare appointed through a competitive process - family and party connections are more important.Poor formal incentives are breeding ground for corruption. Very few channels of communicationexist between top civil servants and their staff and little knowledge of the rules contributes toslow implementation and lack of individual initiative. Public institutions are assessed in terms offollowing procedures correctly rather than in terms of performance against expected results.

Furthermore, as a result of the very recent democratization and of years of armed conflict, thepublic sector tends to be somewhat politicized. Top civil servants and governors are appointed bythe leaders of the party in power more on the basis of their loyalty than their technical merit.

There is little accountability for the use of scarce resources

Despite some improvement in terms of a more transparent and comprehensive budgeting process,several factors contribute to a relatively poor allocation and use of resources. These findings wereconfirned by the 2001-2002 PER and CFAA:

* the functional classification is not sufficiently disaggregated, hindering the efforts toefficiently measure and monitor the impact of public expenditures;

* the Inspectorate General of Finance (internal audit) and the National Administrative Tribunal(external audit) lack trained and qualified staff as well as budgetary resources. There is novalue-for-money audit;

* the MTEF has not been formally institutionalized;* the level of extra-budgetary flows leave important resources unaccounted for;* neither parliament, civil society nor the private sector participates effectively in the planning,

budgeting and financial management process;* the legal framework for accountability is deficient inasmuch as public information about the

Government's performance is insufficient. The current framework does not require leaders todeclare their assets and liabilities, there is no freedom of access to information in place thatwould provide for citizens to be better informed, there is no whistle-blower legislation inplace that would provide protection to citizens who report corrupt practice, and the rules ofevidence do not require leaders and other public officials to explain how they becamewealthy while in office.

Policy coordination, monitoring and evaluation are weak

Public policies are not formulated according to a standard format. Little effective analysisprecedes their submission to the Council of Ministers. The linkage between policy and resourcesis weak. There is little coordination either at the center or in the provinces in the preparation andimplementation of policies, and there is virtually no monitoring of the implementation of policiesor evaluations of their impact.

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Box 1

Analytical Underpinning for the Project

A number of preparatory activities have been undertaken by the Bank and the Governmentover the past three years:

1. Review of Public Sector Reform in Mozambique, July, 1998, carried out by Bank staff incollaboration with Government.

2. Reform of the Mozambican Public Sector: Strategy and Actions, August, 1998,Government of Mozambique - based upon above study.

3. Workshop on public sector reform issues, February, 2000: meeting of senior officials andacademics to identify administrative constraints and possible solutions.

4. Pay policy study, ongoing, 2000-2001: preparation of sustainable pay reform options anddesign of medium term donor support scheme.

5. Policy process study, 2001: study of the process by which policy is formulated, decidedupon, implemented and monitored.

6. Workshops in 2001 to discuss reform issues with groups of stakeholders: permanentsecretaries, NGOs, religious groups, journalists, trade unions, donors, private sector, andnational directors. Each participant completed a questionnaire identifying key constraints.

7. Country Financial Accountability Assessment, 2002.8. Public Expenditure Review, 2002.9. PARPA.10. Civil Service Management System: An Analysis of Reforms To Date and Emerging Next

Steps, Draft, July, 2001.11. Politica Salarial a Medio Prazo, UTRESP, Draft, May, 2001.12. Improving Expenditure Management in Mozambique, World Bank, July, 2001.13. Administrative Constraints to Decentralized Service Delivery, World Bank, August, 2001.14. Changing role of govermment and decentralization, UITRESP, Draft, December 2001.15. Policy management study, UTRESP, Draft, October 2001.16. Future studies: govemance baseline survey (households', businesses', and public servants'

experiences and perceptions of service delivery), salary survey (financed by the PPF).

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HIEV/AIDS is having a growing adverse impact on public sector capacity

HIV/AIDS impacts public sector capacity in two ways, by increasing the demand for publicservices in some sectors, while reducing the public sector capacity, since civil servants areaffected by the disease (lower productivity, high attrition environment). GoM has requested thesupport from IDA in preparing a MAP project.

2.2 Government strategy

Issued in August 1998, the "Reform of the Mozambican Public Sector, Strategy and Actions"(Republic of Mozambique), describes the different areas already undergoing reform, and the needfor articulating a strategy to move "in the direction of a new organizational culture for the publicsector, centered on efficacy and transparency", as well as the changes to be made to transform thepublic sector, currently centered around the delivery of service, to being a "facilitator". Thisdocument, presented at the 1998 CG meeting together with a public sector study jointlyundertaken by the World Bank and the GoM, provides the first, underpinning diagnosis for theelaboration of the public sector reform strategy.

Reform actions of the past few years have focused on three main issues:

* the rationalization of human resources, through the establishment of a new Career andRemuneration System, measures of salary decompression and the implementation of aHuman Resources Management System (computerized database), as well as the establishmentof a program of training for public servants (Public Service Training System, SIFAP) and aState Administrative Inspectorate;

* institutional reform through measures towards deconcentration and decentralization (creationof local governments, municipal elections);

* reform of the budget system, with the enactment of a new Budget Law (1997) and itscorresponding regulations, and enactment of a new Public Finance Law (2001).

Over the past year, following the 1999 elections, the President established the Inter-ministerialCommission for the Reform of the Public Service (CIRESP), chaired by the Prime Minister. TheCouncil of Ministers then set up the Technical Unit for the Reform of the Public Service(UTRESP) to be a secretariat to CIRESP. CIRESP recently approved the reform strategy preparedby UTRESP: Estrategia da Reforna do Sector Publico 2001-2011 (June 2001).

The strategy defines public sector reform as the cross and multi-sectoral reforms in processes andinstitutions needed to support reforms in the separate sectors leading to improvements in thedelivery of services to all citizens and businesses.

The Council of Ministers has decided that the reform will cover all institutions financed directlyor indirectly by the State and will focus on restructuring the State so that public servants willbecome more results-oriented.

The Strategy includes a Quick Wins Program, which consists of identification of measures thatcould be successfully implemented in a relatively short period, and would be highly visible, partlyto build up support for the reform program. The CM has requested that all ministries prepare andimplement quick wins; The Prime Minister has taken responsibility for this program.

The GoM Strategy takes account of the GoM's poverty reduction objectives set forth in PARPA.Good governance is described in PARPA as one of the fundamental conditions for poverty

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reduction, improved public service delivery and sustainable economic growth. Stakeholdersconsulted as part of the PARPA process stressed the need for good governance (and in particulardecentralization and deconcentration policies that favored participative development at the locallevels). They also highlighted the need for the State to improve its capacity to act energeticallyon its policy and program choices, as well as the importance of fighting corruption andestablishing a more mutually supportive relationship between public institutions and citizens.

President Chissano launched the reform of the public sector, based upon this Strategy, on June25th, 2001, National Day, in a speech to the nation. His speech is summarized in Annex 11. Keypoints from the speech are shown in Box 2. He confirmed his commitment to public sectorreform in a speech to the National Assembly in April, 2002.

The Government Strategy has been published and widely disseminated. GoM has prepared anImplementation Plan and has implemented a number of Quick Wins.

Box 2

Quotations from the President's Speech Launching the Public Sector Reform Program

National Day, June 25, 2001, Bagamoio barrio, Maputo

The public sector has generally operated with low levels of efficiency and has provided the citizens with lowlevels of efficiency.

There is now a generalized trend for civil servants to demand illicit payments for providing the services thatare the job of the civil service.

Examples of corruption: The mother or father of a family who must "offer thanks" in order to enroll theirson at school. The patient who is only cared for if he gives the health worker "a little envelope" . ..the driverwho must buy a beer or "act like a man" to the police to avoid a fine.

The Government wants a public service that is flexible, decentralized, free of red tape, simplified,modernized, competitive, and concerned with the results and quality of services provided to the citizens.

The public service must be transparent ... endowed with qualified, professional staff.

I want to see participatory mechanisms institutionalized which allow us to identify more securely the desiresand needs of citizens.

At the top of the list of reforms is the rationalization of procedures and the decentralization of administrativestructures and processes in order to make them more efficient and accessible to the citizens.

From 2001 to 2004 the basic conditions would be established for the profound transformation of the publicsector.

Up to 2011, programs with a much broader impact would be inplemented .... the public sector will be asector working for results and for citizens.

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

The Bank's support will focus on five of the components of the GoM strategy: decentralizationand institutional restructuring, strengthening policy formulation and monitoring, theprofessionalization of human resources, including pay reform, accounting and financialmanagement, and change management.

The phasing of the support is consistent with the Government's strategy, which will focus onquick wins and the preparation of plans to implement the strategy over the coming year, andestablish the basic conditions for a longer reform program in its first, 3-year phase. The Bank willshare support with a number of other donors.

This project will support institutional reforms already underway in key sectors such as education,health and transport, all supported by multi-donor programs by focusing on crosscutting issuesand, through the Performance Improvement Facility, providing the funding and incentives forreform. Reform in the sectors will be managed by the sectors themselves, just as reform in theMinistry of Finance and Planning, the Administrative Tribunal and the Secretariat to theAssembly will be managed and implemented by those agencies themselves. The program andproject will provide leadership, coordination and monitoring and evaluation services, as well asfunding. The reform team will be in a position to deal with major issues since it is led by thePrime Minister and his Inter-ministerial Commission, with a direct line to the Council ofMinisters.

4. Program description and performance triggers for subsequent grants

Phase 1 will begin to address the basic structure of government and incentive issues. In doing so,the project will seek to address the capacity issues identified in the GoM Public Sector ReformStrategy. Systems will begin to be put in place to make sure that individuals and service deliveryunits will be rewarded for performing well; and, if they do not perform well, they will bedisciplined. Process reengineering for improved service delivery will be undertaken as part of theQuick Wins Program. Restructuring support, through the Performance Improvement Facility,will be given to ministries that have already demonstrated a willingness to reform. The projectwill also support the realignment of the center of government with a view to furtherdecentralization of service delivery functions in support of the Bank's Municipal Developmentand Development Planning and Finance Projects. By helping to establish an accountingprofession and reforming procurement processes, the project will support improvements inexpenditure management and accountability funded by other donors.

The agreed performance triggers are:

* At least six reengineering "quick wins" will have been implemented that will berecognized by the Ministries' clients (through service delivery surveys) as improving thequality of its services;

* Three ministries will have begun to implement their plans to reengineer, restructure anddecentralize the delivery of services (implementation to mean: structures have beenrevised and staffing changes made);

* The legislation and regulations required to establish a professional accounting body willhave been presented to the National Assembly;

* A process will have begun under which key technical and professional staff will havetheir salaries increased in line with the Salary Reform Strategy and the restructuring plans

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(the number to be impacted, and thus the exact indicator, will be determined during thefirst year of the project in accordance with the Strategy, once it has been approved by theCouncil of Ministers);

* The new policy process by which policies are formulated and submitted to the Council ofMinisters, and which will link policy to resources and involve widespread consultation,will have been designed and have begun to be implemented.

Phase 2 will continue to implement the restructuring, reengineering and decentralization andassociated capacity building, with support from the Performance Improvement Facility. TheFacility will provide incentives for reform - those who begin to reform will be rewarded withadditional funding for further reform. Wage reform will continue. As more resources becomeavailable for wages, more staff will be moved towards salary levels prevailing in competitivemarkets. More senior staff will be placed on performance contracts. There will be very carefulmonitoring of the restructuring and decentralization experience. There will be unexpectedoutcomes to which adjustments will have to be made. Progress with improved service deliverywill be monitored using the governance survey by comparing results with the baseline survey tobe undertaken this year.

C. Program and Project Description Summary

1. Project components(see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown)

1.1 RestructuringObjective: To begin a process of restructuring central government so that service delivery willbe improve through decentralization and rationalization ofprocedures.

Phase 1 will focus on supporting key ministries committed to reform to prepare plans todecentralize, deconcentrate, and privatize the delivery of services and at the same time movetowards focusing the ministries on policy formulation, monitoring and evaluation. Someministries may be ready to implement the reforms before the end of the first phase. TheGovernment public sector reform and team and country team members have confurned thereadiness of a number of ministries for restructuring; the Prime Minister has asked that allrninistries prepare restructuring plans. The implementation of the reforms, and the associatedcapacity building, will be supported by the Fundo de Melhoramento do Desempenho(Performance Improvement Facility, PIF), which will be designed and begin to be implementedin Phase 1 (see Annex 13 for a description of how the fund will be operated). The Facility willinclude an incentive structure that will reward ministries and agencies that are committed toreform and meet their reform targets. The preparation of the plans, and the actual restructuring,will be carried out by the ministries themselves. The project's role will be to define the process,establish a change management team to support the ministries, train ministry staff in changemanagement and strategic planning, and monitor progress (see Annex 15 for a description of theministerial restructuring process).

The project will help the Council of Ministers to exercise its collective responsibility for povertyreduction and the implementation of PARPA by improving the policy formulation, decision-making, implementation, monitoring and evaluation process. The project will strengthen thecapacity of the Office of the Prime Minister - i.e. the managers of the policy process - throughadequate staffing, training and equipment and will build capacity to link policy and resourcesmore closely, especially through the Medium Term Expenditure Framework (MTEF) and the

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Poverty Reduction Strategy Plan (PARPA), and monitor implementation. These activities willalso help to realign the center of govemment on policy and monitoring as service delivery isprogressively decentralized.

The project will also provide capacity building support for reorganizing district administrationand improving working conditions at the district level through the provision of training andequipment.

Also, since it is important to be able to demonstrate progress while long-term structural changesare planned and implemented, the project will provide funding support to the GoM Quick WinsProgram through the PIF. The quick wins will involve reengineering existing process to improvethe delivery of services.

Linkages will be established between restructuring and reengineering capacity building supportunder this project and the sectoral reform targets set for the first PRSCs. The PIEF will in effectprovide funding to build the capacity of the sector ministries to prepare for the reforms theimplementation of which would be funded by the PRSC.

1.2 ProfessionalizationObjective: Motivate public servants to become more responsive to the needs of citizensand businesses and increase professionalism.

There are immediate and long-term issues to be addressed. The leaders, managers, and keytechnical and professional staff essential to prepare and implement the reforms needed under thisproject and the sectoral reform programs have to have the incentives needed to become fullycommitted to reform and to their roles in the reform programs. There is an immediate need toenhance their conditions of employment to achieve this. There is also a medium term need toreform the salaries in the public service to meet the needs of a restructured and reoriented publicsector: restructured for decentralized service delivery, and reoriented to service the public andfacilitate business development.

These basic medium term reforms of pay and conditions can only be executed alongside therestructuring, since the restructuring will help to define which are the key positions that are belowmarket. In addition, some restructuring may be required to create the resources needed to pay thehigher salaries. The process of preparing the restructuring plans will trade off higher salariesagainst other uses of funding to meet the redefined objectives of the ministries concemed. Sincethe restructuring plans will be prepared during phase I and for the most part implemented inphase 2, it will only be possible to implement the more basic, longer term pay reforms in phase 2.

Thus the project will fund capacity building for the preparation of a sustainable medium term paystrategy, the design of a scheme to enhance the salaries of key staff in the short term, and theassociated implementation plans, as well as substantial training in the skills required for thecurrent and progressively reformed public service. It is assumed that the funding for the salaryenhancement will be funded by the budget. To underpin the strategy, studies will be undertakeninto both supply and demand aspects of the labor market of which the public sector is part. Theenhancement would begin during Phase 1 and the implementation of the strategy would takeplace over a number of years, as resources became available, partly as a result of therestructuring.

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The mainstreaming of gender and HIV-AIDS programs as part of public sector reform will becarried out with the support of other donors who are members of the Public Sector Reform DonorWorking Group and who participated in the appraisal.

Capacity building support will be given for the following:

* Support design and implementation of sustainable medium term pay strategy to establishthe priorities for raising the salaries of civil servants within the context of the revenueexpectations of government and the policy priorities established in MTEF (study isnearing completion);

* Prepare plans to introduce results oriented performance management for senior managersand in key central coordination agencies;

* Reform Human Resources Management processes to improve responsiveness andefficienicy, and to encourage the increasing professionalization of the public service,including establishing equal opportunities for women.

1.3. GovernanceObjective: Improve allocation, efficient use and accountability ofpublic resources.

The important reforms of expenditure management and accountability (referred to as theSISTAFE reform in Mozambique) which are part of the Government's Public Sector ReformStrategy and Implementation Plan, will be supported by the G10 group of donors, led by the IMF.The project will support the governance agenda by helping to establish an accounting professionfor the first time in Mozambique, raising the policy profile of procurement reform, decentralizingprocurement capacity, and strengthening the oversight capacity of the National Assembly throughtechnical assistance and training for its Secretariat.

1.4 Program CoordinationObjective: Enhance UTRESP and CIRESP capacity to coordinate and monitor the reforms andcommunicate with key stakeholders.

* Build capacity of UTRESP to coordinate, administer, and monitor the Government'sPublic Sector Reform Program, including those parts supported by other donors, throughtraining, advisory services and equipment.

* Build change management capacity at UTRESP and in ministries.* Establish Council of Advisors drawn from outside the public service.

3 Governance PFM 20.8 46/ 11-- 2614. Program Coordination CSR 3.7 8/ 3.2 70/

Total Project Cost I 45. 100%° 256. 57%1/ CSR= Civil Service Reform; PFM= Public Financial Management

Note: The figures in total may not add up due to rounding.

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The non-Bank funding for Public Sector Reform consists of two multi-donor pools: one tosupport the expenditure management reforms (to be implemented by the Ministry of Planning andFinance), the other to support restructuring, govemance and human resources management(implemented through UTRESP).

2. Key policy and institutional reforms supported by the project

The objective of the project itself is to enhance institutional capacity to bring about institutionalreforms in service delivery through improvements in accountability and incentives. Many of thepolicy objectives of these refomis have already been discussed by the Council of Ministers andare reflected in the Public Sector Reform Strategy approved by the Council and launched by thePresident. The theme of the reforms is to improve the delivery of services to the poor through agradual process of reengineering, restructuring and decentralization. Improving the accountabilityof the public service to the public will facilitate that process. This will require the introduction ofimproved systems of accountability and a determination by the GoM to respond positively toinformation on the delivery of services to the poor generated by those systems. A substantialcommitment to the establishment of a public accounting profession in Mozambique will also berequired, including a major training program.

3. Benefits and target population

The benefits of the program include:

* an improved quality of life for the Mozambican people through the cost-effectiveprovision of public services;

* a reduction in poverty through better targeting of subsidies to the poor and the effectiveimplementation of public policies that will promote private sector development;

* service delivery staff in ministries, agencies, local govemment and the private sectormotivated to perform well;

* public servants who are accountable for their decisions and actions and promoted on thebasis of merit alone;

* policy decision-making and service provision that is more transparent to the beneficiaries.

The people of Mozambique are the ultimate beneficiaries and target population, in particular thepoor, who have such weak access to public services.

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4. Institutional and implementation arrangements

Leadership and Coordination

To provide political leadership for the reform process, the President and the Council of Ministersestablished the Inter-ministerial Commission for the Reform of the Public Sector (CIRESP). ThePrime Minister is the president of CIRESP, and the Minister of State Administration is the vice-president. Other members are the Ministers of Justice, Public Works and Habitation, Education,Planning and Finances, Agriculture and Rural Development, Tourism, Industry and Trade, Laborand Health. CIRESP reviews all proposals for reform prior to their submission to the Council ofMinisters (CM) and monitors the implementation of the reform program. The Technical Unit forthe Reform of the Public Sector (UTRESP) has been set up to support CIRESP.

Project implementation will be coordinated by UTRESP. CIRESP, whose President is the PrimeMinister, and which is responsible on behalf of the Government for the implementation of itsPublic Sector Reform Strategy, will be accountable for achieving the project's overall objectives.Oversight will be provided by the Council of Ministers. All IDA funds will flow throughUTRESP to the participating ministries and agencies. However, ministries and agencies will beresponsible for the implementation of their parts of the project, as identified in theImplementation Plan for the GoM Public Sector Reform Strategy. There will be three flows offunds to UTRESP: from IDA, a multi-donor pool, and the GoM. UTRESP has established aPublic Sector Reformn Donor Coordination Group, with which it works in the design of thisprogram and associated funding arrangements. This group will meet regularly throughout theproject. UTRESP will be responsible for all financial reports and for coordinating procurement.Auditing will be carried out by a private accounting firm.

Responsibility for implementing the project - meeting its individual results - will lie with theparticipating agencies themselves: the MPF, AT, Secretariat to the Assembly, MAE and thesector ministries. They would draft TORs, prepare training plans, hire consultants, and acquireequipment, but with technical and procurement support from UTRESP. UTRESP would discussproblems with the agencies if they appear to lag in the implementation of their component, and ifnecessary refer the matter to CIRESP.

UTRESP will have a particularly close relationship with UTRAFE , the Ministry of Planning andFinance's coordination agency. UTRAFE is being supported by donors, including the Bank,interested in supporting reforms in budget allocation and execution and expenditure tracking.The Integrated Financial Management Information System (the introduction of which will besupported by other donors in a separate project) is at the heart of these reforms. The policytargets associated with these financial management reforms will become the benchmarks inadjustment operations, as outlined in the PER.

UTRESP's staff include the Director, implementation coordinator, and specialists in financialmanagement and salary policy, governance, public administration, and restructuring. TheDirector, financial management and public administration staff are in place. The rest will berecruited by effectiveness. All are or will be Mozambicans. These specialists will providetechnical support to implementation agencies and will monitor the implementation and impact forthe GoM Public Sector Reform Strategy. The unit is also staffed by a financial managementspecialist and a procurement specialist. Administrative support staff are already in place. Part-time advisors are recruited according to the needs. The Director also has access to an advisorypanel of senior staff drawn from key ministries (Finance, Justice, Industry and Commerce andState Administration). UTRESP has two intermittent international advisors. UTRESP also has a

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journalist on staff who prepares press releases and is responsible for developing a cadre ofjournalists who understand the challenges of public sector reform.

In summary, UTRESP will undertake the following tasks:

* prepare progress and other reports for CIRESP;* provide opinions on policies, legislation and studies concerning public sector reform;* collaborate in the management of the Performance Improvement Facility;* collaborate in the management of the Training Fund;* disseminate information on reform;* monitor the reform process in the sectors;* organize meetings with stakeholders;* support and monitor the development and implementation of quick wins;* facilitate access to technical assistance for the reforms in the sectors; and* maintain contact with and support the reform units in the Provinces.

Focal points have been established in all ministries. These are the Permanent Secretaries (PS)who have worked with UTRESP in the preparation of the reform strategy and will assist in theimplementation of the reforms. A committee of key PSs meets with the Director/UTRESP eachmonth.

CIRESP meets with the Director of UTRESP about every two months. The Director is in almostdaily contact with the President of CIRESP, the Prime Minister.

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Institutional arrangements

Council of Ministers (CM)President

Inter-ministerial Commission for the Reform of the Public Sector(CIRESP, Presidential Decree March 2000)

Prime Minister

Technical Unit for the Reform of the Public Sector(UTRESP, Council of Ministers Decree, April 2000)

Director

1

ProcurementSpecialists Fn lUnit Unit

Procurement Arrangements:

The Procurement Specialist at UTRESP will be responsible for ensuring that all procurementactions particularly those which are funded from the proposed grant will be carried out inaccordance with procurement guidelines of the Bankc. The latter will report directly to Director ofUTRESP and will be primarily responsible for managing procurement actions and will act as afocal person for all procurement related matters of the proposed operation. He will-also beresponsible for ensuring that all procurement activities funded by the IDA Grants areimplemented in accordance with Bank guidelines. Since a major portion of the proposed grant isearmarked to fund consultant services, a draft procedures manual for the recruitment ofconsultants has been prepared. Among other things, the procurement specialist will also carry outthe following activities: (a) prepare, review and implement the procurement plan; (b) prepare andfinalize needed procurement documents (i.e. draft RFP's, draft contracts, draft advertisements,etc.); (c) train relevant staff on procurement matters; and (d) assist in the design of a procurementrecords management system. A detailed procurement plan for the first year of projectimplementation has been prepared with the assistance of the Bank during appraisal. The first yeardetailed plan together with a five-year procurement plan will be presented to IDA prior to granteffectiveness. It has also been agreed that in the event that the volume of procurement tasksincreases substantially and the need for additional support arises, UTRESP will consider thepossibility of recruiting additional procurement staff for the project.

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Financial Management'

Under the supervision of the Director/UTRESP, the Financial Manager of UTRESP is responsiblefor ensuring that financial management and reporting procedures for the Public Sector ReformProject will be acceptable to the Government, the World Bank and other Cooperating Partners.

The principal objective of the Project's Financial Management System (FMS) will be to supportmanagement in their deployment of limited resources with the purpose of ensuring economy,efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes, thatwill serve the needs of the people of Mozambique. Specifically, the FMS must be capable ofproducing timely, understandable, relevant and reliable financial information that will enablemanagement to plan, implement, monitor and appraise the Project's overall progress towards theachievement of its objectives.

For the Project to fully deliver on the aforementioned objectives, its FMS will be developed inaccordance with the Financial Management Assessment Report presented in Annex 5a. Salientfeatures of the financial management arrangements include: (i) Retention of a FinancialManagement Consultant to advise on the selection and installation of the Project's computerizedFMS, to prepare the Project's Financial Procedures Manual and to train staff in the operation ofthe system; (ii) appropriate financial management staff in place (i.e. Financial Manager, ProjectAccountant, Procurement Specialist and support staff); (iii) capacity building; (iv) the budget willbe approved in line with the Govermment process; (iv) the establishment of a Fixed AssetsRegister and a Contracts Register; (v) monthly bank reconciliations, monthly Status of FundsReport and monthly reporting to the MPF; (vi) timely production of quarterly FinancialMonitoring Reports (FMRs); (vii) robust banking and cash flow management including varianceanalysis; (viii) Project activities will be periodically reviewed by the Audit Unit (IGF) at theMPF; (ix) Project Financial Statements will be prepared in compliance with IntemationalAccounting Standards; (x) an annual extemal audit will be undertaken on terms of referenceacceptable to the Bank.

By grant effectiveness, the Project will not be ready for report-based disbursements. Thus, at theinitial stage, transaction-based disbursement procedures (as described in the World BankDisbursement Handbook) will be followed i.e. direct payment, reimbursement and specialcommitments. When project implementation begins, the quarterly Financial Monitoring Reports(FMRs) produced by the project will be reviewed. When the reports are considered adequate andproduced on a timely basis, and the recipient requests conversion to report-based disbursements, areview will be undertaken by the Task Team to determine if the project is eligible.

Supervision activities will include: review of quarterly FMRs; review of annual audit reports andmanagement letter as well as timely follow up of issues arising; annual SOE review; participatingin project supervision missions as appropriate; and updating the financial management rating inthe Project Status Report (PSR).

The overall conclusion of the financial management assessment is that, provided the conditionsoutlined in Section G are met by UTRESP prior to grant effectiveness, the Bank's financialmanagement requirements will be met.

'Please refer to the detailed Financial Management Assessment Report that was prepared jointly by theFinancial Manager of UTRESP and FMSs from the World Bank (February 14, 2002).

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Monitoring and Evaluation

External evaluations of the program will be carried out mid-way through and towards theconclusion of phase 1. However, these reviews do not substitute for sound project managementpractices, which require constant monitoring of program activities and regular evaluation of theirimpact. While financial and procurement audits are certainly key aspects of program monitoringand evaluation, equally important are assessment of the efficacy of program management systemsand the impacts, planned and unplanned, of program activities - particularly in relation to theachievement of program targets. This means that systems must be in place that enable thecollection of data, the compilation and analysis of disparate forms of information, and thedevelopment of conclusions and recommendations to inform future project action. To that effect,a project database has been prepared by UTRESP with support from a consultant funded byDANIDA. The database is based upon the Government's PSR Implementation Plan and includesinformation on components, results to be achieved, indicators, inputs, source of funding,schedule, and GoM responsibility.

Monitoring and evaluation activities are the responsibility of the Director/UTRESP and the UTRESPteam as a whole. Each member of the team will be involved in one aspect of M &E or another(generating, analyzing, or making decisions based on monitoring data). The information producedthrough the program's monitoring and evaluation initiatives will provide important input into theexternal evaluations and reviews conducted periodically throughout the life of the program.

The periodic Governance and Corruption Surveys, which include data on service delivery, willprovide a basis for monitoring improvements. The baseline survey will take place in 2002. Thissurvey covers perceptions and experience of civil servants, households and business people.

The program design also recognizes that monitoring and evaluation is a critical and ongoingfunction of central government itself. Ministries must be able to track key trends in the sectorsfor which they are responsible and to use monitoring information to identify the need for action.For that reason, a major activity is planned to develop a monitoring system under therestructuring component (component 1). Systems will be developed and piloted that will help getcritical information into the hands of policy makers when it is needed. To support this, training inmonitoring and evaluation techniques and in the new M & E system will be provided to targetedindividuals in the civil service.

D. Project Rationale

1. Project alternatives considered and reasons for rejection

The preferred option is Adaptable Program Lending (APL). The APL encourages sustainedinstitution building, which is consistent with the aims of the program. GoM found the long-termcommitment on the part of GoM itself and its cooperating partners to the transformation of thepublic service through APL very appealing. GoM also believes that the triggers associated withAPL provide good incentives to implement the required reforms.

A Technical Assistance Project was considered. Technical Assistance Projects tend to be for ashorter period than what will be required to achieve the overall objectives of the project, given itsfocus on behavioral change. Moreover, Technical Assistance Projects lack the flexibility that willbe required to support the reform of the public service.

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The range and scope of the project were given substantial consideration during the initialpreparation. Although public sector reform is by its very nature broad in impact and implication,it was decided to focus the project in its first, three-year phase on accountability, salary reform,and preparing for decentralization of service delivery. Reforms in these areas are the necessary-conditions for the success of a longer-term program of improving the efficiency and effectivenessof the public service.

Therefore, the scope of the first phase of the project was cut back during the initial preparation.The number of ministries to pilot the restructuring was reduced. It is anticipated that the salaryreform will be very incremental, given human resources management as well as budgetaryconstraints. Even the accountability program was cut back in the light of the capacity of thegovernment and other agencies of accountability to implement the reforms.

As the preparation proceeded, and the Country Team began to talk in terms of an early PRSC asthe principal means of providing support to the Government, the project became increasinglyfocused on what needs to be done to establish the essential fiduciary conditions for an effectivePRSC; in other words, what needs to be done for the Government to build its capacity to managethe funds to achieve the poverty alleviation objectives of the Government and the Bank, and forthere to be adequate accountability for the users of the budgetary support. Thus a strongoverarching focus of the Government's program became the improvement of expendituremanagement. Since a group of donors known as the GI0 agreed to fund all the expendituremanagement reforms under the leadership of the IMF, it was not necessary to provide support forthis part of the Government's program from the Bank project. A number of donors who aremembers of the GIO, including its chair,and the IMg participated in the appraisal of this project.

Even this focused program reform raises substantial management challenges. The implementationarrangements discussed above attempt to balance decentralized day-to-day management by sub-component managers, based in the institutions with principal responsibility for that component,with strong coordination and monitoring by UTRESP.

One issue with APLs is deciding what to do if the triggers are not achieved. This has been thecase with a number of public sector reform APLs. Even when the language in the PAD has beenstrong the tendency has been to proceed to the second phase, perhaps with a delay of somemonths or a year and a softening of the triggers. In some instances triggers are being treated as"floating." Since APLs represent a long-term commitment by the Bank and other donors tosupporting a major transformation of the public sector, it is reasonable to have a fairly "realistic"attitude to triggers. On the other hand motivation diminishes if they are not treated seriously. Theapproach in this project is to have a few, realistic, demanding but not over-ambitious triggers.

The second APL issue concems the number of phases. Most APLs have three or four phases. Itis the view of the project team that there should, at this stage, be two. This is linked to the clearneed for "adaptability." Every public sector reform program in the developed and developingworlds has made major adjustments en route. The directions taken by the reforms have invariablynot been those predicted when the reforms began. The objective has been clear, althoughsometimes that has been adjusted, too, but the path to the achievement of the objective has notbeen as obvious. GoM has a clear development objective for the ten-year period, but no one canbe sure how precisely to get there. The first basic building block phase is clear; what exactlyshould happen next is not: hence a clear first phase and a less clear second phase. It is very likelythat as phase one proceeds subsequent phasing and content will become clearer. The Mid-termEvaluation will provide an opportunity to clarify the way ahead.

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2. Major related projects financed by the Bank and/or other development agencies(completed, ongoing and planned)

Latest SupervisionSector Issue Project (PSR) Ratings

_ (Bank-financed projects only)Implementation Development

Bank-financed: Progress (IP) Objective (DO)Technical assistance to strengthen Capacity-Building: Public Sector S Slegal institutions and build legal and Legal Institutionscapacity; assistance to MAE to Development Project, Cr. 2437formulate and implement civil (Completed)service reform policies, improvepublic sector personnelmanagement, and buildadministrative capacity within theministry and its provincial offices.

Technical assistance for municipal Local Government Reform and S Sgovernment policy and capacity Engineering (PROL), Cr. 2530building in three areas: legal, (Completed)financial and administrative, andtechnical.

Strengthening of the capacity of Municipal Development Projectmunicipal governments in the areas (MDP)of management, finance, and theprovision of infrastructure services.Assisting the Government in theoperation of legal, institutional, andfiscal frameworks. Providingtraining to municipal officials andstaff. Pilot of a municipal grantsmechanism, laying the foundationfor an inter-governmental fiscalsystem.

Further developing and extension of Decentralized Planning anda decentralized system for planning Finance Project (DPPF).and managing public investments (in preparation)through community participation ina wide number of Districts in two ormore Provinces and assistance toMinistries of Planning and Financeand State Administration to developlegal framework and procedures fordecentralization.

Includes component on institutional Agricultural Sector Public S Sdevelopment (analysis of the Expenditure Programstructure of the Ministry of (PROAGRI)

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Agriculture and Fisheries (MAP),its decision-making, andrestructuring, including assessmentof its human resources andstrengthening of MAP, at both thecentral and provincial levels.

Includes component on Education Sector Strategic S Sstrengthening the institutional Project (ESSP)capacity of the education ministry inorganizational structure, policy andplanning, financial management,and monitoring and evaluation.

Including improvement of sector Health Sector Recovery Program S Sinstitutions, support services and (MHS)sub-national health managementsystems and development of humanresources capacity.

Other development agencies 2

DANIDA * Support to the judicial sector* Support to the Assembly of

the Republic* Support to Tax reform* Support to SISTAFE* Support to Poverty

Monitoring Unit in MPF* Support to Justice Sector

Strategic PlanningDFID * Support to customs reform

* Support to MPF andUTRAFE

European Commission * Support to Justice Sector* Support to Finance Sector* Poverty reduction budget

support! Support to Treasuryreform

Frederick Ebert Foundation * Support to ParliamentaryCommissions

* Improving participation oflocal communities in locallevel decision-making

IMF * Support to improvedfinancial management

* Support to tax reform

2 A fuller documentation of other donor projects is being carried by the Donor Working Group in PublicSector Reform. In addition, a group of donors known as the GI 0, are plaining to support the introductionof the SISTAFE reforms.

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IRISH AID * Macro budgetary support* Support to Public Sector

Strategy preparation (viaUNDP)

* Capacity building for reformat provincial level (Niassaand Inbambane)

Netherlands Embassy * Support to MPF* Support to the National

Directorate of Water AffairsNORAD Capacity building for

decentralized planning (CaboDelgado)

Norwegian Embassy * Support to the continuationof the UNDP "SIFAP project

* Support to reform offinancial management in thepublic sector

Portuguese Cooperation * Institutional Partnership forModern Administration

* Technical Cooperation forStrengthening InstitutionalCapacity for PublicFinancing

* Suppoit to judiciary _

SIDA * Capacity building of theAdministrative Tribunal

* Support to the modemizationand decentralization ofpublic administration (MAE)

* Capacity building of thepublic accountability system _

Swiss Development Cooperation * Support to decentralizationand municipalities

* Supporl. to fiscal reform inMPF

UNDP * District Planning andFinance Project (UNCDF,Nampula)

* Preparatory assistance forsupport to decentralizationand deconcentration processin the public administration

* Support to the Parliament* Support to SIFAP* Justice sector project* Global program for

accountability andtransparency

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* Support to PROAGRI* Decentralized planning

(component in support toMPF central level)

USAID * Support to MIC* Support to Labor

Consultative Commissionand Enterprise Owners'Association

* Support to Customsreform

* Support to PROAGRI* Support to the Policy Unit in

MTC* Support to Parliamentarians

(Sunny Project)* Legislative strengthening* Greater Accountability and

Transparency Imitative* Alternative Dispute

Resolution

IP/DO Ratings: HS (Highly Satisfactory); S (Satisfactory); U (Unsatisfactory); HU (HighlyUnsatisfactory).

3. Lessons learned and reflected in the project design} Sector & Themes x KM

Lessons from Mozambique projects

Several lessons have been learned from the Capacity Building: Public Sector and LegalInstitution Development Project.

Capacity constraints

First, capacity constraints in Mozambique are severe even by African standards. The Bankshould therefore guard against overestimating recipient capacity to implement. Specifically,project objectives should be clear, concrete and achievable in the short term. Implementationarrangements should be simple. Objectives and outputs should be practical. To this end, aparticipatory design of the logical framework for the Public Sector Reform and the first phase ofthe forthcoming project was adopted. With the help of two facilitators (a World Bank consultantand a local consultant), working groups have been formed around the key issues previouslydefined as priorities for the reform agenda. Groups, dealing with governance, decentralization,the role of the state, policy processes, financial management and human resources management,and composed of members of relevant sector ministries or public institutions and the privatesector worked together towards the definition of key actions and practical performance indicators.

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Long-term activity

Second, capacity building, especially when there is so little capacity to start. with, is inherently along-term activity. The duration of a normal Bank project can serve to launch and undertake astage of the process. Capacity building projects should be designed within a framework of long-term Bank commitrnent. This is one of the main reasons why this project chose the APL structure.

Training of staff before the implementation stage

Third, where implementation capacity is especially scarce, projects should ensure that local staffhas the necessary skills, and that dedicated persoinel for the project are identified and mobilized.Bank projects should consider developing the necessary implementation skills during projectpreparation or through an initial period devoted to training those responsible for the managementof the project. Selection of the Director of the UTRESP and his staff were done according to theseobjectives, while the Administrator for the project, already trained in financial management,received complementary training in public procurement.

Oversight body

Fourth, where reforms are multi-sectoral, no single ministry will be able to lead the reformprocess; it is difficult to exercise authority over equals. In this case, a legally establishedcommittee of ministers has taken responsibility for the reforms, led by the Prime Ministerhimself.

Lessons from public sector reform in the Africa region

The project design has drawn upon the Bank's own experience of public service reform andcapacity building. The paper "Reforming Public Institutions and Strengthening Governance,"recormmends five broad changes in the Bank's approach. Each will be significantly addressed inthis program:

* Shift focus from the content of public policy-to the way policy is made and implemented.One sub-component of the program will do just this;

* Address a broad range of mechanisms that promote public sector reform. The projectcovers the mutually supportive activities of restructuring, incentives and accountability;

* Emphasize good fit over best practice. The Bank team worked closely with the GOMteam; Over 50 Mozambican civil servants participated in the preparation of the logicalfrarnework;

* Enhance institutions through longer-term programmatic lending. A 10-year APL isproposed for a program that focuses on capacity building;

* Develop skills to do better institutional work. Above all else, the program is setting out todevelop skills to reform processes and institutions.

The program also addresses many of the challenges identified in the Africa Region Annex to thatreport. There is strategic prioritization: the program will begin by building capacity to managechange and by reforming pay. This will motivate staff to pay more attention to the achievement ofthe results citizens and businesses need and expect. Fundamental reform to the state structure willinclude focusing the core civil service on policy formulation and monitoring, and promoting thedecentralization of service delivery. The program will set out to link sector reform initiatives andthus avoid "stove-piping;" there is representation from the key sectors in the Mozambican team

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preparing the project. There has been close collaboration among Bank staff responsible for thepreparation of institutional reforms in the social and economic sectors and betweenmacroeconomic and public sector management specialists.

The project also draws upon the lessons learned from the first PRSCs. First of all, it is importantfor basic expenditure management and governance capacity to be in place prior to increasing theincidence of donor support in the form of budget support. This project will begin to put thatcapacity in place. Secondly, it is important to link policy reform for poverty alleviation tocapacity building on an on-going basis. Governments have to develop their own capacity toprepare the very reforms in the sector and coordination ministries that will form the policy targetsin the series of PRSCs. The project's Performance Improvement Facility will provide the meansfor this. Thirdly, it is even more important to have strong donor coordination in the era ofPRSCs. The donors supporting this program, and hence the PRSC, have worked together closelyin the preparation of this project, and some have agreed to pool their funding for public sectorreform.

A final lesson concerns the need for close coordination not only among members of the Bank'scountry team in the preparation of the project but also with other donors. Many members of thecountry team were consulted during the preparation since one of the objectives of a project suchas this is to provide support to sector programs in key matters beyond their control, such as payreform and improved expenditure management and accountability, as well as redefining the roleof central government as sector programs are decentralized. Other donors' program are impactedin the same way: there is a Donor Public Sector Reform Working Group chaired by theDirector/UTRESP and coordinated by DFII).

4. Indications of recipient commitment and ownership

Early in the life of the new govermment, the President established by decree the Inter-ministerialCommission for the Reform of the Public Sector (CIRESP) chaired by the Prime Minister. TheCouncil of Ministers then resolved to set up the Technical Unit for the Reform of the PublicSector (UTRESP), which has subsequently been provided with its own budget. TheDirector/UTRESP reports directly to the Prime Minister. The vice-president of CIRESP, theMinister of State Administration, has personally participated in all the stakeholder workshops.The action plan prepared by UTRESP and the outline of the strategy have both been presented toand approved by CIRESP and the Council of Ministers. The President officially launched theStrategy for the Reform of the Public Sector on National Day, 2001.

Senior civil servants have been involved in the preparation of the strategy and the reform process.Many participated in the February, 2000 workshop that defined the issues to be addressed. Overforty participated in the preparation of the logical framework in February, 2001.

Commitment can only come with understanding. All ministers, permanent secretaries andnational directors have taken part in a training program to prepare them for their jobs leading andmanaging the public service. Funding was provided from a trust fund adrninistered by the Bank.Senior civil servants participated in a specially designed two-week training program on civilservice reform in Mozambique.

Ownership has been broadened by taking the program to key stakeholders. All stakeholdermeetings have been covered by the press (there was one forjournalists). There was recently a 30-minute television program on the public sector reform program.

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The interactions between UTRESP and the donor cormmunity have also demonstrated ownershipin the sense that plans have been announced to the donors that can be the basis for the donors tohold the government accountable. UTRESP has set up a core group of donors with which itdiscusses the emerging strategy and plans. The group consists of UTNDP, Britain, Denmark,Ireland, Sweden, the Netherlands, Italy, Portugal, EC, Norway, Switzerland, United States andthe Bank. Britain, Ireland, UNDP, and Denmark are also currently funding UTRESP.

5. Value added of Bank support in this project

* Past involvement in the sector: Through a capacity building project and an IDF grant, theBank team has already developed a close working relationship with the implementationagency for the public sector reform, the UTRESP.

* Technical leadership on Public Sector Reform: The Bank has provided technicalassistance to UTRESP, and is a member of the donor working group on public sectorreform. Many of the studies that provide the analytical underpinnings for theGovernment's program and the project have been funded and received technical inputfrom the Bank. These include the PER, CFAA and CPAR.

* Capacity and knowledge: the Bank has the required experience in the sector, as well asthe capacity and instruments to put in place a large-scale and long-term project.

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

1. Economic(see Annex 4)

The project will have a positive economic impact through improving economic management andthe services provided to the businesses important for economic growth. Improved expendituremanagement should help to reduce the fiscal deficit and make the flows of resources to keydevelopment programs more predictable.

2. Financial(see Annex 4 and Annex 5)

A key theme of the project is the cost-effective provision of high-priority public services.Improved and more efficient delivery of public services, as well as the closing of low-priorityactivities should improve the overall financial position of government. Furthermore, improvedfinancial control and accountability will ensure better value for money, improved servicedelivery, and less waste, theft and corruption. The budgetary impact of the public sector reformis also being addressed during project preparation with the active involvement of the Ministry ofPlanning and Finance.

3. Technical

The Mozambique PSR utilizes lessons learned in other reform programs. The general strategyconsists of a specific Mozambican approach, incorporating on a pragmatic basis some of thetrends seen in other parts of the world, such as an emphasis on performance management, greaterprofessionalization of the workforce, and a focus on enhancing transparency and reducingcorruption across the public service.

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4. Institutional

4.1 Executing agencies:

See Section C.4

4.2 Project management:

Effective project management is essential to assure the achievement of project inputs, outputs andimpact, as well as providing financial accountability with due diligence, and to conducttransparent procurement procedures in the award of contracts. The institutional arrangements formanaging the project and for ensuring the sustainability of results build upon experiences gainedfrom similar project in other countries and from earlier stages of reform. The key executingagencies have been fully involved in the design of the current reform program and will participatein execution and management through the Council of Ministers, the Inter-ministerial Committeefor the Reform of the Public Sector (CIRESP, a committee of the Council of Ministers), andthrough a committee of the task managers for each of the departments/agencies involved in theproject. Project management will be coordinated by the Technical Unit for the Reform of thePublic Service, which will report to CIRESP, which is chaired by the Prime Minister; theMinister of State Administration is the vice-chairman.

4.3 Procurement:

An initial review of UTRESP's procurement management arrangements of the proposed projecthas been carried out. A full-time Procurement Specialist with World Bank procurementexperience has been recruited.

Based on the initial review, the mission believed that the procurement capacity of UTRESP is nota major issue. For example, funds under the PHRD Grant were disbursed almost completely andin a very timely manner. UTRESP is fully equipped with sufficient office equipment and isstaffed with very competent and qualified personnel such as a Project Advisor, ProjectAccountant, Administrative Officer and a good number of support personnel. It has also alreadyprepared and completed a detailed financing plan which was use as the basis for the procurementplan. The latter was prepared with the assistance of a consultant and was completed, presentedand cleared by IDA prior to negotiations.

4.4 Financial management:

Although the country fiduciary risk is assessed as high (CFAA Report, December 2001), theProject Risk is considered moderate as the following measures will be taken from the Project'sinception to establish a strong control environment and to mitigate financial management risks:(i) a Financial Management Consultant (FMC) was retained and advised on the selection andinstallation of the FMS; (ii) the Financial Procedures Manual has been prepared and the FMC willtrain staff in the operation of the financial management system; (iii) The budget will be approvedin line with the Government process; (iv) Financial Manager and support staff appointed; (v)Monthly bank reconciliations will be prepared and independently approved; (vi) Quarterly CashFlow Management and quarterly FMRs; variances will be examined and remedial action will betaken in a timely manner; (vii) Fixed Assets and Contracts Registers will be established andregularly updated; (viii) Project Financial Statements will be prepared in compliance withInternational Accounting Standards; (ix) Project activities will be periodically reviewed by theIGF; (x) Regular Bank supervision missions, including SOE reviews and timely follow-up of

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management letter issues; (xi) An annual external audit will be undertaken on TORs acceptable tothe Bank by relevantly qualified and experienced auditors. IFAC Auditing Standards will befollowed and audit reports will be submitted to the Bank within 6 months after the year-end.However, care must be exercised in ensuring the timely availability of Counterpart Funds. Inconclusion, provided the financial management arrangements summarized in Annex 5a3 aresatisfactorily addressed in practice, the Project financial management risk is assessed as beingmoderate. The challenge for Project Management will be to convert from the "drawing board" topractice.

5. EnvironmentalEnvironmental Category: C (Not Required)N.A.

5.1 Summarize the steps undertaken for environmental assessment and EMP preparation(including consultation and disclosure) and the significant issues and their treatmentemerging from this analysis.

N.A.

5.2 What are the main features of the EMP and are they adequate?N.A.

5.3 For Category A and B projects, timeline and status of EA:

Date of receipt of final draft:N.A.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b)draft EA report on the environmental impacts and proposed environment management plan?Describe mechanisms of consultation that were used and which groups were consulted?N.A.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project onthe enviromnent? Do the indicators reflect the objectives and results of the EM1'?N.A.

6. Social

6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The positive impact of improved service delivery, and savings from increased effectiveness andefficiency, should be felt nationwide. Government has involved civil society organizations andthe private sector throughout Mozambique in the discussion of its public sector reform strategy.These same groups will also be involved in monitoring the project's success. Retrenchment isless of an issue in Mozambique's reforn program than in many countries since the public serviceis relatively small. The problem is poor quality staff rather than too many.

3The detailed Financial Management Assessment Report was prepared jointly by the Financial Manager ofUTRESP and FMSs from the World Bank (February 14, 2002) and is available on the Project file.

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6.2 How are key stakeholders participating in the project?

Stakeholder workshops have been held with ministers, officials, trade unions, journalists,religious groups, businesses, youth groups, provinces, NGOs, donors, political parties and theNational Assembly. See D4.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

See 6.2. Also an advisory committee will be appointed with representation from outside as wellas inside government (ex-ministers, academics, civil society leaders and some prominent privatesector managers).

See D4.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

Widespread publicity about the GOM Strategy and the project, and continuing consultations withintended beneficiaries. See D4.

6.5 How will the project monitor performance in terms of social development outcomes?

The project main objective is to improve service delivery. Another key aspect of the project is toopen up the Mozambican administration to allow citizens to be better informed, and to make theadministration more responsive to citizen's needs through increased participation. Severalinstruments needed to monitor performance in social development will be established by theproject (guidelines for conducting client surveys of service delivery by local and central organs).Mechanisms will also be established to inform citizens (regulations on public informationdissemination, website) and to listen to their demands (complaint mechanisms, hotlines, etc.)

7. Safeguard Policies

7.1 Do any of the following safeguard policies apply to the project?

Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) NoForestry (OP 4.36, GP 4.36) NoPest Management (OP 4.09) NoCultural Property (OPN 11.03) NoIndigenous Peoples (OD 4.20) NoInvoluntary Resettlement (OP/BP 4.12) NoSafety of Dams (OP 4.37, BP 4.37) NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

NA

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F. Sustainability and Risks

1. Sustainability

Sustainability will depend upon:* political leadership: the President, Prime Minister and Council of Minister support the

reforms;* firm local ownership: the project is based upon the GOM reform strategy and

Implementation Plan;* systematic participation of stakeholders: there is an ongoing series of stakeholder

consultations, and an Advisory Committee will be established;* clearly defined change management bodies at all levels (mainstreamiing reform): change

managers are senior staff in the ministries;* adherence to work plan: targets have been widely publicized;* capacity to maintain long-term vision while achieving immediate objectives: GOM and

project have a 10 year vision, as well as a Quick Wins Program;* a judicial sector with the capacity to support the public sector in its role as a regulator and

guarantee fair treatment for citizens and businesses: other donors supporting reforms injudicial sector.

2. Critical Risks(reflecting the failure of critical assumptions found in the fourth column of Annex 1)

Risk Rislk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveGoM remains committed to reform M Continue dialogue with political leadershipGoM continues to involve all key N Frequent interaction with stakeholdersstakeholders in reform processCapacity to lead the reforms is developed M Training for management team; early salaryand retained reformGoM leadership of reform process fully M Continue dialogue with interministerialin place committeeGoM prepared to make tough salary S Wages study will lay out options, costs,choices benefits

From Components to OutputsTimely availability of counterpart funds M Dialogue with interministerial commission of

which Minister of Finance is memberAdequate UTRESP procurement and M Bank to train UTRESP stafffinancial management capacity

Overall Risk Rating MRisk Rating H (High Risk); S (Substantial Risk); M (Modest Risk); N (Negligible or Low Risk).

The CFAA Report for Mozambique (December 2001) assessed the risk of waste, diversion andmisuse of funds in the country as high. However, this inherent risk is mitigated in UTRESP byensuring that the robust financial management arrangements, outlined in Annex 5a, will be inplace by grant effectiveness.

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3. Possible Controversial Aspects

The salary reform supported by the project will be controversial, since it is likely to focus thegreatest increases at the top of the salary scale. The GOM, through CIRESP, has already agreedto this policy in principle. The restructuring will result in re-assignments and possibly somelosses of jobs. The introduction of performance management will introduce a system of rewardsand discipline that most will find unfamiliar and some may resist.

G. Main Grant Conditions

1. Effectiveness Condition

General conditions:

* Project Implementation Manual (Financial Procedures Manual, Procurement Plans,Procurement Procedures Manual) acceptable to IDA prepared and adopted;

* TORs for first half-year's activities/inputs prepared;* UTRESP fully staffed (appointment of an implementation coordinator, a monitoring and

evaluation specialist, a restructuring specialist, a governance specialist, a quick winsspecialist and a salary reform specialist, all with experience and terms of referenceacceptable to the Association).

Financial Management Conditions:

* FMS (Financial Management System) satisfactory to the Association installed andcapable of producing FMR (Financial Monitoring Reports);

* Financial Monitoring Report formats agreed;* Project Accounts opened;* Relevantly qualified external auditor appointed on approved terms of reference.

Financial Covenants

There are no special requirements.

H. Readiness for Implementation

[ ] l.a) The engineering design documents for the first year's activities are complete andready for the start of project implementation.

[ x ] L.b) Not applicable.

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

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

[ ] 4) The following items are lacking and are discussed under grant conditions (Section G):

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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. Theproject complies with all other applicable Bank policies.

Hay BrianD.Team Leader, AFTPR S ager, AFTPR Co Director, AFC02

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Annex 1: Project Design SummaryMOZAMBIQUE: Public Sector Reform Project

Hierarchy of Objectives Key Performance Indicators Data Collection CriticalStrategy Assumptions

Sector-related CAS Sector Indicators: Sector/ country (from Goal toGoal: reports: Bank Mission)

Increasing economic * Poverty headcount reducedopportunities. to 60% by 2006.Improving Govemance * New public accountingand empowerment. system implemented by

2006.Improving human * 90% health posts staffedcapabilities. with trained personnel by

2006.* 55% grade 10 students pass

exams by 2006.Program Purpose: End-of-Program Indicators: Program reports: (from Purpose

to Goal)To transform the public * Access to basic health and * Poverty assessments * GoMsector so that the poor education services; remainsthroughout Mozambique significantly improved by * Service delivery committedreceive the services they 2013. surveys to reformneed and the economy canafford and entrepreneursthroughout Mozambiqueare encouraged to invest. _

Project Development Outcome/ Impact Indicators: Project reports: (fromObjective: Objective to

Purpose)To support the By the end of Phase 1 of the * Review of progress * GoMGovemment to restructure program, the following should with triggers 6 leadershipthe public service for have been achieved: months before end of reformdecentralized service of Phase I processdelivery, professionalize fully inthe public service, and placeimprove govemance.

* At least six reengineering"quick wins" will have beenimplemented that will berecognized by theMinistries' clients (throughservice delivery surveys) asimproving the quality of itsservices.

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Project Development Outcome / Impact Indicators: Project reports: (from Objective toObjective: Purpose)

* Three ministries will havebegun to implement theirplans to reengineer,restructure and decentralizethe delivery of services(implementation to mean:structures have been revisedand staffing changes made).

* The regulations required toestablish a professionalaccounting body will havebeen approved by theCouncil of Ministers.

* A process will have begununder which key technicaland professional staff willhave their salaries increasedin line with the SalaryReform Strategy and therestructuring plans (thenumber to be impacted, andthus the exact indicator, willbe determined during thefirst year of the project inaccordance with theStrategy, once it has beenapproved by the Council ofMinisters).

* The new policy process bywhich policies are formulatedand submitted to the Councilof Ministers, and which willlink policy to resources andinvolve widespreadconsultation, will have beendesigned and have begun tobe implemented. ___

Output from each Output Indicators: Project reports: (from- Outputs toComponent: Objective)Objectives and Activities1. Restructuring,:

To begin a process ofrestructuring centralgovernment so that servicedelivery will be improvethrough decentralizationand rationalization ofprocedures.

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Performance improvement * Restructuring and * Progress reportsmodel institutionalized in reengineering planssix ministries restructuring completed with high staffand decentralizing plans involvement.approved by Council ofMinisters.

Performance Improvement * PIF in place by end of 2003.Facility in place. First round of applications toAt least three ministries the PIF processed by end ofwill have begun 2004, and implementationimplementing the plan. underway by end of 1 st

phase.

At least 6 reengineering * Studies to identify potential * Feedback from"Quick Wins" quick wins completed. hotlines,implemented with * Studies to reengineer suggestionsconcrete and visible selected processes boxes and webimpact on service delivery completed. sites established

* Implementation of quick in ministries andwins completed. agencies as

* Information campaign on vehicles fornew procedures/services feedback andcompleted. participation of

* Service delivery surveys citizens.implemented. * Service delivery

surveys showbetter servicedelivery.

Manual on process of * Report on policy * Progress reportsformulating and formulation completed.evaluating public policies.

Policy analysis units * Middle level staff,strengthened or specialists, senior managersestablished in key and ministers trained in thegovernment institutions. policy formulation and

evaluation process.

Communication within * GOVNET established.public service facilitated * Staff trained in GOVNET.through GOVNET.

2. Professionalization:To motivate publicservants to become moreresponsive to the needs ofcitizens and businesses.

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Support design (including * Medium Term Pay Strategy * Salary Review * GoM preparedfunding and administrative completed and adopted by Study to make tougharrangements) of a Council of Ministers by end salary priorityMedium Term Pay of 2003. choicesStrategy.Design of a scheme to * Scheme designed andenhance the salaries of key implemented by end of firststaff in the short term phase.

Human resources * Civil services statutes * Progress reportsmanagement strengthened revised to promote greaterand decentralized. professionalism.

* HRM departmentsstrengthened at the centerand sub national levels.

* Effective decentralization ofkey hiring and promotiondecisions in place.

3. Governance:To improve allocation,efficient use andaccountability ofpublicresources.

New established institute * Strategic plan for * Progress reportsof accountants has establishment ofbecome a member of the Accountancy professionEast, Central and completed.Southern Africa * Professional accountingFederation of Accountants body established.and has promulgated the * Procurement capacity ofInternational Federation public procurement entitiesof Accountants' assessed and appropriate.accounting and auditing * Training programsstandards to its members. developed.

Procurement code * Dissemination and trainingcompleted capacity on new Procurement code.building for procurementimplementation.

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Support to oversight role Establish technical office in theof National Assembly National Assembly to support

deputies.

4. ProgramCoordination:To enhance UTRESP andCIRESP capacity tocoordinate and monitorthe reforms andcommunicate with keystakeholders.

Effective management * Reports on progress, plans, * Progress reportsand coordination of policy finance and accounting,development and procurement submitted onimplementation of public time and of high qualitysector reforms throughout the project.technical support. * Council of Advisors

established.* 70% of contracts under * Supervision

UTRESP signed on time in reports2004.

* Governance and corruptionsurvey results.

Service delivery * EEC strategy implemented.improvements monitored * Regular radio and televisionand reported regularly to programs to discuss issuesstakeholders. relating to the public sector.

Project Components / Inputs: (budget for each Project reports: (from ComponentsSub-components: component) to Outputs)Inputs: Proiect BudgetComponent 1: $ 9.6 million * Quarterly * TimelyRestructuring progress availability of

counterpartfunds

Component 2: $ 1.1 million * AnnualProfessionalization disbursement

reportsComponent 3: $11.7 million * Annual auditGovernanceComponent 4: $ 3.2 million * Project reportsProgram Coordination

Total $25.6 million

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Annex 2: Detailed Project DescriptionMOZAMBIQUE: Public Sector Reform Project

The President launched the Public Sector Reform Strategy in June 2001. The ten-year strategywas prepared for CIRESP, inter-ministerial commission on public sector reform, by UTRESP, itstechnical secretariat. The strategy has been discussed with a wide range of stakeholders.UTRESP already prepared a detailed and costed draft action plan for the three first years ofactivities, that will be discussed with the sectors, and then sent to CIRESP for approval. Thestrategy is summarized below.

GoM Public Sector Reform Strategy(in italics, Bank project's component)

Component 1 (restructuring): Improving service delivery through decentralization and InstitutionalrestructuringObjectives: To enhance capacity of institutions at the local level to provide public services; to restructure units ofcentral Government for improved public service delivery.Results: Improved delivery of public services as a result of restructuring and capacity building of local organs andenhanced participation of citizens in governance; A more effective state with enhanced capacity to deliver publicservices.

Component 2 (restructuring):: Strengthening the policy formulation and monitoring processObjective: To enhance capacity of the Government and administration to formulate and monitor public policies.Result: Creation of an effective system of intersectoral committees to deal with the formulation and evaluation ofimportant national policies.

Component 3 (professionalization): Enhancing professionalism in the public sectorObjectives: To improve the institutional framework for human resource management at central and provincial levels;To improve the employment conditions in the public service so as to promote the hiring of qualified personnel and theretention of key staff; To effectively implement the national training system in public administration.Results: Greater professionalism in the management of hurnan resources in the public sector at both central andprovincial levels; Public sector better equipped to recruit, retain and monitor the performance of qualified staff,particularly those in senior policy and management positions; Well-functioning national training system in publicadministration with significant training capacity.

Component 4 (governance): Improving financial management and accountabilityObjectives: Strengthen financial planning and budgeting systems to improve the efficiency of resource allocations inthe public sector; strengthen expenditure management to increase control and to improve social and economicoutcomes of resource allocations in the public sector.Results: Better integration between sectoral policies and budgets; Higher economic and social rates of return on publicexpenditures because of better targeting and resource management and enhanced accountability and transparencythrough quality audit and inspection mechanisms.

Component 5 (governance): Promoting good governance and combating corruptionObjectives: A comprehensive national anti-corruption strategy approved and implemented; Quality of the govemancesystem improved.Results: Greater understanding among policy-makers and the citizens at large of the root causes of corruption and theneeded legal, institutional and capacity building remedies; improved functioning of the judicial sector, legislativesystem and electoral administration.

Component 6 (program coordination): Management of the Reform ProcessObjectives: UTRESP well-equipped to lead, coordinate and monitor the public sector reform process.Results: Highly effective leadership and management of the reform process at both central and local levels with activeparticipation of citizens and stakeholders.

The project is aiming to support the implementation of this strategy through the provision oftechnical assistance and training, procurement of equipment and vehicles and funding ofincremental operating costs. The project description details the various activities it is proposedthe IDA grant will support. IDA support will consist of four components.

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By Component:

Component 1: Restructuring (US$9.6 million)

Objective: To restructure central government for improved service delivery, through furtherdecentralization and rationalization ofprocedures.

The GoM strategy links enhancing the capacity of institutions at the local level to deliver servicesand restructuring the center of Government to realign its role towards the core functions of policymaking and monitoring and evaluation. The PSR project will mainly take responsibility foractivities aiming at realigning the center, since other donors and two World Bank projects arealready providing support to local governments and local authorities.

Quick Wins

The necessity to build early support for the reform program has been acknowledged by the GoM.To that effect, each Ministry has proposed "quick wins", i.e., concrete actions that areinexpensive, can be carried out in the relatively short term, are visible, and have a direct andpositive impact on service delivery. The Prime Minister has asked that Ministries report to him asPresident of CIRESP on progress with quick wins. The project will fund the process ofreengineering studies leading to the quick wins and the cost of implementing the quick wins.

Quick Wins to Date:

* physically opening up all counters separating civil servants from the people;* posting complaints books in all offices, as well as dedicated phone lines to make complaints;* reducing to 90 days the land use approval process;* introducing quick process of visa application directly at the frontier;* approving a decree defining public service standards;* providing special access for large taxpayers.

Restructuring of key ministries

At the request of the Prime Minister, UTRESP will support the preparation of restructuring plansin all ministries along the lines of the vision/plan recently prepared for the Ministry of Education.UTRESP will undertake preparatory work that will include guidelines, mapping the publicservice, an analysis of the existing structures, and other ground rules for the process. Withsupport from donors UTRESP will also help to establish and train change management teams inall ministries in the period before effectiveness. Bidding will take place under the project forconsulting firms to work with the ministerial change management teams to prepare therestructuring plans and then possible work with the ministries in the implementation of the plans.

During the first phase, key ministries will be benefiting from this exercise, and in particularEducation and Health. Since some of these ministries have already undertaken reforms, thisactivity will build on progress to date. For example, the Ministry of Health is improving planningand budgeting in the provinces and aims to decentralize service delivery. Education has asked forsupport for decentralizing activities.

The functional review of key ministries will set the agenda and build commitment for thesubsequent restructuring. Key elements of this functional review process will be: strong linkagesbetween the ministry's mission and the objectives defined in PARPA; the links with the Salary

41

Enhancement Scheme now under preparation (the functional review will be the basis for theindividual performance contracts); a close involvement of the staff of the ministry at all levelsduring the functional review, in order to create support for follow-up implementation;formulation for plans to deconcentrate/decentralize service delivery. Once approved, therestructuring, re-engineering and decentralization plans for the 6 key ministries will beimplemented (including the adjustment of staffing tables to reflect the recommendations of thefunctional review and the revision of job descriptions for senior staff) through a PerformanceImprovement Facility (PIF - see Annex 13 for an outline of how the fund will be operated).

The PIEF will provide flexible financing to facilitate performance improvement and provideincentives for ministries to do so. Access to the PIEF will be conditional upon the development ofthe restructuring, re-engineering and decentralization plan. Further drawdowns will be contingenton clear improved performance against the identified performance indicators.

The PIEF will thereby assist the sector ministries to prepare the reforms of processes, structuresand policy needed to implement PARPA. The achievement of these reforms would form thetargets for successive PRSCs.

Policy and monitoring

The results of a study commissioned by UTRE,SP of the process by which policies areformulated, decided upon, implemented and monitored characterized this process as unsystematicand uncoordinated. In order to prepare the GoM's central management units to play their "whitecollar" role (i.e. policy making and monitoring), the policy processes will be rationalized andstaff trained. The project will build capacity to link policy and resources more closely, especiallythrough the Medium Term Expenditure Framework (MTEF) and the Poverty Reduction StrategyPlan (PARPA). This will "raise the political profile of MTEF", as-recommended in the PER andCFAA, and create the legal basis for the MTEF. It will strengthen or establish policy analysisunits in key government ministries and other institutions (PR, GPM, MAE, MPF), providesupport for analytical reviews and/or evaluations of selected policies, and create a centraldepository (database) of public policies (with associated analytical reviews and evaluations).Capacity building of middle level staff, specialists, senior managers and ministers in the policyformulation and evaluation process will be an important element of this reengineering process.

Another key aspect of this process will be the installation of GOVNET to facilitatecommunications among staff within the public sector, and of GOVSYS - an electronicdocumentation center to promote enhanced information sharing with the public. As noted inseveral countries,-introduction of electronic mail may have a strong positive impact on behaviorby encouraging dialogue, speeding decisions, and even flattening hierarchies.

Phase 2

The restructuring plans prepared in Phase I will be rolled out in Phase 2. The current GoMpolicy favors deconcentration plus a modest expansion in the number of local authorities, largelybecause of capacity constraints. The degree of decentralized service delivery during phase 2 willdepend largely on the success of the decentralization policy which is supported by a number ofdonors, including two Bank projects. At this slage, the issue of overlapping competenciesbetween local sectoral administration and territorial administration will need to be systematicallyaddressed. The policy itself is one of proceeding at the rate at which capacity is developed anddemonstrated. Fiscal decentralization will follow the development of capacity. During this phaseall other ministries will prepare and implement their restructuring plans. The implementation of

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the plans will be supported by the PIEF. The built-in reward mechanism will promote reformwhere there is strong commitment. The quick wins program will continue. As Phase 2 proceeds,the center of government will increasingly focus on policy formulation and monitoring andevaluation.

Component 2: Professionalization (US$ 1.1 million)

Objective: Motivate public servants to become more responsive to the needs of citizens andbusinesses and increase professionalism.

Quality rather than quantity has long been identified as the principal staffing issue in the country.Although there may be a need to change some staff, the most obvious needs are to attract andretain qualified staff, provide staff with on-the-job training through locally-based traininginstitutions, and rationalize, speed-up and improve human resources management at all levels.

Incentives: salary enhancement scheme

The project will support the design of a sustainable medium term pay strategy that will establishthe priorities for raising the salaries of civil servants within the context of the revenueexpectations of government and the policy priorities established in MTEF and PARPA. Theproject will support the design of a donor supported scheme that will provide the basis forsupplementing the salaries of key staff within the framework of the medium term pay strategyand on the basis that the salaries will eventually be sustained by the GoM's own funds. Theproject will support the preparation of plans to introduce results oriented performancemanagement for senior managers and in key central coordination agencies.

Alternative policy scenario are being developed by the Government's multi-agency task force. APPF-financed study salary survey will provide information on salaries paid in the private sectorand parastatals for positions and skills that are most difficult to retain in the public sector. Optionswill be constrained by what is thought to be affordable, at the moment a wage bill of no morethan seven per cent of GDP, as indicated in the PARPA targets. The scenarios vary by allocatingthe additional resources to different ranges of "key technical, professional and managerial staff."All those receiving salary supplements would have to sign performance contracts. TheGovernment favors disbursing donor support through normal budgetary channels. The salaryenhancement fund will be transitional, and phased out over a yet to be agreed period of years.

Implementation of this strategy can only take place alongside the restructuring, which will helpdefine the key positions. It will therefore be done during the second phase. Meanwhile, theleaders, managers, and key technical and professional staff essential to prepare and implement thereforms needed under this project and the sectoral reform programs have to have the incentivesneeded to become fully committed to reform and to their roles in the reform programs. There isan immediate need to enhance their conditions of employment to achieve this. The project willfund the design of a scheme to enhance the salaries of key staff in the short term.

Human resources development

Reforms supported by this activity will include the following activities, aiming at improving thecurrent HRM systems:

1. System improvement:

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a. revised civil service statutes (EGFE - General Status of Civil Servants-, SCR -Compensation and Remuneration System) to promote greater professionalism inthe public sector and reflect the new role of the state in public management;

b. improved systems and more effective processes for the management of the SCR(recruitment, promotion, etc.);

c. revised State Career and Remuneration System (SCR) with links to SIFAP(Public Service Training System) and salary reform;

d. adoption of Gender Strategy for the public service.

2. Strengthening and restructuring of Human Resources Management departments at bothcentral and provincial levels through:

a. re-profiling of HRM departments based on outcome of special functional reviewsof these units;

b. establishment of performance indicators for these departments;c. adjustment of staffing tables following their functional review; andd. comprehensive HRM training.

3. Decentralization of HRM:

a. institutionalization of a decentralized personnel information system in the publicsector (joint use by TA, MPF and MAE;

b. information technology infrastructure in place in all ministries at the central andprovincial levels to maintain the register of public servants (SIP, PersonnelInformation System);

c. pilot testing of the decentralized operation of SIP, followed by fullimplementation of the system;

d. linking of SIP to the SIFAP system;e. adjustment of SIP to medium term pay reform strategy;

4. Specific support for rare skills:

a. feasibility study for creating a special career path for policy specialist at thecenter;

b. definition of a special career for ICT specialists.

Phase 2

Experience with pay reform programs shows that progress will be slow. The Medium Term PayStrategy will be in place in Phase 1, some refomis across the board will have been implemented,but much of the salary enhancement for key staff linked to performance contracts will remain tobe implemented in Phase 2. The rate of progress will depend on the rate at which performancecontracts can be drafted and the funding available from the budget.

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Component 3: Governance (US$ 11.7 million)

Objective: Improve allocation, efficient use and accountability ofpublic resources.

Accounting and procurement

The GoM PSR Strategy supports improving expenditure management and accountability as ahigh priority. The section of the Strategy outlining the principal problems complains of poorbudget execution, incremental budgeting, unclear responsibilities, too much extra-budgetaryspending, and weak accountability and auditing, including weak parliamentary supervision. Toaddress these problems the Strategy includes the following objectives:

* promotion of MTEF based budgeting at central, provincial and district levels;* improving budget execution;* introducing a chart of accounts in line with the new functional budget classification;* linking budget execution to the results to be achieved in programs and projects;* establishing SISTAFE (IFMIS);* improving the accountability of GoM to the Assembly;* making sure there is accountability for all public funds;* gradual fiscal decentralization;* expand the use of contraction obligations in the use of public funds;* improve the regulation of procurement in the public sector, including monitoring the

application of rules;* improving internal and external auditing; and* introduce legislation to underpin the above reforms.

The Government is aware that accountability and procurement systems will have to bedramatically improved for donors to be able to rely more heavily on budget support, in particular,the series of PRSCs. This appreciation is reflected in the Draft Letter of Sectoral Policy. TheGovernment's draft Anti-corruption Strategy recognizes the importance of improvedaccountability systems in combating corruption.

UTRESP has drafted a detailed Implementation Plan for the first three years of the Strategy,which approximately coincides with the first phase of this APL. The plan includes measuressuggested in the CFAA and PER, such as: a single treasury account, double entry bookkeeping,improved budget coverage, IFMIS, and MTEF as the basis for the annual budget. The plan alsoincludes steps to improve procurement, an improved framework for regular audits andexpenditure tracking, the implementation of the new law on public finance and of newprocurement rules, a functional review of the Administrative Tribunal, with a view to newoperational regulations. The Plan, and the associated budget, includes substantial provision forthe development of training capacity and for training itself, at all levels of Government.Substantial funding for IT is also anticipated, in particular to support the introduction of IFMIS.

The Bank and other donors have undertaken to support the implementation of this part of the

Strategy as a matter of high priority. It is foreseen that the installation of the IFMIS will befunded through the G-10 group of donors. Considering the importance of this activity for thecountry, the Bank project will include a high contingency that would allow this project to fundpart of the IFMIS, should this be needed. The Bank's project will focus its support on theestablishment of an accounting profession. This will require consulting, institutionaldevelopment, training and equipment support including procurement of vehicles. The project will

45

also build capacity in the National Assembly to provide legislative oversight, throughorganizational, technical, administrative and operational reforms, the creation of a Technicaloffice to support the deputies, and training of its staff. The Bank's project will also supportprocurement reform and capacity building.

Phase 2

The program will continue to provide capacity building support, through training, as needed toimprove budget preparation, cash management and accounting, with a focus on the implementationof IFMIS (SISTAFE). With funding support from other donors, the IFMIS will be rolled out duringthe second phase, having been piloted in the first. Two approaches to the piloting have beensuggested: top down (Ministry of Finance first) and bottom up (starting with a willing and preparedministry, perhaps Education). The intention is for the IFMIS to cover the whole of Government,central and local.

The MTEF, which will be linked to the PARPA priorities, will become the basis for the budget, not,as now, a technical exercise. The Council of Ministers will become much more actively involved indetermining MTEF priorities than is the case now with the budget. The MTEF will be a true settingof priorities not just an incremental, three-year budget. The MTEF will become a very participatoryprocess, inside and outside government.

During phase 2, the Administrative Tribunal will itself be decentralized. At the moment the onlyoffice is in Maputo. It will have developed better auditing capacity in phase one; this capacitywill be spread to the provinces. The Assembly will continue to develop its oversight capacity,and become increasingly able to respond effectively to the recommendations of the AT.

The accounting profession, established in phase 1, will progressively raise its standards in phase2. The training of bookkeepers and accountants will increasingly cover those in deconcentratedand decentralized service delivery units in phase 2.

It is not clear at this stage what parts of the program will be financed through the project, sincemuch will depend on the progresses made during the first phase.

Component 4: Program Coordination (US$3.2 nmillion)

Objective: Enhance UTRESP and CIRESP capacity to coordinate and monitor the reforms andcommunicate with key stakeholders.

CIRESP and UTRESP will be supported by a number of long-term Mozambican consultants, and'intermittent international advisors. Funding will be provided for UTRESP to carry out studies ofkey issues as they arise. The project will fund a Council of Advisors drawn from outside and insidethe civil service.

An Information Center for the public sector reform program will be set up. Wide-spreaddissemination of reform plans, activities and progress reports will take place through a regularupdating of a public sector reform web site, the setting up of an information center in Maputo, andregular publications of key documents of interest. In order to accompany the reforns and changeprocesses outside the capital, provincial public sector reform offices with adequate staffing andtechnical infrastructure will be established.

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Regular training of staff of UTRESP and provincial reform offices, Permanent Secretaries andmembers of CIRESP in facilitation and management skills to lead the reform process will befinanced throughout the project.

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Annex 3: Estimated Project CostsMOZAMBIQUE: Public Sector Reform Project

1. Restructuring 4.7 8.7 13.42. Professionalization 3.5 2.3 5.83. Governance 10.0 9.0 19.0

4. Program Coordination 1.4 2.0 3.4

Total Baseline Cost 19.6 22.0 41.6

Contingencies 1.6 1.8 3.4

Total Project C'ost 21.2 23.8 45.0

Civil Works 0.6 0.Goods, Equipment & Vehicles 0.5 4.9Consultants' Services and Audits 4.9 14.9 19.8

Training 10.7 0.4 11.1Grants for PIF Plans 2.9 3.6 6.5

Operating Costs 1.6 0.0 .

Total Project Cosl 21.2 23.8 45.0Note: Figures may not add up due to rounding.

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Annex 4: Cost Benefit Analysis Summary(Cost-Effectiveness Analysis Summary)

MOZAMBIQUE: Public Sector Reform Project

None

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Annex 5: Financial SummaryMOZAMBIQUE: Public Sector Reform Project

Project CostsInvestmnent Costs 10.9 18.4 10.8 3.0 43.1

Recurrent Costs 0.5 1.0 0.4 0.1 1.9

Total 11.3 19.4 11.2 3.1 45.0

Financing Sources (% of Total)IDA 51% 49% 67% 91% 57%

Government 9% 9% 9% 9% 9%Others 40% 42% 25% 0% 34%

Total 100% 100% 100% 100% 100%Note: Figures in total rmay not add up due to rounding.

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Annex 5a: Financial Management Assessment Report4

MOZAMBIQUE: Public Sector Reform Project

A. GENERAL

1. The Inter-Ministerial Commission for the Reform of the Public Service (CIRESP) wasestablished by Presidential Decree No 5/2000 (March 28, 2000) and is chaired by the Prime Minister.The Council of Ministers created the Technical Unit for the Reform of the Public Service (UTRESP)as a Secretariat to CIRESP.

2. Under the supervision of the Project Director, the Financial Manager of UTRESP isresponsible for ensuring that financial management and reporting procedures for the Public SectorReform Project will be acceptable to the Govermment, the World Bank and other CooperatingPartners.

3. The principal objective of the Project's Financial Management System (FMS) will be tosupport management in their deployment of limited resources with the purpose of ensuring economy,efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes, that willserve the needs of the people of Mozambique. Specifically, the FMS must be capable of producingtimely, understandable, relevant and reliable financial information that will enable management toplan, implement, monitor and appraise the Project's overall progress towards the achievement of itsobjectives. For the Project to fully deliver on the aforementioned objectives, it's FMS will bedeveloped in accordance with the Financial Management Arrangements presented in Section C ofthis Annex.

B. SUMMARY RISK ASSESSMENT

Inherent Risk:

4. The CFAA Report on Mozambique (December 2001) stated: "The public sector financialmanagement environment in Mozambique denotes a situation of high fiduciary risk: material receiptsand payments are excluded from the budget and from the Government accounting and reportingsystems; accounting systems and standards are outmoded; internal and external auditing requiresubstantial support; and parliamentary oversight requires strengthening. Because of the highfiduciary risk, the World Bank takes special measures to ensure adequate financial management of itsportfolio. Project management units are often established to manage IDA-financed projects andBank funding is "ring-fenced " to mitigate fiduciary risk ".

Control Risk:

5. Although the country fiduciary risk is high, the Project financial management risk isconsidered moderate provided: (a) the financial management arrangements described in Section C ofthis Annex are satisfactorily addressed; and (b) the grant effectiveness conditions outlined in SectionG of the PAD are met.

4 Please refer to the detailed Financial Management Assessment Report that was prepared jointly by theFinancial Manager of UTRESP and FMSs from the World Bank (February 14, 2002).

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C. FINANCIAL MANAGEMENT ARRANGEMENTS

Financial Management Staff:

6. Staff include: Financial Manager, Project Accountant, Procurement Specialist and supportstaff. Varying levels of staff training will be required in fmancial, management and governmentaccounting; information systems and computer applications; and procedures relating to the utilizationof funds (e.g. Special Accounts, SOEs, Special Comrnitments, Procurement, FMRs etc.). On-the-jobcoaching will also be provided.

Financial Management System (FMS):

7. In order to ensure that an acceptable FMS will be in place by grant effectiveness, a FinancialManagement Consultant will be retained: (i) to advise on the selection and installation of the Project'scomputerized FMS; (ii) to prepare the Project's Financial Procedures Manual5 (FPM, includingrecords management); and (iii) to train staff in the operation of the system. Provision has been madein the budget for hardware and software requirements as well as training.

Accounting Policies and Control Procedures:

8. The Chart of Accounts will facilitate the preparation of relevant monthly, quarterly andannual financial statements, including information on the following: (a) total project expenditures; (b)total fnancial contribution from each financier; (c) total expenditure on each projectcomponent/activity; and (d) analysis of that total expenditure into civil works, various categories ofgoods, training, consultants and other procurement and disbursement categories.

9. Project accounts will be maintained on a cash basis, augmented with appropriate records andprocedures to track commitments and to safeguard assets. Accounting records will be maintained indual currencies (i.e. Meticais and US Dollars). Annual financial statements will be prepared inaccordance with International Accounting Standards (IASs).

10. All accounting and control procedures will be documented in the FPM, a living documentthat will be regularly updated by the Financial Manager.

11. Project activities will be periodically reviewed by the Audit Unit (IGF) at the MPF.

Planning and Budgeting:

12. The Financial Manager, in consultation with the Project Director, Procurement Specialist andother members of the Project Team, will be responsible for preparing the Project's Quarterly/AnnualCash Flow Forecasts. The Forecast will be modeled on the suggested presentations contained in theWorld Bank publication: Financial Monitoring Reports (FMRs) for World Bank Financed Projects:Guidelines for Recipients (OPCS, November 30, 2001). Detailed procedures for planning andbudgeting will be documented in the FPM.

5 A consultant will be retained to develop the Procedures Mamual for the Performance Improvement Facility.

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Procurement of Goods, Works and Services:

13. World Bank and Government procurement regulations will be observed. The financialmanagement staff will be conversant with those procedures, as intemal control issues and theincurring of liabilities on behalf of the Project will be matters of concem to the financial managementfunction. A Procurement Report, showing procurement status and contract commitments, will beprepared quarterly for consideration by the UTRESP.

14. Procurement procedures will be documented in the Project Implementation Manual.

Banking Activities-Flow of Funds (To be finalized with the Loan Dept)6

15. The FMU will maintain 3 bank accounts as follows:

(a) Special Account with Bank X in US Dollars/Meticais, that will show:

* Dollar/Meticais cost of transfers to Part I Account with Bank X;* Dollar/Meticais cost of payments to suppliers;* Dollar advances (Meticais equivalent cost) from the IDA Ledger Grant Account;* Opening and Closing Balances.

(b) Current Account in Meticais with Bank X (Part 1 Account) to which draw-downs from theSpecial Account will be credited once per month (towards the end of the month) in respect ofincurred eligible expenses. Following the immediate payment of those liabilities, the balance onthis account should be zero at the end of each month.

(c) Current Project Account in Meticais with Bank X (Part 2 Account) to which CounterpartFunding will be deposited. Initially, a three months float will be provided and, thereafter, it willbe replenished monthly.

16. In addition, an IDA Ledger Grant Account (Washington) in US Dollars/Meticais/SDR will bemaintained to track drawdowns from the IDA grant i.e. (a) cost of transfers to Bank X; (ii) cost ofdirect payments to suppliers; and (iii) opening and closing Balances.

17. Bank accounts will be reconciled monthly and reconciliations will be approved by theFinancial Manager on a timely basis. Identified differences will be expeditiously investigated.Control procedures over all bank transactions (e.g. check signatories, transfers, advances etc.) will bedocumented in the Financial Procedures Manual.

Withdrawals/Disbursements:

18. By grant effectiveness, the Project will not be ready for report-based disbursements. Thus, atthe initial stage, transaction-based disbursement procedures (as described in the World BankDisbursement Handbook) will be followed, i.e. direct payment, reimbursement and specialcommitments. In due course, provided the quarterly Financial Monitoring Reports (FMRs) producedare considered adequate and available on a timely basis, and provided the recipient requests

6 Project fumding will comprise the IDA Grant, Counterpart Funds and the proposed Multi-Donor Pool(proposed funding from Denmark, Britain, Ireland and some others is still under discussion).

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conversion to report-based disbursements, a review will be undertaken by the Task Team todetermine if the project is eligible.

Fixed Assets/Civil Works/Consultants:

19. A Fixed Assets Register will be prepared, regularly updated and checked. RegardingConstruction/Capital Work in Progress (if appropriate), controls will be established to ensure thatpayments are made only for certified work (including physical verification). Contracts Register willbe maintained for all contracts. Control procedures will be documented in the FPM.

Financial Reporting and Monitoring (Monthly, Quarterly and Annually):

Monthly Reporting

20. In compliance with Government reporting requirements, the UTRESP will be responsible forpreparing a Monthly Return (Statement of Expenses - "Prestacoes de Contas") to the MPF forconsolidation into the National Accounts of Mozambique.

21. The Financial Manager will also prepare a monthly Status of Funds Report for the ProjectDirector.

Quarterly Financial Monitoring Reports (FMRs)

22. The Financial Manager, in collaboration with the Project Director and ProcurementSpecialist, will prepare quarterly FMRs on a timely basis that will include:

Consolidated Financial Reports comprising a statement showing for the period and cumulatively(project life or year to date) inflows by sources and outflows by main expenditure classifications;beginning and ending cash balances of the project; and supporting schedules comparing actual andplanned expenditures. The reports will also include a cash forecast for the next two quarters.

Consolidated Physical Progress Reports comprising narrative information and output indicators(agreed during project preparation) linking financial information with physical progress, and highlightissues that require attention.

Consolidated Procurement Reports providing inforrnation on the procurement of goods, work, andrelated services, and the selection of consultants, and on compliance with agreed procurementmethods. The reports will compare procurement performance against the plan agreed at negotiationsor subsequently updated, and highlight key procurement issues such as staffing and building recipientcapacity. In addition to procurement progress, the reports will include information on all authorizedcontract variations. Information on complaints by bidders, unsatisfactory performance by contractors,and any major contractual disputes may also be included.

23. Indicative formats for Financial Monitoring Reports (FMRs) are outlined in the World Bankpublication: Financial Monitoring Reports for World Bank Financed Projects: Guidelines forRecipients (OPCS, November 30, 2001).

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Annual Financial Statements

24. The Project Financial Statements will include:

* Consolidated Statement of Sources and Uses of Funds (showing IDA, Counterpart Fundsand funds from other donors);

* Project Balance Sheet as at the reporting date;* Notes on significant accounting policies and accounting standards adopted by management

when preparing the accounts; and on any supplementary information or explanations that maybe deemed appropriate by management to enhance the presentation of a "true and fair view";

* A Statement reconciling the balances on the various Bank Accounts (including the IDASpecial Account) to the bank balances on the Statement of Sources and Uses of Funds;

* SOE Withdrawal Schedule, listing individual withdrawal applications relating todisbursements by the SOE Method, by reference number, date and amount;

* A Cash Forecast for the next two quarters.

External Audit

25. Relevantly qualified, experienced and independent auditors will be appointed on approvedterms of reference. Audited financial statements (Consolidated) will be submitted to the Bankwithin six months after the financial year end.

26. Besides expressing a primary opinion on the financial statements in compliance withInternational Auditing Standards (EFAC pronouncements), the auditor will be required to include aseparate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOEprocedures and the extent to which these can be relied upon as a basis for grant disbursements.

27. Regarding the Special Account, the auditor will also be expected to form an opinion as to thedegree of compliance with World Bank procedures and the balance at the year-end.

28. In addition, the auditor will be required to prepare a separate Management Letter givingobservations and comments, and providing recommendations for improvements of accountingrecords, systems, controls and compliance with financial covenants.

Financial Management Supervision

29. Supervision activities will include: review of quarterly FMRs; review of annual audit reportsand management letter as well as timely follow up of issues arising; annual SOE review; participatingin project supervision missions as appropriate; and updating the financial management rating in theProject Status Report (PSR).

Grant Effectiveness - Required Actions and Next Steps

30. Salient issues to be addressed:

* FMS installed;* Financial Procedures Manual developed;* Counterpart Funds and Special Accounts opened; World Bank advised of authorized bank

signatories/specimen signatures.* Initial capacity building completed e.g. FMS, Special Account, SOEs and computer skills.

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* Relevantly qualified external auditor appointed on approved terms of reference.

Conclusion:

31. Subject to the Required Actions and Next Steps presented above being satisfactorilyaddressed by the UTRESP prior to grant effectiveness, the Bank's financial managementrequirements will be satisfied.

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Annex 6: Procurement and Disbursement ArrangementsMOZAMBIQUE: Public Sector Reform Project

Procurement:

Procurement requirements for the entire project will be carried out at the UTRESP but in closecollaboration with the beneficiaries of the project. The focal institutions of project components willbe responsible for the preparation of lists of requirements and annual procurement plans for works,goods and services that are to be procured under their respective components. A Procurement Unit tobe established within UTRESP under the guidance of a Procurement Officer (to be recruited byUTRESP) will consolidate the individual needs and procurement plans of such institutions into anoverall annual procurement plans for the project. The consolidated annual work plans andprocurement plans of the project will be reviewed by the Advisory Panel of UTRESP, andsubsequently agreed with the Bank.

Procurement methods (Table A):

Procurement of all IDA-financed works, goods, and services will be carried out in accordance withthe Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995 andrevised in January and August 1996, September 1997 and January 1999). Consulting services byfirms or individuals financed by IDA will be awarded contracts in accordance with the Bank'sGuidelines: in Selection and Employment of Consultants by World Bank Recipients (January 1997,revised in September 1997 and January 1999). The appropriate World Bank standard biddingdocuments will be used for all International Competitive Bidding (ICB) and National CompetitiveBidding (NCB) with any appropriate modifications. The World Bank's Standard Request forProposals (RFPs) will be used for the selection of consultants.

Advertising:

A General Procurement Notice (GPN) for consulting services, goods and works was submitted to theBank for publication in the United Nations Development Business prior to negotiations. The GPNwill be updated at least once a year and submitted to IDA for review.

Procurement Plan:

A procurement plan for consulting services, goods and works for the first year of project has beenprepared. The plan includes relevant information on consulting services, goods and works as well asthe timing of each milestone in the procurement process. The procurement schedule will be updatedevery quarter and reviewed by IDA at each supervision mission. The detailed implementation plan isincluded in the PIP.

Performance Improvement Fund (PEY) Plan:

The proposed IDA Grant will also finance procurement activities associated with the implementationof the PIEF Plans. Funding of these activities will be made on the basis of an appraisal conducted inaccordance with the guidelines and eligibility criteria specified in the PIF Manual. Furthermore, thePIF Plans will be carried out in accordance with the PIF Memorandum of Understandings to bereceived, reviewed and selected, approved and executed by CIRESP and relevant Ministries underterms and conditions agreed with IDA.

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Procurement of Goods, works and services under the PIF will be in accordance with the proceduresset forth in the PIF Manual. Such goods, works and services will be used exclusively in the carryingout of the PIF Plan. Disbursement of funds under the PIF will be based on a positive list of activitiesas described in the PIF manual.

Civil Works:

Civil works will consist of small rehabilitation of offices estimated at around US$0.6 million ofwhich about US$0.4 million will be funded by the proposed Grant. Contracts will be awarded on thebasis of National Competitive Bidding (NCB) procedures acceptable to IDA. Minor works costingless than the equivalent of US$50,000 per contract up to aggregate amount not to exceed $200,000equivalent may be procured under lump-sum, fixed price contracts on the basis of quotations obtainedfrom three qualified domestic contractors invited in writing to bid. The invitation shall include adetailed description of the works, including basic specifications, the required completion date, a basicform of agreement acceptable to IDA, and relevant drawings were applicable. The awards will bemade to the contractors who offer the lowest price quotation for the required work, provided theydemonstrate they have the experience and the resources to complete the contract successfully.

Goods:

The total cost of goods for the entire project is estimated at US$6.0 million of which approximatelyUS$3.5 million will be funded by the proposed Grant. Approximately US$0.7 million of the IDAfunding for goods is earmarked for PIF Grants. Procurement will be bulked where feasible intopackages valued at US$100,000 equivalent or more and will be procured through ICB procedures.

Goods estimated to cost US$100,000 equivalent or less per contract up to an aggregate amount ofUS$1,500,000 will be procured through NCB procedures that are acceptable to IDA.

Goods that are estimated to cost less than US$50,000 equivalent per contract up to an aggregateamount of US$400,000 equivalent may procured through National Shopping procedures for goodsavailable in the local market and/or through International Shopping procedures for goods that cannotbe supplied within the country and/or through the Inter-Agency Procurement Services Office of theUNDP (IAPSO). Procurement through LAPSO be carried out for goods that are estimated to cost lessthan $100,000 equivalent per contract.

Services:

The total cost of consultant services for the entire project is estimated at US$24.0 million of whichabout US$13.2 million equivalent will be funded by the proposed Grant. Approximately US$4.2million of the IDA funding for consultant services is earmarked for PIF Grants. Except as detailedbelow, consulting services will be selected through competition among qualified short-listed firmsbased on Quality- and-Cost-Based Selection (QCBS) in accordance with the provisions of Section IIof the Consultant Guidelines.

Services for audits estimated to cost US$100,000 equivalent per contract may be selected throughLeast-Cost Selection as prescribed in paragraph 3.1 and 3.6 of the Consultants' Guidelines.

Selection of individual consultants will be carried out in accordance with the provisions of paragraphs5.1-5.3 of Section V of the Consultants' Guidelines.

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Services for very small assignments for which the need for preparing and evaluating competitiveproposals is not justified and which are estimated to cost less than $50,000 equivalent per contractmay be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3.7(Selection Based on Consultants' Qualifications) of the Consultants' Guidelines.

Services for sector studies, market studies and surveys of limited scope estimated to cost less than$100,000 equivalent per contract may be procured under contracts awarded in accordance with theprovisions of paragraphs 3.1 and 3.5 (Fixed Budget Selection) of the Consultant Guidelines.

Only in exceptional cases that meet the conditions set forth in paragraphs 3.8-3.11 of the ConsultantGuidelines, consultancy services estimated to cost US$100,000 equivalent or less up to an aggregateamount of US$400,000 may be procured on single-source basis subject to prior clearance with theBank.

To ensure that priority is given to the identification of suitable and qualified national consultants,short-lists for contracts estimated to cost US$100,000 equivalent or less may be comprised entirely ofnational consultants in accordance with the provisions of paragraph 2.7 of the Consultants'Guidelines.

Review by the Bank:

Prior Review

Prior to commencing any procurement activity for goods, works and services the proposedprocurement plan will be presented to the Bank for its review and approval. The proposed plan forthe selection of consultants will be reviewed in accordance with the provisions of paragraph 1 ofAppendix 1 to the Consultant Guidelines.

The first three procurement packages for goods, works or services irrespective of their value will bereviewed by IDA in accordance with the Bank's Prior Review Procedures.

Goods and Works

IDA's prior review procedures will apply to all purchases for which the contract value is equivalent toUS$200,000 or more for works.

With respect to each contract for goods estimated to cost the equivalent of $100,000 or more, theprocedures set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines will apply.

Consultants ' Services

The Bank will review the Terms of Reference for all Consultancy Services. Contracts for servicesabove US$250,000 for firms and US$50,000 for individuals require the prior review no objection byIDA.

Training

Approximately US$12.4 million is earmarked for training activities of which about US$7.8 millionwill be funded by the proposed Grant. Approximately US$1.3 million of the total IDA funding fortraining is earmarked for PIF Grants. Training programs will consist of study tours, seminars,workshops which are geared toward improving management and skills of public servants. The

59

training activities will be subject to the Bank's prior review and approval. All training will be carriedout in accordance with Bank and Government approved annual training plans that identify the natureof training, institutions involved, cost estimates, contents of courses, and reporting requirements. Thetraining plan will be reviewed by IDA on a quarterly basis

PostReview

With respect to each contract not subject to prior review, post review will be conducted m accordance with theprocedures set forth in paragraph 4 of Appendix I to the Guidelines.

Operating Costs:

Approximately US$0.7 million of the IDA funds is earmarked for incremental costs. This wouldinclude support for expenditures that pertain to project implementation, management and monitoring,including office supplies, equipment maintenance, communication costs, vehicle operation, travel andsupervision costs, but excluding salaries of officials of the Recipient's civil service. Of the totalestimated amount, about US$0.3 million is estimated to be utilized to support incremental operatingrequirements of demand-driven programs through the Performance Improvement Facility and aboutUS$0.4 million is estimated to be utilized by relevant technical units to support operatingrequirements of activities that deals with the promotion of good governance and campaign againstcorruption and management of the reform process.

Procurement Methods IXTable A: Project Costs by Procurement Arrangements

(US$ million e auivalent)

Civil Works 0.40 0.17 0.57

(0.31) (().13)4 (0.44)

Goods, Equipment & Vehicles 3.93 1.06 0.37 5.36

(1.67) (0.88) (0.32) - (2.87)

Consultant Services 19.81 19.81

(8.91) (8.91)

Trairing 11.11 11.11(6.51) (6.51)

Grants for the PIF Plans 3 _ 0.65 - 5.88 6.53

(0.65) - (5.88) (6.53)

Operating Costs - 1.60 1.60

- - - (0.32) (0.32)Total Project Cost 3.93 2.11 0.37 38.58 44.99

of which IDA Funded by IDA 7. (1.84) (0.32) (21.75) (25.58)rICB = Intemational Competitive Bidding; NCB= National Competitive Bidding; NIS = National and International

Shopping; Other = Other procurement selection procedures (see Table A2 below).2 1Figures in parenthesis are the amounts to be financed by the IDA Grant. All costs includes contingencies.3 Performance Improvement Fund4/Procurement of small works on the basis of quotations obtained from three (3) domestic contractors.

Note: Figures in total may not add up due to rounding.

60

Annex 6, Table A2: Consultants Selection Arrangements(US$ million equivalent) j/

A. Finns 0.4 15.0 0.1 0.1 15.6(0.3) (6.4) (0. 1) (0.1) - (6.9)

B. Individuals 2.8 0.2 0.2 1.0 4.2(1.2) - (0.2) 0.2 0.4 (2.0)

Total 3.2 15.0 0.4 0.3 1.0 19.8

(1.5) (6.4) (0.3) 0.3) (0.4) (8.9)T'Including contingencies

Note: QCBS = Quality- and Cost-Based Selection; CQ = Selection based on Consultant's Qualifications;LC= Least Cost; FB = Fixed Budget; SS = Single Source Selection;.Figures in parentheses are the amounts to be financed by the Bank grant.

Note: Figures in total may not add up due to rounding

Table B: Thresholds for Procurement Methods and Prior Review

_7

Civil Works >200,000 NCB Prior Review<200,000 NCB First three contracts

prior review. Allothers post-review

Goods >100,000 ICB Prior Review<100,000 NCB Post Review<50,000 NS/IS Post Review

ConsultantsFinms >250,000 QCBS Prior Review

<250,000 QCBS Post Review<100,000 CQ Post Review

Individuals >50,000 IC Prior Review<50,000 IC Post Review

Overall Procurement Risk Assessment: Average

Frequency of procurement supervision missions proposed: One every six months (includesspecial procurement supervision for post-review/audits).

An assessment of UTRESP procurement capacity has been conducted, and a report has beenprepared. The report indicates "Average" risk based on the following: (i) UTRESP has hired aProcurement Specialist who has previous experience in a World Bank project; (ii) implementation ofprocurement under the PHRD Grant and PPF were carried out smoothly and in a timely manner (i.e.PHRD grant was fully committed as planned and procurement actions under the PPF were initiatedpromptly); (iii) strong and clear reporting arrangements between UTRESP, CIRESP and other keystakeholders; and (iv) UTRESP has used procurement rules of the Bank and other Donors and verylittle procurement was initiated using government rules since it was established a year ago. UTRESPwill also ensure that all procurement staff are adequately trained on World Bank procedures and if the

61

need arises, additional staff would be hired to facilitate implementation of day-to-day procurementtasks under the project.

It is noted that the procurement process of all goods and services contracts, and selection of allofficers under the project as well as the evaluation process of received bids and proposals will becarried out by the UTRESP in close collaboration with other implementing agencies and relevantGOM entities as appropriate. In addition, a detailed Procurement Plan with timelines of theprocurement processing steps for the first year implementation of the project has been prepared. Tothe extent feasible, smaller activities have been grouped into larger contracts for economy andefficiency.

Disbursement:

Use of Statement of Expenditures (SOEs)

Disbursements would be fully documented except for contracts below the equivalent US$200,000 forworks, US$100,000 for goods and US$250,000 for consulting firms and US$50,000 for individualconsultants. For such contracts and particularly training expenditures, the recipient would be allowedto submit withdrawal applications based on Statement of Expenditures (SOEs). All supportingdocuments for such applications would be retained by UTRESP and made readily available forperiodic review by IDA during supervision missions and by extemal auditors. All expendituresrelated to contracts above the equivalent of US$200,000 for works, US$100,000 for goods,US$250,000 for consulting firms and US$50,000 for individual consultants would be fullydocumented, and would not be paid from SOEs. The SOE methodology will also be used forOperating Cost and Training expenses.

Special Account (SA)

To facilitate payment of expenditures by the project, two Special Accounts (A & B) in US Dollarswould be established in the Central Bank. Special Account A is the primary account which will beused for disbursing funds associated with project activities other than those which relate to thePerformance Improvement Fund. Funds for the latter component will be deposited under a separateaccount called "Special Account B". The Authorized Allocation to the Special Account A would beUS$1.7 million while Special Account B would be US$0.8 million. IDA would make an initialestimated deposit of about one half of these amounts for each Special Account immediately aftereffectiveness until the aggregate amount of withdrawals from the Grant Account plus the total amountof all outstanding special commitments entered into by IDA pursuant to Section 5.02 of the GeneralConditions shall be equal or exceed the equivalent SDR of the Authorized Allocation to the SpecialAccounts. The SDR triggers are 4,000,000 XDRs for Special Account A and 1,500,000 XDRs forSpecial Account B

Flow of Funds

IDA's share of eligible expenditures would be paid from Special Accounts, except for expendituresgreater than twenty (20%) per cent of the outstanding advances to the Special Accounts, which couldbe made directly by IDA. The Recipient can ask IDA to make direct payments or issue SpecialCommitments for amounts less than 20% of the advances to the Special Accounts.

For withdrawals of the Authorized Allocation, the Recipient shall furnish to the Association a requestor requests for deposit into the respective Special Account of an amount or amounts which do notexceed the aggregate amount of the Authorized Allocation. On the basis of such request or requests,

62

the Association shall, on behalf of the Recipient, withdraw from the Grant Account and deposit intothe respective Special Account such amount or amounts as the Recipient shall have requested.

Disbursements under Special Account B will be based on an annual report integrating the results of themonitoring and evaluation activities as descnbed in the PIF manual. The annual report will be prepared nolater than March 31, 2004 and thereafter on an annual basis no later than March 31 of each year. An advanceof up to 3 months of approved activities will be deposited to Special Account B after receipt by IDA of thelist of eligible activities/grants. The grantees will have to document the initial advance in order to receiveadditional funds.

Project Accounts/Counterpart Fund Accounts

A project account would be opened at the Central Bank under termrs and conditions satisfactory toIDA. The project account would be used for deposits and withdrawals related to govermnentcontributions and others non-IDA sources. UTRESP would ensure that disbursements are effected inaccordance with Bank procedures and would have financial monitoring responsibility.

An amount in local currency equivalent to $50,000 will be deposited immediately after granteffectiveness, and replenished on a regular basis, to finance the recipient's share of project costs.

Quarterly reports

Quarterly reports and forecasts will be prepared by the project and submitted to the IDA for review.

Allocation of grant proceeds (Table C)

It is estimated that the project would be implemented over a period of about three (3) years starting inMarch 2003 and the closing of the project is set for June 2006. Disbursements of IDA funds will bedone through traditional disbursement mechanisms. It is expected that the project will becomeeffective in March 2003.

Table C: Allocation of Grant Proceeds

Civil Works 0.5 100% of foreignexpenditures and 80% oflocal expenditures

Goods, Equipment and Vehicles 2.6 100% of foreignexpenditures and 80% oflocal expenditures

Consultants' Services and Audits 7.5 86%Training 5.9 100%Grants for PIF Plans 6.5 100% of amounts disbursedOperating Cost 0.3 80%Refunding of Project Preparation Advance 0.6Unallocated 1.7

Total 25.6

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Annex 7: Project Processing ScheduleMOZAMBIQUE: Public Sector Reform Project

Time taken to prepare the project (months) 17 months

First Bank mission (identification) October 2001

Appraisal mission departure March 2002 June 2002

Negotiations May 2002 December 2002

Board January 2003

Planned Date of Effectiveness March 2003

Prepared by: Bank team together with GoM Technical Unit for the Reform of the Public Sector(UTRESP)

Preparation assistance: PHRD US$260,000; PPF US$599,000; multi-donor pool; national budget.

Bank staff who worked on the project included:

Harry Gamett Task Team Leader, AFTPRHelene Grandvoinnet Public Sector Specialist, AFTPRReynaldo Castro Operations Specialist, AFTPRNelia Dinkin Program Assistant, AFTPRJose Kastrup Counsel, LEGAFJose Janeiro Senior Finance Officer, LOAG2Anthony Hegarty Manager, Financial Management, AFTFMMarius Koen Sr. Financial Management Specialist, AFTFMJoao Tinga Financial Management Analyst, AFTFMFrancesco Sarno Procurement Specialist, AFTPCSubhash Dhingra Procurement Specialist, AFTPCMaria Isabel Nhassengo-Massingue Procurement Assistant, AFC02

64

Annex 8: Documents in the Project FileMOZAMBIQUE: Public Sector Reform Project

See Box I in main text for list of studies carried out in preparation of the project.

A. Project Implementation Plan

GoM has prepared detailed Implementation Plan for its Public Sector Reform Strategy

B. Bank Staff Assessments

C. Other

*Including electronic files

65

Annex 9: Statement of Loans and Creditsas of December 12, 2002

MOZAMBIQUE: Public Sector Reform Project

Differencebetween

Original Amount in US$ Millions expectedand actual

disbursementsa

Project FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm

ED ____ Rev'd

P049878 2003 MZ-EMPSO 0.00 120.00 0.00 0.00 63.50 -23.50 0.00

P001806 2002 MZ-Municipal Development Project 0.00 33.60 0.00 0.00 31.08 2.92 0.00

P001785 2002 MZ-Roads and Bridges MMP 0.00 162.00 0.00 0.00 163.98 23.74 0.00

P069824 2002 Higher Education Project 0.00 60.00 0.00 0.00 59.28 -2.96 0.00

P073479 2002 MZ-Communication Sector Reform 0.00 14.90 0.00 0.00 14.26 -0.12 0.00

P001808 2001 Mineral Resources Project (NRMCP) 0.00 18.00 0.00 0.00 16.68 1.49 0.00

P070305 2000 Coastal & Marine Biodiversity Mgmt 0.00 5.60 0.00 0.00 4.87 4.93 0.00

P049874 2000 Enterprise Development 0.00 26.00 0.00 0.00 17.51 11.96 0.00

P042039 2000 Railway & Port Restr. 0.00 100.00 0.00 0.00 69.60 43.70 -4.95

P035919 2000 Coastal Management 0.00 5.60 4.11 0.00 3.36 2.93 1.82

P052240 1999 National Water 11 0.00 75.00 0.00 0.00 65.10 28.41 0.00

P001786 1999 Transborder Parks 0.00 71.00 0.00 0.00 58.31 51.92 0.00

P001799 1999 Education Sector Strategic Prog.(ESSP) 0.00 30.00 0.00 0.00 18.97 16.63 0.00

P039015 1998 National Water I 0.00 36.00 0.00 0.00 23.44 20.31 0.00

P001759 1997 Transborder Parks 0.00 0.00 5.00 0.00 0.54 4.95 0.00

P001792 1996 Health Sec Recovery 0.00 98.70 0.00 0.00 13.99 25.28 0.00

P001780 1994 MZ Gas Engineering (ENGY) 0.00 30.00 0.00 3.47 0.83 4.78 4.78

P001804 1994 2nd Road and Coastal 0.00 188.00 0.00 1.66 17.25 19.68 19.56

Total: 006 1074.40 9.11 5.12 642.55 237.06 2

66,

MOZAMBIQUESTATEMENT OF IFC's

Held and Disbursed PortfolioJun 30 - 2002

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1996 AEF Cahora Bassa 0.18 .00 0.00 0.00 0.18 0.00 0.00 0.001998 BIM-INV 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.002000 BMF 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.001997/01 MOZAL 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001999 Maragra Sugar 10.30 0.00 0.00 0.00 0.00 0.00 0.00 0.001992 Polana Hotel 0.53 0.00 0.00 0.00 0.53 0.00 0.00 0.002000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.45 0.00 0.00 0.001997 SEF CPZ 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.001997 SEF CTOX 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.002000 SEF Cabo Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.001999 SEF ROBEIRA 0.13 0.00 0.00 0.00 0.13 0.00 0.00 0.00

Total Portfolio: 0.50 0.00 0.00 3.53 0.50 0.00 0.00

Approvals Pendi g Commitment

FY Approval Company Loan Equity Quasi Partic1999 Mozal Swap 9.00 0.00 0.00 0.002000 BIML 2.00 0.00 0.30 0.002001 SEF Grand Prix 0.44 0.00 0.00 0.00

Total Pending Commitment: 11.44 0.00 0.30 0.00

67

Annex 10: Country at a GlanceMOZAMBIQUE: Public Sector Reform Project

Sub-POVERTY and SOCIAL Saharan Low-

Mozambique Africa Income Development dlamond'2001Population. mid-year (millions) 18.1 674 2,511 Life expectancyGNI per capita (Atlas method, US$) 210 470 430GNI (AUas method, US$ billions) 3.8 317 1,069

Average annual growth, 1995-01

Population (%) 2.2 2.5 1.9 G/NLabor force (%) 2.2 2.6 2.3 GNI ' Grossper -primaryMost recent estimate (latest year available, 199541) capita \ ,' enmollment

Poverty (% of population below national poverty line)Urban population (% of total population) 41 32 31Life expectancy at birth (years) 42 47 59Infant mortality (per 1,000 live births) 129 91 76Child malnutrition (% of children under 5) 26 Access to improved water sourceAccess to an improved water source (% of population) 60 55 76Illiteracy (% of population age 15+) 55 37 37Gross primary enrollment (%of school-age population) 71 78 98 Mozambique

Male 83 85 103 -- Lowincome groupFemale 80 72 88

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001EconomIc ratlos

GDP (USS billions) 3.5 2.5 3.8 3.6

Gross domestic investmenttGDP 6.0 16.0 39.8 41.8 TradeExports of goods and servires/GDP 9.9 11.2 12.3 21.7Gross domestic savings/GDP -9.8 -11.2 11 9 19.2Gross naftonal savings/GDP -8.6 -e.7 15.6 17.3

Current aocount balance/GDP -13.2 -29.6 -27.7 -23.6 DomesticInterest paymentsWGDP 0.0 0.6 3.8 5.1 sav h InvestmentTotal debVGDP 1/ 0.0 338.7 138.5 1381 savlgsTotal debt service due/exports 21 0.0 15.5 9.1 3.5Present value of debVGDP 2/ .. 24.6 25.3Present value of debVexports 2V 194.4 116.0

Indebtedness1981-91 1991401 2000 2001 200145

(average annual growth)GDP 1.2 7.3 1.6 13.9 9.0 MozambiqueGDP per capita -0.1 4.9 -0.2 11.8 6.9 Low-income groupExports of goods and services -2.7 14.8 15.0 60.0 25.6

STRUCTURE of the ECONOMY

(% of GOP) 1981 1991 2000 2001 Growth of Investment and GDP(%

Agricuture 35.1 33.7 24.4 22.0 soIndustry 33.8 17.6 25.1 25.8 s

Manufacturing 9.2 12.6 11.5 40-.

Services 31.1 48.6 50.5 52.2 20

Private consumption 97.0 100.8 78.2 70.4 9s 97 98 99 oo o0General govemment consumption 12.8 10 . 9.9 10.4 GDI -GDPImports of goods and services 25.8 38.4 40.0 14.0

(average annual growth) 198141 199141 2000 2001 Growth of exports and Imports (%)

Agriculture 5.4 5.9 -10.3 14.0 75Industry -3.9 17.2 4.3 34.1 so

Manufacturing 18.0 11.0 343 25Services 9.4 1.2 11.3 48.3 0

Private consumption -0.2 3.9 -4.3 -2.2 0 97 09 o 01General govemment consumption -2.7 3.0 5.0 -4.4 -soGross domestic investment 49 16.8 6.2 1486 Exports -> portsImports of goods and services -2.6 7.7 0.0 3.0

Note. 2001 data are prelirrinary estimates.The dianionds show four key Indicators in the country (in bold) conpared vith Its income-group aveage. If data are nrissing. the dlamond vAII be inconffete

68

Mozambique

PRICES and GOVERNMENT FINANCE18s0 1980 199 199 2000 Inflation (%)

DomesOc prkes 8

(% change)Consumer prices 4347 2.9 12.7 soImplicit GDP deflator 34,1 3.3 13.1 4o

Government flnance(/ of GDRP includes current grants) 0 . I

Current revenue 13.8 17.0 18.2 17 5 ss 96 97 90 99 05

Current budget balance 1.4 2 4 6.1 4.6 - GDP defiator eCPIOverall surplus/defldct -3.5 -11.7 -6.8 -10.0

TRADE

(US$ milions) 1980 1990 1999 2000 Export and Import levels (USS mill.)Total exports (fob) 281 126 284 364 l,e

Cashew 67 15 33 29Prawn 32 43 66 66 1 * -Manufactures .. 27 14 14 ,oo00

Total imports (clf) .. 780 1,200 1,157Food 47 87Fuel and energy .. .. 124 44Capital goods .. .. 243 410 o

94 00 go 97 90 00 00Export price index (1995=100) 83 91 96 97Importpricelndex(1995=100) 107 92 86 88 *iExports lnsiportsTemmsof trade (1995=100) 77 99 112 110

BALANCE of PAYMENTS

(US$ millions) 1980 1990 1989 2000 Current account balance to GDP (%)Exports of goods and services 399 229 601 732 oImports of goods and services 844 850 1,540 1,511Resource balance -445 -621 -939 -T79 -10

Net income 22 -145 -214 -228 -20 I " I*Net current transfers o 0 0 0 4

Current account balance -423 -766 -1,152 -1,007 -

Finandng items (net) 390 772 1,220 1,314Changes in net reserves 32 -6 -68 -307 ._0

Memo:Reserves including gold (USS millIons) 238 232 669 745Conversion rate (DEC, local/US$) 32.4 929.1 12,689.5 15,689.5

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) Composition of 2000 debt (USS mill.)Total debtoutstandingand disbursed 1/ .. 8,326 6,322 7,136

IBRD 26 0 0 0 G:567 B. 760IDA .. 268 702 760 ~ C 219

Total debt service 1/ .. 57 156 176 AIBRD .. 0 0 0IDA .. 7 16 2 F: 1,75i

Composition of net resourre flowsOfficial grants .. 448 428 564Offical creditors2/ .. 165 191 105Private creditors .. 20 344Foreign direct investment 9 392 84Portfolio equity .. .. E: 3.461

Wodd Bank programCommitments3/ .. 105 276 62 A -IBRD E -BilateralDisbursements 3/ * 74 79 97 B -IDA D -Other rriultilateral F -PrivatePrincipal repayments .. 6 1 4 C - IMF G -Short-tennNet flows .. 68 78 94Interest payments . 1 111 Net transfers .. 67 67 88

Development Economics 10/9/01

69

Annex 11: President Chissano's Speech on Public Sector ReformMOZAMBIQUE: Public Sector Reform Project

This summary appeared in Mozambican news service AIM: 107601E CHISSANO LAUNCHESREFORM OF PUBLIC SECTOR Maputo, 25 Jun (AIM) - Mozambican President Joaquim Chissano onMonday declared that the country's public sector "has generally operated with low levels of efficiency,and has provided citizens with poor quality services." He was speaking at a rally in the Maputosuburb of Bagamoio marking the 26th anniversary of the country's independence - the momentchosen by the government to launch a ten-year programme to reform the public sector. Chissanonoted that there was now a generalised trend for civil servants "to demand illicit payments forproviding the services which are job of the public administration. This undermines the trust thatshould exist in the relations between state and society." The President stressed the urgency of makingchanges to "raise the moral and ethical standards of public servants, transforming them so that they doindeed serve the public."

Chissano said that the government wants a public service that is "flexible, decentralised, freeof red tape, simplified, modernised, competitive, and concerned with the results and quality of theservices provided to the citizens." The public sector must be "transparent with regard to the use ofpublic property and resources, as well as regards procedures and the presentation of results " It mustbe "endowed with qualified, professional staff, who are always ready to make necessary changes, andare aware of their duties and responsibilities to society." Chissano stressed that this reformed publicsector must be "intransigent in fighting against corrupt or fraudulent practices.' The staff it employsmust "serve the citizens and not serve themselves." Furthermore, the public sector should bedemocratised.

Chissano wanted to see participatory mechanisms institutionalized "which allow us toidentify more securely the desires and needs of citizens, and also create a space for the participationof society in the search for solutions to the problems of development." There would be two phases tothe reform programme. From 2001 to 2004 the basic conditions would be established for "theprofound transformation of the public sector". The foundations for the new organisation, planningand management of the public administration would be laid in this period, and some short termmeasures introduced that should "significantly improve the performance of staff'. In the followingperiod, up until 2011, programmes with a much broader impact would be implemented. "In thisstage, the public sector should function in a qualitatively better manner than at the start of the reform,and present new standards and values that clearly excpress an irreversible change in the mission of thepublic sector -- a sector essentially working for results and for the citizens", declared Chissano.

At the top of the list of specific reforms is the "rationalization of procedures and thedecentralisation of administrative structures and processes" in order to make them "more efficient andaccessible to citizens". Much attention, Chissano promised, will be given to the system of managinghuman resources in the public administration in order to improve "levels of professionalism,competence and ethics". He laid a heavy stress on the fight against corruption, as a phenomenon that"destabilises institutions, drains society's confidence in the state, and attacks national unity itself'."Corruption inhibits the development of the private sector, scares off foreign investment and puts atrisk continued foreign aid and cooperation", Chissano wamed. "It seriously erodes citizens'confidence in the govemment and in state institutions. It prejudices the effectiveness and results ofpublic policies". "The social and economic cost of corruption is immense, and weighs in an unjustand disproportionate manner on the most vulnerable strata of the population", the President declared.He added that both "grand corruption", involving large sums of money, and "petty corruption" thataffects people's day-to-day lives, "produce equally perverse effects". Grand corruption "diverts, tothe benefit of a few, resources which could generate wealth and minimise the effects of absolute

70

poverty", Chissano continued. "It damages the image of the country and compromises the credibilityof our state internationally". As for petty corruption, it was "only petty when considered in isolation.The multiplication of such acts thousands, or perhaps millions, of times means that it reachesincalculable sums".

Chissano gave examples that are wearyingly familiar to all Mozambican families. "Themother or father of a family who must "offer thanks" in order to enroll their son at school, the patientwho is only cared for if he gives the health worker "a little envelope", the driver who must "buy abeer" or "speak like a man" to the police in order to avoid a fine or the seizure of his driving license,the small businessman who is resigned to paying "something extra" to the notary to obtain hiscertificate quickly, all these and other situations are occurring with alarming frequency", the Presidentdeclared. But he rejected the common argument that corruption is caused by low wages in the publicadministration. "That argument is false", he said, "since it cannot explain the large number of honeststaff members, who do not abuse their position to their own benefit". Wages in the public sector wereindeed below what would be desired, "but we are still a poor country, and the state can only pay whatnational production allows", Chissano said.

As for specific measures, Chissano promised increased modernisation and computerization ofprocedures. This would not only speed matters up, but it would cut out many personal contactsaltogether. There would be "a significant reduction in the influence of the human factor on dealingwith requests and authorisation, in collecting taxes and fees, and in other direct contacts between thecitizens and the public sector", he said. Some of the new measures are extremely simple. All civilservants who deal with the public must wear a badge with their names, so that citizens can identifythem when maling complaints. In health units, the prices for all medical services and all drugs mustbe fixed on the walls. There are also promises to simplify mechanisms for importing used cars, topublicise the rights and duties of Mozambican emigrants, and to create channels whereby complaintsand suggestions can be phoned in. Chissano also promised "direct channels of communicationbetween society and the government which guarantee security and eliminate threats of reprisalsagainst citizens who exercise their legitimate right to denounce acts of corruption". (AIM)

71

Annex 12: Letter of Sectoral PolicyMOZAMBIQUE: Public Sector Reform Project

REP0i3LICA DE MOI;AMBIQUEMINISTERIO DO PLANO E FINANQAS

GABINETE DA MINISTRA

N. ./GVM/MPFIo2Maputo, September 10 . 2002

Mr. Jamne Wolfnsohn,PresidentWorld BankWashington DCUSA

SUBJECT: LETTER OF SECTORAL POLICY: PUBLIC SECTOR REFORM

Introducton

1. The overriding development objecie of the Govemment of Mozambique is asubstantial reducUon in the levels of absolute poverty in the country. The fight againstpoverty has been of central conoem since independence, with high priority being givento expenditures on health and education togeher with eforts to rehabilitate basicinfrastructure. Since 1987, siructural reforms have been enacted to induce rapid andsustained economnic growth and improve incomes through the creation of an economybased on private Initiative and market foroes, As a result. Mozambique has recentlyachieved sinificant annual economic growth rates and some improvement in per capitaincome.

2. In spite of these achievements, the country remains one of the poorest in theworld and poverty clearly remains Its key challenge. In order to provide a short- andlong-term strategic fraunework for addressing poverty, the Govemrment has adopted theAction Plan for the Reduction of Absolute Poverty 2001-05, which represents thecountry's Povefty Redudion Strategy PapW. The Action Plan recognizes that rapid,Inclusive growth is an essential tool for poverty reduction through its generation of publicend private resources and improved economic opportuniies. Thus, the strategycombines short-tern programmes that cirectly benefit the poor with medium and long-term policies to promote balanced. rapid growth in order to create a virtuous circle' ofacoelerated and sustainable progress in the fight against poverty.

3. The Poverty ReducUon Strategy Identifies six priorities, or 'fundamental area ofaction' to promote human development and broad-based growth. These are: (I)education, (ii) health, (ii) agriculture and rural development, (iv) basic infrastructure, (v)

72

good govremanoe, and (vi) macro-economic and financial management. By includingthe last two fundamental areas of action, the Government recognizes that hee exists adirect correlation between the achievement of broad-based soco-economicdevelopment that reduces the Incidence of poverty and the performance of the publicsector. Sustained economric growth and increased welfare provision demands that thepublic secior provides the essential policy environrent infrastructure, and servicesresponsively, efficiently and effectively.

4. In order to improve the performance and responsiveness of the pubic sector, theGovemment has adopted a comprehensive Pub#i Sector Reform Strategy 2001-2011.The Strategy builds upon discete anod partial reform actions that have been undertakenover the past several years that focused upon: Institutional reform through measwes todecentralize and deconcentrate, including the establishment of municlpalites, reform ofthe budget system, the establishment of a training progranme for civil servants, therationalization of human resources through a new career and remunerafton systm,salary decompression and a human resource management data base.

Background and Scope of Public Sector Reform

5. Govemment's commitment to widen and accelerate on-going, partal sectorreform was made evident with the creation of the lnfter-mbirgte4W Publ:c Sector ReformCommintee (CIRESP) In March 2000, the establishment of the Public Sector RefomTecohncal Unit (UTRESP) in June 2000 and the speech made by the Prsident on June2 5 h 2001 launching the new comprehensive Public Sector Reform Stategy. There nowexists high-level consensus on the need for oomprhehnsive reform and the oommitmentto tum plans into operational acton.

6. The overall goals of the Public Sector Reform Stategy may be summarized asbeing:

a) Redefine and reinforce the role of the Slate and its pubfic administration;b) Improve the quality of service delivery;c) Strengthen democratic participation of citizens at different evels of govemment;d) Decentralization;e) Consolidation of mechanisms aimed at fhting corruption; andf) Promotion of transparency and good governance.

7. The Council of Ministers has decided that the reforms will cover al institutionsfinanced directly by the State. The National Assembly, has also resolved to include itsSecretariat among Fe insttutions to be covered under the reforms. It will kfous uponrestructuring the State so that public serwvants become more responsive to public needsand resul-orientated. The Stralegy includes a VQuick Wins Programme' which gonsistsof highly visible measures that will be successfully Implemented in a relively short time.

8. The reforms will be carried out in two interrelated phases. The first phasecovering the years 2001-2004 is intended to create the basic conditions needed totransform the public sen*or. Reform policies, programes and methodologies will bedeveloped and refined, in some cases through implementng pilot schemes. Other basicfoundations for reform such as an anti-corruption programme and a medium-term paypolicy wil be initiated. The second phase (2004-2011) will build an the experience

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gained in the first phase to viden the refonms across Ute pubic service in order to bringabout the complete transformation of all institutions of the public servioe.

9. CIRESP, chaired by the Prime Minister, will provide politkcal leadership, review allreform proposals prior to submnission to the Council of Ministers and monitor theirimplementation. A small team of coon specialists to provide technIcal gudance andcoordination staffs the UTRESP. The Director of UTRESP will interact with allPermanent Secretaries on a day-to-day basis and through regular meetings ofcommittees established for this purpose. The views of stakeholders outside the publicservice will be regularly sought while close liaison will be established with inth steddonors.

Puiorftte. and ComponenX of Public Sector Refom

10. The first phase of the reform programme includes six main components:

a) Improving service delivery through decentraliation and insitutional restructuring,b) Strengthening the policy formultIon and monitoring process;c) Enhancing professionalism in the public sector,d) Improving rinancial management and accountability;e) Promoing good govemance and oombating corruption; arndfl Management of the reform prooess.

11. The component to improve swice delivery through decntralization andinstitutional restrctudng seeks to enhance service delivery at th local level, thrughrestcwing. capacity buding and increased partidtpafon, while creasting a more agileand capable State able to facilitate national development. It wgl include:

a) Revised lgal and policy fra#ework Including: new law enacted on localauthorities, lgislation on municipalities, regulason for decetralized serviceprovson, o*ent surveys, improved Iformation dissmination, simplifcommercial regulations and laws on tourism and customs procedures;

b) Institutional reform including: functional review of Govemment units andrestructuring of key ministries, revieNv of local authority adminisrativeprocedures, expansion in fe nwnber of municipalities, reorganization ofdistrct administration, establishrmnt of 'localities' as further tier of localgovernment, new forms of partcipation In local affairs, new land registraionprocedures, one-stop shops piloted;

c) Human resource development Including: training of local authority staff insimplified administrative procedures, irnproving working conditions of localauthority staff, civil servant capaciy building on new legislation andproodures.

12, The component to strengthen polic forlatIon and mnioring seeks to createan effective inter-sectoral mechanism to guide and coordinate the formulation andevaluation of important national policy. It will lnclude:

a) To formulate the legal and policy frameworks for the policy proces induding:manual on process of policy formulation, monkoring and evaluation andguidelines for inter-sectorel coordinatori;

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b) Institutional reform including: establishing policy analysis units in keyministries, analytic evaluation of selected policies, inproved ITcommunications within government and with the public;

c) Human resource development Including: training on pulic policy developed,capacity building of mid-level staff in policy formulation, training staff in theuse of electronic information systems.

13. Enhancing professionalism in the public sector w9ll pursue the effectiveimpementation of the nationat public administraon training system and improveemployment conditions in the pubic service.

a) Revised legal and policy framewok including: decree to establish High LevelInstitute, creation of IFAPA's, Interfinkg SIFAP and SCR, adoption and

plnnentation of medim term pay policy, introduction of performanceimprovement management.

b) Institutional reform including: making operational High Level Institute andIFAPA's. consolidation of intituional base of SIFAP and the ceation of atraining fund, adoption of performarce contracts for senior staff, improved jobdescriptions, review of pensions system.

c) Hwnan resource development Incduding: wide -staff training and devefopmentprogrammes, training in result-iented management.

14. The component to impove fnanciaf management and accourNabty will improvefinancial planning and budgeting to increase the effidency of resource alocaton andstrengthen expenditure management to increase control and accountability as well asimprove social and economic outcomes.

a) Revised legal antd policy framework incuhi: legislaion and regulatons tomodernize the financial planning, budgeting and maagement instruments,clarified egal administrative status of each public enttty, adoption of newprocurement regulations, regular audit introduced, reform of fiscal andcustoms litigation, decorncentration of Administrative Tribunal.

b) Institutional reforms inctuding: introduction of single treasury account,rationalization of bank account procedures of spending units, introduction ofdouble entry accounting, improved budget coverage, gadual instalation ofIntegrated financial rnanagement information system, MTEF uUlized as basefor annual budget;

c) Human resource development including: training of selected staff in use ofintegrated financial management system, training of seleced staff to improvefinancial planning, specialized accountancy training. IT training, trainingpadliamentarians in budget analysis and expenditure management, training ofAdministrative Tribunal staff.

15. Promotig good govermano and combating comnftn will lead to theimpneentation of a comprehensive national anticorruption srtey and legislabon andimproved funcdioning of the judicial sector, legislative systems and the eletoraladministration. It w*ll include:

a) Review of eal and policy framework includin: review and redrafting of theexisting proposal of a national anti-corruption straty, enactment of anti-corruption laws and associated regulations, Implementation of Governance,

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Ethics and Deontology law, Integrated strategy for the judicial sedor, revisionof electoral legislation, sbutegy to reborm parliamentary management;

b) Institutional refofm including: creation of new and additional Instituinalmechanisms to implwnent anti-corruption lgislation, enhanced capacity ofthe judiciary to handle oorruption cases, establish data base on corruption.reform of electoral administration and impoved voters register, creation ofinter-Institutional task forces for Implementation of proriy judicial reformactions;

c) Human resource development intcluding: training of all civil servants Inprofessionalism and ethics, training of magistes to deal with corutoncases, training of Inspecton units on corruption, pubic awareness campaign.trining of SGAR staff.

16. Under he cornponent Managament of the Reftrm Process the capacity ofUTRESP will be reinforced to provide highly effective leaderstip, technical support andmanagement at both the central and local levels. RegLiar updating of the PSR Strtegywill be undertaken and a monitoring and evaluation capacity establihed. Finandal andprocurement capacities will be created to enable UTRESP to manage donor funding ofthe reform process and programme.

17. A contal requcret identified in all components of the Reform Programme isbuiWd capactes and h*wbing to equip the Public Service with the technical andmanagerial skills required In a modem service. Urder the SIFAP (Training System inPublic Administration) 15000 civM servants without secondary education are targeted toreoeive training in human and financial resources management. The SIFAP WMil mainlyrely on non-formal education modalities (modular system, short term courses, distanceeducation) and guarantees that training Is positIvely rewarded via career progress. It isplanned to establish a complementary High Level Insitute to provide managerial trainingfor senior staff.

18. In the drive towards operational efficiency, fudI advantage must be taken of theopportunites provided by elecrnic information, data andng and communicaionstechnology. In order to do so, there Is need for coordinalion, compatibiit and a degreeaf standardization between systems, equipment and user trainIng requirementsthroughout the public service. Therefore, Govenment has prepared an 1nrpWmenteJonStrategy for the Information and Communicaton TechnooAies to provide the technicalfwaework, institutional arrangements and necessawry Integration of computer and otherelectrnic hardware and software. Through systems such as GOVNET and GOVSYSgovemrnent will seek to maximize the potential of elctronic communications to transferinformation within govemment and to make Irmfonaton readily available to the publlc.Computer-based management systems such as the Staff Information Syslems and theFinancial Management Information System wil be wWdened in coverage to providewoceible, up-o-date management tools.

19. The goal of Public Sector Reform Is to restore service to fe peopbe. For this tobe achieved, people must be able to voice their needs and opirdons and partipate indecision-maling. The process of establishing paterships between govenment andstakeholders will be extended to all elements of fe publi sector. Stakeholdews, fromthe national to most local level, must be provided the opportunity to articulate needs,establish t ptiorities and monitor service delive. The govemnment's decentralzationpolicy will be pursued vigorously and the capacities of lower tiers of govermment will be

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radically strengthened, a number of new Municipalities will be created and a fourth tier ofgovernment at the most local level, the locality, wil be introduced. Efforts to eradicatepoverty and social marginalisation will require greater responsiveness on the part of thepublic sector coupled with deliberate moves to empower the communiy, In all Its forms,to better its welfare and economic well-being.

Implementing the Reforms

20. With the Public Sector Reform Straty and institutional arrangements In place,the Govemment wishes to move as quickly as possible to implementation. As a first stepa detailed Implementation Plan for the first three years of the reform programme Is In thefinal stages of preparation. the proposed World Bank Adaptable Loan Programmetogether with the Phase 1, Public Sector Reform ProJect, covering Its first three years willprovide an important element of implementation finance. The World Bank ProJect willprovide signficaft contributions to the implementaion of five of the six components ofthe Reform Sbttegy. Ofter donors have expressed interest in funding other areas ofreform, notabty those concemed with promoting good governance, combating corruptionand judicial sector reform. There is good reason to be confident that other donor fundingwIll be made available to enable the Govemrment to impment all parts of Kts strategy.Close laison will be maintaned with the donor group and it is hoped that a flexible, multi-donor bsket fund will be estblished and funded.

Coinclusion

21. While the Government is fully committed to the Implerentafion of the polidesand actions outlined in this letter, the collaboration and continued support of ourdevelopment partners wil be essential. Thus, the Govenment Is appreciative ofthe joint Initiative with the World Bank to establish a line of credit to facilitate theimplementation of the activities contained in the Publc Sector Reform Projecl.Available funds will be drawn upon judidously, and in accordance with teProject documentation, to obtain the expertise and equipment required to movethe reform programme forward. The Government looks forward to contiruedcooperation and collaboration with the World Bank and other developmentpartners so that the vital reforms to our public sector can be canied out In aoonsidered but expeditious manner.

Yours sincerely,

Vice MiniIsbr of Planning and Finance

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Annex 13: Performance Improvement Facility: An OutlineMOZAMBIQUE: Public Sector Reform Project

Outline of Performance Improvement Facility

1. The PSR Project will provide the resources needed to implement reengineering, restructuringand decentralization through the a Performance Improvement Facility (PIF).

2. To access the PIF, a Ministry will prepare a PIF Plan describing a set of restructuringactivities to achieve its strategic restructuring objectives, and submit it to CIRESP for approval.Approval will be granted following the PIF Manual eligibility criteria and guidelines, and will beformalized by a PIF Grant Agreement between CIRESP and the ministry.

Purpose and Uses of the Facility

3. The Perfornance Improvement Facility (PIF) will be a flexible instrument used to financeministry-led programs to improve priority services. The Facility will provide resources to meet the directcosts of implementing the strategically identified performance improvement plans and key capacitybuilding interventions. Such plans and interventions will have a direct bearing on specific targetimprovements in services delivered by that ministry. During the first phase, imnprovements in servicedelivery will emphasize "quick-wins"'.

4. To access the PIF, a ministry will initially prepare a strategic plan. Resources for capacitybuilding will be accessed as soon as a ministry has developed a credible strategic plan and has diagnosedits requirements to deliver the strategy. Thereafter, funds for technical assistance and training in strategicplanning, operational planning and performance appraisal will be drawn down according to agreedtargets and standards for service improvements, as described in a PIF Plan, describing a set ofrestructuring activities to be carried out by any of the Recipient's Ministries through a PIF grant.

Performance Improvement Cycle

5. The Facility will be used to operationalize a performance improvement cycle (PIC) in aministry. In summary, the key features of the PIC will include:

* Three inter-linked planning processes: at the strategic, operational and individual level;* During the strategic planning review process each ministry will re-examine its organization's

mission and vision (based on their respective external and internal environment) togetherwith policies, strategies and associated objectives for achieving them;

* Ministries will be required to ascertain critical factors to measure performance to achievetheir objectives. They will also identify capacity and resources (professional skills,leadership, HRD, management structures, management and operating processes) needed toimplement the strategic plan;

* Following the strategic planning phase, an operational planning process (at departmental anddivisional levels) will begin. This process should run in tandem with the Government'sexisting budget process. At this stage, Ministries will be expected to identify priorities for thenext financial year taking into account budget constraints, ceilings and external sourcesavailable. Therefore, outputs will be related to expenditures. Deliverables anticipated from

7 A "quick-win" is defined as a significant improvement in service delivery which has minimal demands forbudgetary resources and technological changes.

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this process include objectives and targets, outputs, performance indicators, activities andoutput-based budgets;At the individual level, ministry employees, starting at the top, will discuss and agree on threeor more individual objectives that should be linked to ministry's targets identified in itsoperational plan. Development and training needs arising from this will also be agreed,prioritized and scheduled.

6. It is anticipated that performance reviews of all three plans (strategic, organizational andindividual) will be undertaken at least twice a year. This process will include review of progresstowards achieving the specified "quick-wins" for the year.

7. There are four distinct phases of the PIC:

* Review of strategic plans;* Annual planning and activity budgeting;* Independent evaluation of plans and budgets;* Monitoring, evaluation and appraisals.

Review of strategic plans

8. The ministry will be required to set the direction of their organization for the next three yearsthrough a review of their current strategic plans and defining new plans. The ministry's managementwill:

* Assess the extent to which current functions and activities match each Ministry's mission,vision and goals; identify poorly performing or duplicated functions/activities; agree uponnew functions and activities; which ones should be discontinued, and what are the "quickwins";

* Define strategic performance indicators ("critical success factors") to monitor progress andfor reporting purposes;

* Prepare a revised strategic plan for the ministry with a central focus on achieving the quickwins. This strategic plan will be within the Medium Term Expenditure Framework agreedbetween the ministry and the Ministry of Planning and Finance (see Box 1 below);

Box 1: Strategic Planning to be within Medium Term Expenditure Framework

The strategic plans by ministries using PIF will be within the Medium Term ExpenditureFramework (MTEF) agreed between the ministry and the MPF8. This ensures therelevance of the plans.

When the GoM launches the implementation of a comprehensive MTEF in ministries, it isanticipated that:

8 In proper practice, the credibility of a ministry's strategic plan should influence the ministry's allocation in theMPF. Therefore, in the ideal situation, a draft strategic plan should be the basis of negotiations for resourcesallocation between the ministry and MPF well before the final MTEF is promulgated as part of the annualbudget guidelines. In any case, the final strategic plan must be consistent with the final MTEF.

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(a) Strategic planning by ministries will be an intermediate but mandatory phase of theMTEF process. Preceding phases will include macroeconomic forecasts and definition ofsector policies and strategies;(b) This will be a framework for ensuring a fi-ri link between public service reform andpublic financial management reform programs.

Annual planning and activity budgeting

9. On the basis of the strategic planning results, the ministry will:

* Project expected outputs to achieve during the year, together with activities required toachieve the outputs;

* Prepare budgets for the activities. Priorities will be within the resource envelope available;* Finalize plans and budget;* Have its employees agree on how they will contribute to reaching the objectives. This will be

done by setting and agreeing objectives for each individual, based on the PerformanceReview and Appraisal process whereby individual performance is linked with the ministry'sgoals and objectives, and development needs and identified and planned for.

Evaluation of plans and budgets

10. During this stage, Ministries will submit plans and budgets (a PIF Plan) to a central teamresponsible for the technical management of the PIF. The plans and budget will be evaluated by theteam, which will have expertise to check the requirements. The evaluation team will develop a set ofstandard criteria for examining plans and budgets.

11. On the basis of this evaluation, a ministry will be cleared to access the PIF resources toimplement its PIF plan, to the extent that these are not already funded from GoM revenues or by otherdonors. Specific interventions that could be financed by PIEF include:

* Technical assistance and consultancies at all stages of the PIC;* Contract-hire of technical and professional staff to fill crucial skills gaps;* The performance-based payments to technical and professional staff responsible for accomplishing

specific tasks in the annual work plan;* Demand-driven training focusing on equipping public servants with knowledge and skills to

achieve the capacity and performance improvements specified in the strategic plan; and* Work tools and equipment needed to accomplish the priority "quick-win" services

improvements.

Monitoring, evaluation and appraising

12. During the year there will be continuous monitoring and evaluation of implementation of thePIF plans supported by PIF in each ministry, with particular focus on progress in the "quick-wins'targets. Monitoring and evaluation in each ministry rnay take the form of:

* Monthly review sessions where the Ministries' management provide updates onimplementation actions;

* Repeat Service Delivery Surveys to assess customer satisfaction and other participatoryapproaches;

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* Impact assessment studies of new implemented policies and procedures;* Financial and value-for-money audits by the Administrative Tribunal;* Staff appraisals.

Box 2: PIEF plans, staff appraisals and performance-based incentives

All technical and professional staff in a ministry involved in theimplementation of PIC with support from the PIF will have individual workplans derived from their respective departmental PIF plans. The results ofmonitoring and evaluating performance against the PIEF plans will therefore bethe basis of annual staff appraisals.

Under the new policy whereby the traditional practices of automatic annualsalary increases and promotions based on schemes of service will beabandoned, the results of the performance-based staff appraisals will be thebasis for determining the annual salary increments and promotions. In thisway, the PIF will support the introduction of performance-based incentivesacross the civil service.

13. Ministries will maintain adequate documentation to support the results of the M & E process.In addition, Ministries will demonstrate commitment and learning through continuous improvementby:

* Reporting to key stakeholders on their performance (success and areas for improvements)with respect to achieving "quick-wins" and other key results highlighted during the annualplanning and budget process;

* Providing comments and action plans resulting from audits and reviews undertaken duringthe period;

* Disseminating results to the appropriate level within the ministry and outside for follow-upand action;

* Recognizing and rewarding individual performance and sanctioning lack of performance;* Improving procedures to accommodate feedback from monitoring functions.

Accessing PIF by Ministries

14. Once these plans and budgets have been assessed and funding levels approved by the centraltechnical team, the ministry will prepare a cash flow plan indicating cash requirements from the PIEFduring the year, and on this basis submit an application for the funds to the Facility Manager(UTRESP Director). These arrangements will be formalized through a PIEF Grant Agreement betweenCIRESP and the ministry.

15. The Facility Manager will make the necessary arrangements to disburse cash or otherresources to the ministry according to the Ministry's cash flow plan.

16. Further drawdowns will be contingent on clear improved performance against the identifiedkey performance indicators.

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Box 3: Link to Budget and Institutional Incentives

Detailed design of the Facility implementation arrangements will be specifiedin consultation with the Ministry of Planning and Finance. In this process thedesigner will explore:

* The opportunities and framework for linking the PIC with the budgetprocess, and particularly the implementation of the MTEF in the pilotministries; and

* The scope for availing budgetary incentives to ministries that are assessedto make good progress in the PIF application.

Facility Administration Arrangements

17. The Director/UTRESP will be designated PIF "Facility Manager". In this role, the FacilityManager will be assisted by the UTRESP team.

18. With regard to PIF, the specific activities to be undertaken by the UTRESP will include:

* Creating awareness of the PIF in ministries through information;* Distributing application forms and guidance needed to lodge requests for financing from the

PIF, and verifying and processing applications for funding;* Supporting procurement by Ministries;* Developing checklists to guide the technical team in the evaluation of annual plans,

applications for financing and performance reports received from Ministries;* Authorizing approved disbursements from the PIF;* Providing regular progress reports on Ministries' results with respect to PIF-financed

activities to CIRESP.

Accounting and reporting

19. Accounting for the PIEF will follow the Bank guidelines to ensure that financial management,procurement, accounting and reporting systems are complied with.

20. The UTRESP Finance Manager will be responsible for the following specific aspects of fundmanagement:

* Estimating annual financing needs identified during the annual planning and budgetingprocess and matching them against amounts to be made available;

* Day-to-day management of the PIF account including maintaining a cashbook andreconciling bank statement against cashbook balances;

* Maintaining a suitable management information system to allow for recording, tracking,monitoring and evaluating PIF flows;

* Making authorized payments from the PIEF account to ministries and departments;* Ensuring that adequate financial controls are in place to maintain propriety and proper

accountability for expenditure;* Designing standard formats for filing reporting returns;

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* Collecting and consolidating returns from Ministries;* Reporting periodically on fund flows for management's use and audit purposes.

21. The regular accounting reports that will be prepared on the fund by the UTRESP FinancialManager include the following:

* Annual financing requirements by ministries;* Deposits received into the PIF by type of donor;* Disbursements made by ministry and type of release;* Allocations utilized during a period or in the year to date;* Schedule of any backlogs, in terms of approved applications for which there is no funding

available.

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Annex 14: CPAR 2002, Executive SummaryMOZAMBIQUE: Public Sector Reform Project

1. Scope of the CPAR

The Country Procurement Assessment Review (CPAR) of Mozambique was carried out by Bank staffin cooperation with the technical unit (UTRESP) of the Inter-ministerial Commission for the Reformof the Public Sector (CIRESP) and participation of donors well established in the country. The CPARis an economic and sector work (ESW) made to verify the strength and weakness of the country'sprocurement policies, organization and procedures, and, in particular to: (i) provide an analysis ofthe country's public sector procurement, including the legislative framework, organizationalresponsibilities and capabilities, present procedures and practices, and how well these work inpractice; (ii) undertake a general assessment of the institutional, organizational risks associated withprocurement process and; (iii) develop a detailed action plan to bring about institutionalimprovements. The CPAR findings and action plan will be discussed with the Government and maindonors operating in Mozambique to agree on a common line of action for any needed reform of theprocurement system.

2. Overall Assessment

The CPAR indicates that the Mozambican procurement system has serious institutional, legislativeand manpower weaknesses which have a negative impact on the use of Government funds and thosefrom donors and international organizations. These weaknesses affect every sector of procurementand commercial activities including imnports and banlcing services. The CPAR report describes thesedeficiencies in detail but also proposes an action plan to support the country's objectives to reformand achieve standards of transparency, economy and efficiency on par to international benchmarksfor public procurement . The CPAR also indicates the risks likely to be encountered in the process ofreform and the most suitable tools to overcome them through sustained Bank and donors support.

3. CPAR linkages to CAS and fiduciary ESWs

The CPAR constitutes an integral part of IDA' s Country Assistance Strategy (CAS). Its recommendationssuch as support of decentralization, building up of capacity for service delivery at central, provincial anddistrict level are consistent with reform initiatives proposed under other 'fiduciary" ESWs such as theCountry Financial Accountability Assessment (CFAA) and the Public Expenditures Review (PER). Inaddition, coordination with donors based in Mozambique and engaged in similar reform initiatives, such asSIDA is seen as a priority and was made part of the development action plan based of main CPARrecommendations.

4. Main Weaknesses of the Mozambican Procurement System

Based on national statistics for the year 2000, Mozambique has imported about US$1300 million ofgoods and executed US$150 million worth of civil works. These are significant amounts for adeveloping country. Their monetary value is bound to greatly increase in forthcoming years, providedthat a sound public procurement system is in place. The CPAR has reviewed therefore theMozambican system to assess whether it would satisfy the criteria of transparency, economy,efficiency and accountability necessary to guarantee a sound use of public and donor funds. Thesecriteria are based on whether (i) a comprehensive and transparent legal framework is in place andassures suitable and transparent regulations for public procurement, (ii) a clearly definedorganizational structure is in place in order to assure application of the same regulations and adequate

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monitoring of procurement, and (iii) well trained, experienced, evenly distributed procurement staffare used by the public procurement implementing agencies.

Based on the assessment, Mozambique's procurement system has NOT satisfied any of theserequirements and needs to be substantially improved. A brief summary of the main weaknesses ofthe Mozambican procurement system are listed below. For a more detailed description and comments,please refer to Volume 1 (Part B) and Volume 2.

4.1 Legal and Regulatory Framework for Public Procurement

Mozambique has no adequate legal and regulatory framework for procurement. Presentlegislation concerning procurement of goods and works is fragmented into various pieces oflegislation both old and new, each of which is inadequate to guarantee an efficient implementation ofpublic procurement. In addition, there are no regulations concerning procurement of services, apartof a few rules on the selection of consultants for design and supervision of civil works contracts.Finally, no new procurement laws and regulations have been released suitable to recent Governmentdecentralization programs, thus effectively postponing any effective transfer of authority to theProvinces. Lacking adequate procurement regulations, implementing agencies have presently noaccess to bid documents, guidelines, procedures manuals or similar written documentation whichwould guide them through the procurement process. Hence the need for a reform leading to thecreation of comprehensive procurement legislation preferably based on internationally recognizedmodel laws, such as the UNCITRAL (see Volume HI, Annex 1) and integrated into the overalllegislative framework of the new Public Finance Law. The new legislation, to be integrated into anoverall legislative frameworks such as the new Public finance law, may fumish a morecomprehensive coverage of procurement including new provisions for procurement of services,commodities and private concessions; allowing for the establishment of monitoring authorities atcentral and provincial level; establishing higher procurement authority to provincial offices;introducing the modalities for use of electronic procurement, etc.

4.2 Institutional

There is no a central directorate or tender board in Mozambique with specific function of overseeingthe procurement process, establish procurement policies and promote development of procurementstaff. The National Directory of Patrimony (NDC) located in the Ministry of Planning and Finance(MPF) is heavily engaged in the management of state assets and does not have the authority and theexpertise required to exercise an overall monitoring and policy role. Since spending and procurementauthorities are basically the same in Mozambique, Govemment agencies and their subsidiaryinstitutions procure within the limits of their allocated resources. Procurement monitoring withinGovernment agencies is however inadequate. Evaluation committee do not always include qualifiedstaff and independent observers are usually absent. "Reception commissions" required by law forboth procurement of goods and works to monitor awards and contract implementation are seldom ifever used. Hence the need for a new Central Policy Directorate, based in the MPF or in thePresident's office, as one of the first steps towards the monitoring and overall transparency of theprocurement process in Mozambique.

4.3 Procurement regulations for goods, works and services

Presently in use national regulations for goods (Decree No. 42 of 28 December, 1989 ) concemingprocurement of goods and requisition of services by State bodies and subordinate institutions (asamended by Decree No. 29 of 23 September, 1997); works (Decreto-Lei No. 48871 de 19 Fevereirode 1969) and consulting services are inadequate for the needs of modem and efficient public

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procurement. The regulations presently in use lack in clear instructions to the bidders concerning themodalities of basic procurement process such as bid opening, negotiations with bidder, priceescalation, liquidated damages, delivery and completion time, arbitration etc. In addition, there are nonational standard bid documents. As a result bid documents used in Mozambique frequently omitcritical instructions such as delivery time, contract signature, penalties for delays, etc. creatingsubjective evaluations and inconsistent contract awards. Moreover, the national practice of usingapproved list of contractors and suppliers without periodically updating their financial and technicalcapability strongly limits open competition, in addition to discriminate towards foreign suppliers. Inconclusion, presently used procurement regulations cannot be considered adequate and sufficientlytransparent for use of public funds. New, comprehensive standard bid documents, RFPs andcontracts should be prepared and used in all competitive national and international tenders.Registration of contractors an suppliers must be upgraded and made to follow precise, transparentand objective qualification criteria.

4.4 Lack of Transparency and Corruption Issues

Corruption represents a serious problem in Mozambique. Issues due to lack of transparency, ofteninvisible to outside observers, have negative impact on project implementation and are probably themain reason behind the resistance to needed changes such as decentralization, delegation of authorityand opening of the market to more active competition. Corruption is assisted by the lack of a properset of procurement regulations to which to confoim and the consequent use of non-transparentprocurement practices such as subjective listing of contractors and suppliers. Other major causes forthe lack of transparency in public procurement are the lack of proper monitoring authorities, theabsence of a Code of Ethics and of proper incentives to denounce corruption. Finally, the role ofenterprises from neighboring countries, having a strong commercial presence in Mozambique, may beone of the causes for un-needed requests for sole source purchases and restrictive technicalspecifications. This may explain why, Transparency Intemational (T.I.) corruption perception indexfor Mozambique was a very low ranking of 81 out of 90 countries Recent initiative (October 2001) bythe GOM to stem out corruption through the use of the Administrative Tribunal to approve allcontracts, including those financed by extemal donors, might prove to be slow and cause bottlenecksto project implementation.

4.5 Human Resources

There is a huge vacuum of professional expertise in Mozambique's public procurement. Until anadequate number of professional staff is created in all sectors related to procurement, there are norealistic chances that funds by the Govemment and donors will be timely and efficiently disbursed.Lack of human resources at provincial offices is a serious problem undermining the process ofdecentralization and de-concentration of procurement authority undertaken by the Government use ofTechnical Assistance (TA) and focus on transmission of skills may somewhat compensate thesituation, but only on a short term basis. GOM and donors will have to give priority to capacitybuilding in the area of procurement, technical management and supervision to be able to see positivechanges in the use of their funds. Mozambique has only a few training institutions such as theUniversity of Mondlane, INSPU and ICM . Focused TA to the institutions with specific courses inprocurement management and "training for trainers" courses may be necessary to establish apermanent vehicle for capacity building capacity at national level. IDA may also consider toundertake a Leaming Innovation Loan (L.I.L.) or project in capacity building for decentralizedservice delivery, with special emphasis in procurement, as presently done in other countries.

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4.6 Decentralization and deconcentration

There is a tremendous disproportion of power between the Center (as represented byMaputo) and the rest of the country. Provincial capital expenditures in year 2000 amountedto 3% of total national capital budget. On the other side, provincial own revenues representles than 3% of total national revenues. Even though the Central Government has de-concentrated a limited amount of power to provincial and district administrations, anddevolved power to 53 municipalities following the promulgation of a series ofdecentralization laws, procurement authority is still concentrated at central ministries level,with little or no delegation to provincial authority. In addition, central ministries have done very littleto facilitate transfer of skills to provincial offices through specialized TA [see also section (v) fortraining], adoption of standard documentation, capacity building, etc. Unless the situation is reverted(through legislation, establishment of substantial monetary thresholds for provincial authorities,capacity building), Sector Wide Approach Program (SWAP) will have performances much belowexpectations for the foreseeable future.

4.7 Donors Coordination

Interest by donors for Mozambique is high. With a few exceptions, such as the PROAGRI agricultureprogram, coordination between donors has been lacking. This contributes to create a heavyadministrative burden on GoM in addition to inconsistent, even overlapping approach to issues andlack of sufficient TA resources in the sectors where there are most needed. Better coordinationbetween donors is therefore a must if a serious reform of procurement has to be undertaken inMozambique. The Bank is not alone in taking initiatives towards a modernization of the legislativeframework and procurement regulations. Other donors such as Sweden, Norway, Switzerland andPortugal have initiated reform initiatives in coordination with the govemment. Of these the "StateFinancial Management Project" financed since its inception in 1988 by several Swedish Governmentagencies has the objective the development of a legal framework, capacity building and the draftingof new financial laws. Coordination of TA and where possible, joint financing of similar initiatives,is almost a necessity and has been taken into account in the simplified action plan shown in Table 1,below. Joint financing and even pooling of funds, could be considered therefore for the TA neededfor procurement reform under the Public Sector reform project, as already done for the PROAGRIand other projects.

4.8 Performance of IDA and donor financed projects

Recent (October 2001) Country Portfolio Performance Review (CPPR) by the World Bank andanalysis of results of projects financed by other donors reveals that implementation is far from beingeffective. There are too many delays due to an overlapping of causes which represent a serious drainof badly needed resources. The main cause is probably the lack of motivation and individualinitiative typical of public sector (and financers) bureaucracy. The other main causes are, in thatorder, lack of managerial and technical staff both at center and provincial offices; lack of planningand adequate bid documents and contracts; lack of decentralization of minor procurement actions;lack of observance of procurement guidelines / good practices ; political interference and widespreadlack of transparency, etc. The CPAR mission considers that improvements of 30-40% are feasible inimplementation if full commitment to reform is achieved and at least a portion of the reformsproposed (such as legislation, bid documents and focused training) will be carried out.

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5. Action Plan for Procurement Reform

In order to eliminate or at least reduce the weakmesses of the procurement system, a reform isneeded. This would greatly benefit the Government of Mozambique. Benefits would range from atangible reduction of the costs of imports and civil works contracts due to more transparentprocurement practices, increased competition, but also greater recognition from the donorscommunity making Mozambique more eligible for continued support. The momentum is high due tothe Government commitment to improve the management of public funds in six priority areasidentified by the PARPA (Poverty Reduction Strategy Paper) and by the establishment of a Inter-ministerial Commission for the Reform of the Public Sector (CIRESP) and its Technical Unit(UTIRESP). Reforms identified by the CPAR have been summarized in an Action Plan forprocurement reform in Table 1.

The Action Plan, which has been kept simple in order to focus on a few, critical actions, should beseen as part of a long term IDA and donors support seeking to enhance public procurementperformance through a coordinated program ofi (i) implementing procurement reforms, (ii)restructuring and empowering provincial authorities and (iii) strengthening training institutions forcapacity building. The Action Plan will be discussed with Government and other donors in order toagree on a common strategy and assure sustained support for the reform. A National Team (to bedetermined by UTRESP in coordination with MPF and prominent ministries) of national expertsshould lead or at least actively participate to the process.

Funding of some of the initiatives may be obtained through the Bank-financed Public SectorReform Project (PSRP) and support from other donors such as SIDA presently assisting MPF underthe State Financial Management project. Additional sources of funding may have to be considered forthe longer terrn such as IDF grants, Learning and Innovation Loan (L.I.L.) or even a DecentralizedService Delivery projects to sustain long-term capacity building at central, provincial and districtlevels and promote more efficient project implementation in key sectors such as agriculture,infrastructure, health and education.

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TABLE 1PROCUREMENT REFORM - ACTION PLAN

Stage 1 (short term 0-9 months)Stage 2 (medium term 9-18 months),

Stage 3 (long term -18 to 36 months)

: :P _.RisR T A- E C i "*;;; '*- =*- -______r _-_-___ _'__.__

POTY:. PROP6SEDTE(GENICAL-ASS-STA'CEi . , tREPORM CTVBJECT¶IVES.

IDA/MPF/ Legislative reform - Stage I * To modemize, make moreCIRESP/ IDAgrant (Public Sector Reform Project) or transparent andSIDA LIL/IDF grant on procurement to draft comprehensive the public(international comprehensive procurement regulations procurement rules andconsultant and (based on the UNCITRAL model law in practices in Mozambique.

National Team) annex 3), to be incorporated into new Finance * Establish adequatelaw. monetary thresholds for

decentralization.

* Increase transparency andefficiency of PublicProcurement.

IDA/MPF/ Training - Stage I . Improve Capacity of

UEM Procurement Workshops for implementing Procurement staff / Createagencies / training for trainers courses /TA to new Trainers fortraining institutions /Preparation for IDA dissemination of good

capacity building project. practices to

* Provinces/Create specificcourses in Traininginstitutions.

I MPF/CIRESP Draffing of national standard bid documents * Simplify, standardize andand five main and contracts for the procurement of goods, make more efficientMinistries works and consulting services. procurement process and

implementation ofcontracts at national level.

5U W ,2 MPF/CIRESP Legislative reform - Stage II * Improve quality and

Establishment of a new Directorate for transparency of publicprocurement policy making and monitoring. procurement.

2 MPF/CIRESP/ Training - Stage II * Improve knowledge and

UEM Dissemination workshops for new propagate use of soundProvincial procurement regulations for ministerial staff national procurementMinisterial at central and provincial level TA to training practices.offices institutions (continue). * Improve decentralized

service delivery ofprovincial offices.

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2 MPF/ETICA/ Transparency seminars/ Anti-corruption * Improve transparency inCIRESP initiatives/ Drafting of a Code of Ethics. public and private sector

procurement.

2 MPF Establishment of public procurement M.I.S. * Improve monitoring andintegrated into MPF's IFMIS. record of public

procurement activities

3 IDA/Donors/Tr Training -Stage IIIAaining Implementation of Capacity building projectInstitutions to support de-centralized service delivery.

3 MOW / UEM Training - Stage III B * Improve efficiency,Seminar to civil works contractors and transparency and capacityconsultants. to compete of national

construction industry

3 MICT/ Training - Stage III C' * Improve efficiency of theChamber of Seminar to private sector private sector inCommerce/ (Importers, suppliers, consultants). contractual issues,WTO commercial laws and

imports.

3 MOW/MPF Establish registration criteria for contractors, * Improve transparency,suppliers and consulting firms. efficiency and competitionEstablish national criteria for price indexes for national andfor price escalation formula. international contracts.

3 GoM/ World Establishment of common procurement * Improve availability ofBank and procedures leading to long term pooling of funds for TA / reduceIriternational funds for TA (as for PROAGRI). administration

donors costs/simplify

procurement procedures.Note: Each of the major reform actions, included in Table A, envisages sub-actions, too numerous to belisted in a schematic plan, which will become obvious once the major actions are started. As an example, thedrafting of new, modern, standard bid documents for the procurement of works would create the need for sub-actions in the areas of pre-qualification and post-qualification of bidders; registration and listing of contractors;price adjustment formulas and indexes; performance and securities guarantees; service contracts etc.

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5.1 Risk Assessment

Resistance may be expected to any reform initiative proposed under the CPAR. Individualsand organizations may see reform as a loss of their present authority or as an outside interferencemore than a tool for a necessary modernization of structures and refurbishing of their expertise.Attempts to reduce corruption might be seen as politically motivated or as an unwelcome reduction ofopportunities for Mozambican nationals. A risk management strategy is therefore necessary to avoidthat reform, like previous Government initiatives, would exhaust before reaching any meaningfulresults. Table 2, below indicates the areas where reform measures are strongly recommended. It alsoindicates obstacles to reform and the tools to overcome resistance to changes.

TABLE 2Risk Assessment and Strategy

t Ai$ 'OErRF,R ) A1lI s OBST -ClLES'16 -VUEFORiiN - GR;

Reform of Procurement Government may prefer to draft its (i) leadership by UTRESP andRegulations own procurement regulations, with use of national team / coordination

no reference to UNCITRAL with interested donors such asmodel. This would perpetuate use SIDA;of fragmented and inadequate laws (ii) new Regulations to be madeand regulations. part of new Public Finance Law;

andDraft of Bid Documents Initiative to draft bid documents (iii) final product to be made

may languish for lack of initiative comprehensive and includeas for previous attempts. standard documents for goods,

works and services.

Establishment of New Policy MPF may resist reform by UTRESP should: (i) work inDirectorate interpreting it as a reduction of liaison with MFD to establish the

authority or lack of trust in their Policy Body; (ii) strengthenpresent institution (Patrimonio). Patrimonio functions as monitor of

public assets, and (iii) incorporateMFD staff into new Directorate.

Long Term Capacity Building Not sufficient funds will be made TA fmancing may be increased byPrograrns and Assistance to available for the purpose. pooling funds with other DonorsTraining Institutions and through capacity building

projects supporting traininginstitutions.

Corruption Issues No serious action taken by the MPF to tale lead through newGovernment. Sporadic actions Policy Directorate. Ethics Code tobased on political motivations. No be institutionalized in all GOMmonitoring of anti-corruption agencies .initiatives kept. No incentivesused to favor anti-corruptioninitiatives.

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Annex 15: Ministerial RestructuringPROCESS OUTLINE

MOZAMBIQUE: Public Sector Reform

Government goal is to improve service delivery through increased efficiency, effectiveness andcoverage. The functions and structure of Government and its individual parts need to be redefinedand re-engineered to ensure they are able to respond to this goal.

This must be done within resource constraints of finance and manpower and to reflect the goals andpolicy priorities of Government (notably PARPA). In the medium term the restructuring shouldresult in a sustainable wage bill i.e. that can be financed entirely from revenue.

Although the process is centered at the ministry level there must be a common framework withinwhich any one ministry completes the exercise.

A three-stage process is required:

1. Preparation of the framework;2. Functional redefinition; and3. Ministry restructuring.

1. Preparation of the Framework

Three elements that may be addressed together:

* Completion of the Mapping of the Public Sector (consultants/JTRESP) to provide adefinitive explanation of the current functions, structures and institutions of Government.

* Identifying, clarifying and where necessary developing the Ground-rules9 which will provideconstraints and determinants for the restructuring exercise, e.g.:> Policies - PARPA priorities, role of the State vs. private sector, NGO's etc,

decentralisation (some of these may still be preliminary 'drafts');> Explanation/interpretation of legislation/regulations that will irmpinge on restructuring,

e.g. new Public Finance Management Law;> Projections of financial resource envelopes based on medium term (10 years) estimates of

expenditure ceilings for the public sector and interpretation of their implications forMinisterial operational and staff funding. Imnportant that GoM work towards establishinga sustainable financing of wage bill (and 0 & M) - i.e. revenue based;

> Definition of institutional framework (i) overall coordination, (ii) within a ministry and(iii) 'arbitration' on inter-ministerial issues.

* Guidelines/Manuals'° providing detailed instructions to ministries on the process andinstitutional arrangements they must adopt. Most likely two 'volumes' require on (i)functional redefinition and (ii) restructuring/re-engineering. Should include explanations ofthe organisational options available to ministries (e.g. retain functions, pass to other agencies,contracting out, transfer to other ministries, privatise, abandon, etc). Also need to identifytraining needs, costs and proposals to build capacity to undertake the exercises.

9 Preparation can continue during implementation of Functional Redefinition.'° Preparation of Guidelines on Restructuring can continue during Functional Redefinition althoughconsolidated Guidelines in two distinct parts would be preferable.

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2. Functional Redefinition

Two elements that can be implemented together leading to third element:

* Each Ministry to complete a Functional Review using the Mapping exercise as starting point.Should result in prelirninary definition of:> Key/Core functions and strategic objectives of Ministries' mandates;> Overlap and duplication of functions between Ministries;> Functions that should be retained in public service but transferred, contracted out, etc;

and> Functions that should be privatised or abandoned.

[NB at this stage no consideration of operational structure is required]* Analysis (consultants/UTRESP) of Mapping exercise leading to a preliminary re-articulation

of the State's Macro Structure. Review of appropriateness and responsiveness of existingstructure to contemporary needs/policy priorities and effectiveness/efficiency leading to anoutline of recommendations for change (perhaps re-organisation of ministries etc).

* Comparison of two exercises (UTRESP) to identify issues, commnonalities and opportunitiesleading to recommendations on redefinition of Macro Structure. Tested in consultation withMinistries (workshops for PSs or oversight committee). Agreed recommendations submittedto CIRESP and Council of Ministers for adoption.

3. Ministerial Restructuring Plans"

The objective of restructuring is to determine the most appropriate organisational structureresponding to redefined functions and enabling improved service provision (efficiency, effectivenessand coverage). It may be carried out for all ministries concurrently, for priority ministries or clustersof ministries sequentially. Should the Macro Structure adopted include the merger of Ministries orthe creation of new Ministries then special arrangements will need to be made. Suggested the exerciseshould be undertaken collaboratively between the Ministry and outside expertise. The restructuringexercise should identify:

* Mission statement and strategic objectives;* Organisational structure and distribution of responsibilities;* Operational level at which functions to be undertaken;* Staff requirements - numbers, qualification and cost;* Indicative assessment of equipment requirements;* Recommendations on treatment of functions not regarded as core;* Posts (and personnel?) to be retrenched;* Training and capacity building requirements;* Estimates of operational and staff costs when restructuring complete; and* Implementation plan including costs requirements.

The exercise could be extended to include, for example, performance improvement managementmeasures, service provision output targets, policy review, and so forth. However, the scope isprobably best kept as straightforward as possible with performance management introduced as asecond step.

" This exercise should not be treated as a definitive one-off exercise but rather as building the capacity toundertake functional/structural checks/reviews as a periodic exercise as integral part of the prospective MTEFprocess.

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4. First Steps

Assuming the approach outlined above is adopted, then the early steps would include:

* Completion of the Mapping exercise;* Briefing for CIRESP on proposed process;* Completion of Guidelines;* Defining the Groundrules, particularly policy framework;* Initial work to define and/or revise medium-to-long term fiscal envelope;* Identify appropriate institutional arrangements in Ministries (and Provinces) to manage the

process and undertake necessary capacity building (Danida proposal)* Strengthen UTRESP capacities to oversee the process;* Identify short term funding requirements and donor;

Early thought also needed on how to build sustained high-level commitment to restructuring processto drive through difficult decisions.

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