Business Case

Summary Sheet

Title:

Improving Public Financial Management and Accountability in Nepal (PFMA)

Project Purpose:The programme will support and influence reforms in government policies, processes and activities to improve PFM and revenue administration, and reduce opportunities for corruption, in Government of Nepal (GoN) service delivery sectors that matter most for the poor.

Programme Value: £5 million Country/ Region: Nepal

Project Code: Start Date: September 2016

End Date: March 2021

Overall programme risk rating: Moderate

Quest Number:

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Intervention Summary What support will the UK provide?The UK will provide up to £5 million over four years to support public financial management (PFM) reforms at the sectoral level in Nepal, and improve accountability in Nepal’s revenue and expenditure systems.

What are the main programme activities?The programme will support and influence reforms in government policies, processes and activities to improve PFM and revenue systems, and reduce opportunities for corruption in Government of Nepal (GoN) service delivery sectors that matter most for the poor.

Accountable systems of PFM (both expenditure and revenue) are needed in key sectors in Nepal to enable more efficient and effective delivery of services to the poor and to support Nepal’s self-financed exit from poverty. For instance, very low capital budget expenditure limits the delivery of pro-poor services and infrastructure. Poor budgeting processes result in the non-strategic use of sector resources and missed opportunities to prioritise scarce resources effectively. Serious accountability constraints in PFM systems also increase the risks of wastage, mismanagement or corruption and the marginalisation of in-need populations.

By improving the performance of PFM systems in social sectors this intervention will thus contribute to enhancing the effectiveness of expenditure in social sectors and their contributions to poverty reduction in Nepal. Improvements to revenue administration and policy will support the GoN to better budget around the use of its own resources, reducing over time the reliance on external assistance in social sectors. In light of the fiduciary and corruption environment in Nepal, the focus on improved accountability in sector PFM systems will reduce opportunities for corruption, safeguard UK funds, and protect the use of development funds in critical areas such as health, security and justice and disaster resilience for the purpose – and people – for whom they are intended.

UK Aid will:

deliver high quality analysis of fiduciary and corruption risks in key sectors in Nepal, support the development and implementation of tailored sector PFM reform plans and activities, provide technical advice and capacity building on fiduciary and corruption risk mitigation and

safeguards at the sectoral level, and support embedded technical assistance and “hands-on” support for sector financial management

and revenue administration reforms.

Building on an approach that has demonstrated results over the past four years, this intervention will balance strengthening fiduciary assurance in social sectors with a responsive and opportunistic approach to identifying and capitalising on reform opportunities in PFM, revenue or anti-corruption. This responsive approach reflects the challenge of Nepal’s institutional reform context: small, strategic interventions are critical in helping key reform partners to capitalise effectively on windows of reform when they emerge. This approach also complements our more traditional investment in core PFM capacity that will be delivered through the World Bank-managed Multi Donor Trust Fund (MDTF) on PFM (detailed below).

Why is UK support required?Despite significant improvements in recent years, Nepal’s PFM systems remain weak at all levels. This undermines the ability of the GoN to maintain fiscal discipline, to meaningfully pursue strategic spending priorities, and to deliver value for money in the use of limited development resources. This in turn constrains Nepal’s ability to achieve its goal of graduation from least development country status by 2022 and avoid the waste of scarce development resources through corruption. These weaknesses limit the effectiveness of poverty reduction interventions, and undermine UK support for Nepal.

PFM system weaknesses (for instance, in accounting and reporting practices in line ministries or in dysfunctional internal audit functions) are particularly acute at sectoral and local levels. Previous support to sector level reforms (for instance, the creation of financial reporting templates) has been less comprehensive than at central levels, where progress has been driven by clear GoN strategy and support by multiple development partners (DPs), including the MDTF. The coordination of sector reform efforts both between central government and sector ministries, and among development partner (DP) programmes has also been limited. Poor coordination has resulted for instance in financial management

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information systems that are incompatible, or in the establishment of contradictory accounting standards. Lessons learned from DFID Nepal’s PFM portfolio since 2012 suggest that supporting basic, complementary reforms at national, sectoral and local levels helps to ensure that PFM changes are picked up and sustained across the whole system.

As the largest bilateral DP in Nepal1, the UK is very well placed to respond to PFM and anti-corruption challenges in sectors. We can influence reforms that are taking place at central and sector levels, and in doing so, can reinforce the effectiveness and sustainability of these reforms throughout the system. To this end, this Business Case is being designed in concurrence with a second phase of support to the MDTF that will focus on central level PFM in support of GoN PFM strategy/ This will mean that sector interventions will benefit from alignment with central level reforms.

Further, DFID Nepal’s Business Plan 2016/17 – 2019/20 commits UK support to a range of sectors that are critical for delivering immediate benefits to the most vulnerable and to the safeguarding of Nepal’s future.2 A large portion of this work is done through GoN systems which present a range of fiduciary risks, as detailed below.

What are the expected results?The overall impact of UK funding will be increased accountability and effectiveness in Nepal’s PFM and revenue systems, and reduced opportunities for corruption. At the outcome level, the programme will support reforms in government policies, processes, and activities that will contribute to improved accountability and effective functioning of Nepal’s social sector PFM systems and revenue. The programme will consist of work in three components:

Component 1: Analysis of fiduciary and corruption weaknesses in key sectors for DFID Nepal (including Fiduciary Risk Assessments, FRAs), and the provision of advice to either:

a) put short term safeguards in place; or b) provide advice to the GoN to remedy assessed weaknesses (such as the development of

financial management improvement plans, or fraud risk assurance frameworks).

Component 2: Flexible technical assistance and capacity building that will:

a) respond to specific assignments identified in existing sector PFM reform plans (e.g. budget processes in Department of Women and Children); and

b) identify emerging windows of opportunity or ‘orphan’ needs not addressed through other programmes such as the MDTF. For instance, this could include work on the development and roll out of standardised internal control processes, or support to improved external audit in social sectors (as is currently being piloted in the health sector). These emerging areas are deliberately not defined in this BC but will be identified through a process of analysis determined by DFID Nepal and implementers that draws on the analysis in Component 1 as well as sectoral political economy analysis mapped against sector priorities.

Component 3: Reserve fund for significant institutional reform opportunities. This fund will enable scale-up on specific, stand-alone reforms that stem from sector or revenue assignments supported in Components 1 and 2, or that may arise as a result of Nepal’s constitutional transition. For instance, this might involve support to revenue or municipal administration reforms with GiZ; additional funding to GoN to support fiscal federalism transition work; anti-corruption work led by the DP Anti-Corruption Working Group; or utilisation of UK institutional expertise (e.g. National School of Government International or Her Majesty’s Revenue and Customs) to support specific revenue reform efforts. The conditions use of this reserve fund are detailed in the Management Case below. It is likely to be procured or delivered through a different modality to the commercial partner anticipated for Components 1 and 2.

Over the lifetime of the programme, UK support will deliver the following results:

Improved evidence and analysis on risk and PFM through the delivery of 12 annual FRAs/ASPs, that will support improved value for money, transparency and accountability understanding in sectors of DFID operations.

Strengthened sectoral financial management through the delivery of financial management improvement plans, reform measures and capacity building in at least six sectors

1 Government of Nepal, Development Cooperation Report FY 2014/15, 2016, p. 12.2 DFID Nepal Business Plan 2016/17 – 2019/20.

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Improved performance of external audit in sectors through the reform pilots and improved coordination and engagement between external auditors and sectoral auditees.

Strengthened fiduciary and corruption risk programme safeguards that reduce risks to UK funds

The above results offer reflects the work anticipated under Component 1 and Component 2.a. As noted here and in the Strategic Case below, the reserve fund outlined in Component 3 and the proactive searching for opportunities in Component 2.b are not identified at the outset. These will be identified and selected using the governance arrangements outlined in the Management Case below.

This flexible, iterative approach balances ongoing responsiveness to GoN needs with a proactive mechanism to identify and exploit opportunities for small strategic interventions. It is based on the experience of recent successful interventions and is judged to be a reasonable and necessary response to the difficult PFM reform environment in Nepal. It also builds on extensive recent evidence on institutional reforms such as the work by Matt Andrews and Lant Pritchett on problem driven iterative adaptation (PDIA)3. Additionally, the approach is complementary to the larger-scale reform approach pursued by the MDTF, which builds on the comparative advantage of the WB technical skills, mandate and close relationship with central GoN economic entities.

Cross-sectoral learning (on both systemic problems and on promoting innovative solutions) is a key element of this intervention. This is reflected in the critical success criteria used to assess option (below) and will be a key element of programme delivery. Learning around PFM reforms across sectors will be focused on supporting GoN to improve PFM and revenue performance at a systemic level by building on successes in individual sectors, an also on development partners by improving understanding of ‘what works’ for PFM reform in sectors and therefore, how best to frame future support.

How does the project fit with the country programme or department’s strategic objectives set out in the Operational Plan?DFID Nepal’s ‘Vision for 2020 and Beyond’ commits DFID to supporting opportunities for transformational change, to delivering immediate benefits to the poor, and to safeguarding Nepal’s future through disaster resilience and climate adaptation. The objectives outlined in the DFID Nepal Business Plan 2016/17–2019/20 spell out how the UK will work with multiple sectors and partners to deliver this vision. This programme will directly address the priorities spelled out in the Business Plan to strengthen peace, security and governance. It will help deliver commitments to improve management of public finances in all sectors where we work, strengthen the Office of the Auditor General, improve central and local tax revenue, and reduce opportunities for corruption.

The programme also directly responds to Ministerial priorities and the UK Aid Strategy. In supporting the delivery of poverty reduction programmes in key sectors in Nepal, and by doing so through the strengthening of expenditure and revenue systems, this programme supports both the first and third Strategic Objectives of the UK Aid Strategy. The focus on transparency and accountability of such systems are at the centre of DFID’s commitment globally to supporting strong and inclusive economic, social and political institutions. Further, both the UK Aid Strategy and the Prime Ministerial Anti-Corruption Summit in May 2016 emphasise the importance of anti-corruption efforts as a core element of the UK’s strategic aid objectives.

What are the key risks to the success of the programme?The political economy environment of administration reform in Nepal is highly challenging: corruption is endemic, with government historically oriented more to provide patronage to some than deliver services to all. The civil service is also highly politicised. Where similar initiatives have failed in the past this has been largely due to the pursuit of a highly technical approach which failed to pay sufficient attention to, and work within, this political economy context. Key risks include: the high frequency of staff turnover in the civil service; incentives against reform and patronage networks within the civil service; and a perception that reforms are externally-driven (donor agendas rather than solutions to Nepali problems).

Lessons from the current PFM portfolio suggest that these key risks can be mitigated to a large extent through sound and regular analysis and a responsive, flexible approach that is able to capitalise on windows of reform opportunity as they emerge. Close alignment with GoN PFM reform priorities (as expressed in the GoN’s second phase PFM Reform Action Plan, the PFMRP2); being clear on the benefits of improved PFM systems for sector outcomes (e.g. more effective allocation of resources for

3 See for instance: Andrews, Pritchett, Woolcock, ‘Escaping Capability Traps through Problem-Driven Iterative Adaptation’, Faculty Research Working Paper Series, Harvard Kennedy School, 2012.

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sector priorities; better planning; greater value for money of sector spend); by working to build strong relationships with key GoN sector stakeholders will also help to address these risks. A detailed risk register and risk matrix is included in the Management Case below.

Strategic CaseContext and need for DFID intervention Ongoing challenges

Despite some significant improvements in recent years, Nepal’s systems of PFM are weak at all levels. These weaknesses undermine the ability of the government to maintain fiscal discipline, to meaningfully pursue spending priorities, and to deliver value for money in the use of resources. PFM system weaknesses – which are particularly acute at local and sectoral levels – also put development resources at risk of mismanagement, waste or corruption. They fundamentally constrain Nepal’s ability to achieve its goal of graduation from least development country status by 2022 and undermine UK support for Nepal’s development objectives.

Based on Nepal’s second Public Expenditure and Financial Accountability (PEFA)4 assessment of 2015, the GoN published the second PFM Reform Plan (PFMRP2) in early 2016. This Reform Plan highlights particular areas for improvement around “budget execution and control, enhancing parliamentary scrutiny on PFM system for better accountability and enhanced control of extra budgetary funds.”5 Deficiencies in PFM systems are most evident and acute at the local and sectoral levels, due to comparatively weaker capacity than at the centre, a lack of effective oversight, and a disconnect between recent PFM reforms enacted at the centre and those implemented and sustained at sector and local levels. Fiduciary risk assessments commissioned by DFID in the past three years note similar challenges.6 These vary by ministry or government entity but include the following common characteristics:

Challenging intra-governmental context for PFM reform: Coordination between the actors in Nepal’s fiscal architecture is limited, constrained by unclear organisational power, remits and political patronage; non-compatible systems (IT, HR, approvals etc); and limited data for decision-making.

Weak technical capacity in core expenditure, revenue and general administrative areas: All levels of Nepal’s civil service are characterised by limited technical capacity sufficient to respond to demands in key PFM and administrative functions (i.e. accounting, financial reporting, audit, budgeting). This is particularly acute at local and sectoral levels.

Poor public sector administrative accountability: Both the formal structures as well as the culture of public service accountability are weak. PFM functions and processes are often non-transparent; structural separations between finance functions (e.g. accounting and audit) are absent; and civil service staff turnover is high.

Weak PFM and administration systems: Despite often ‘best practice’ rules and regulations, all levels of government suffer from compliance issues (particularly critical at local and sectoral levels); IT systems are poorly implemented, inadequately utilised, or non-compatible, and systems of accounting and reporting are constrained; the integrity of the budget cycle is undermined by political interference; and budget execution (particularly capital expenditure) is weak.

Absent or weak oversight: Despite strong leadership in the Office of the Auditor General, systems and practices of audit are weak; core controls (e.g. internal control or internal audit) are weak or absent; parliamentary scrutiny is minimal; and citizen engagement in PFM is extremely limited/ineffective.

Low levels of technical specialisation in revenue administration: Fundamental human resource capacity gaps hinder reform (e.g. lack of range of technical tax specialisations within the Inland Revenue Department), as does the lack of a systematic approach to ICT tools and several areas of

4 A PEFA assessment is a standardised methodology that assess the condition of country public expenditure, procurement and financial accountability systems against internationally-accepted benchmarks to develop a practical sequence for reform and capacity-building actions. Nepal first undertook such an assessment in 2008. 5 GoN, Public Financial Management Reform Action Plan 2, February 20166 DFID Nepal, Fiduciary Risk Assessment 2013 and Annual Statement of Progress of National Systems 2015.

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pending policy reform (e.g. unified tax code).

Recent improvements and opportunities

Alongside these challenges there are opportunities and in recent years several assessments have indicated that PFM in Nepal is improving. This is underpinned by commitment and leadership by GoN to strengthen central reforms.7 The second PEFA assessment recorded improvements in 19 indicators (61%), deteriorations in two indicators (7%), with ten (32%) indicators remaining constant against 2008 assessment scores. Notable areas of improvement relate to the credibility of the budget at the central level; the comprehensiveness of the budget and its formulation process; accounting and reporting standards and practices; and external audit. A detailed assessment of fiduciary risk in national systems similarly noted an improving trajectory, downgrading overall levels of fiduciary risk from ‘high in 2014 (and in preceding years), to ‘substantial in 2015.8

Table 1 Overall fiduciary risk, corruption risk and credibility of reforms (2008-20149)

Overall Situation FRA 2008 ASP 2011 FRA 2013 ASP 2014 ASP 2015 ∆

Fiduciary Risk High High High High Sub Improving ↑

Corruption Risk High High High High High Stable ↔

Credibility of reforms Credible Credible Partially Credible

Partially Credible

Partially Credible Improving ↑

Strategic fitAccountable systems of public finance management (both expenditure and revenue) are needed in key sectors in Nepal to enable more efficient and effective delivery of services to the poor and to support Nepal’s self-financed exit from poverty. The development impacts of the system weaknesses outlined above at sectoral and local levels are manifest in multiple ways. Very low capital budget expenditure (in FY 2014-15, only 74% of capital expenditure planned was spent10) constrain the delivery of pro-poor services and infrastructure. Poor budgeting processes result in the non-strategic use of sector resources and missed opportunities to prioritise resources effectively. Serious accountability constraints (e.g. in internal audit; limited external scrutiny/oversight) increase the risks of wastage, mismanagement or misuse of funds and the marginalisation of in-need populations.

By bringing a focus on improved performance of PFM systems in these sectors, the intervention will contribute to enhancing the effectiveness of sector expenditure and their contributions to poverty reduction in Nepal. By strengthening accountability and transparency in these sectors, the intervention will also help to counter the negative effects of corruption, often cited as a major barrier to poverty reduction.

UK Aid Strategy and DFID priorities

The programme directly responds to the UK Aid Strategy and to Ministerial priorities. By strengthening core government (PFM) systems and by doing so to improve poverty reduction efforts in key sectors in Nepal, this programme supports both the first and third strategic objectives of the UK Aid Strategy. The UK Aid Strategy and the Anti-Corruption Summit in May 2016 make clear the importance of anti-corruption efforts as a core part of UK’s strategic aid objectives. In light of this, and the fiduciary and corruption environment in Nepal, there is a need to strengthen the analysis and mitigation within key sectors. This responds not only to the need to safeguard UK funds, but importantly, protects the use of development funds in critical areas such as health, security and justice or disaster resilience for the purpose – and people – for whom they are intended.

Increased transparency and accountability in core government systems are at the centre of DFID’s global commitment to support strong and inclusive economic, social and political institutions. The focus on improving revenue administration capacity reflects the ambition that DFID support increased focus on 7 Government of Nepal, Second Public Expenditure and Financial Accountability assessment, 2015; DFID Nepal, 2015 Annual Statement of Progress of National Systems; DFID Nepal, Project Completion Review of PFM Multi Donor Trust Fund, 2016. 8 DFID Nepal, 2015 Annual Statement of Progress of National Systems9 DFID Nepal, 2015 Annual Statement of Progress of National Systems10 L. S. Ghimire and Y L Bhusal, ‘Low Capital (Budget) Expenditure: Context, Challenges and Recommendations’, Discussion Paper No: 2, National Planning Commission, 2015.

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domestic resource mobilisation in developing countries as an essential part sustainable development funding. This was at the heart of the Addis Ababa Action Agenda on Financing for Development.

The programme will also address core elements of DFID Nepal’s Business Plan 2016/17-19/20. It will support priorities related to strengthening peace, security and governance. It will help deliver commitments to improve management of public finances in all sectors where we work, strengthen the OAG, improve central and local tax revenue, and reduce opportunities for corruption.

This programme is being designed in concurrence with a programme of support for central level PFM reforms through the MDTF. The MDTF is the leading PFM reform mechanism at the central level and the seven donors are currently negotiating a new round of sub-projects and new strategic framework. The focus of the second phase will remain on central level reforms (e.g. external audit, public procurement, the harmonisation of PFM information management systems and citizen engagement in the PFM process). The MDTF is managed by the WB and is run as a more traditional, large-scale technical assistance and is unlikely to focus on sector-specific issues. By designing two complementary programmes in concurrence, DFID Nepal assesses that this will enable the achievement of the complementary programme objectives with greater overall control and programme accountability.

The programme will also help deliver on the anti-corruption priorities outlined in DFID Nepal’s 2016 Anti-Corruption and Counter Fraud Strategy.11 In particular the programme will support objectives one and three: a more comprehensive approach to addressing accountability constraints in PFM and revenue; and building the evidence base on corruption in Nepal. It will also continue our work with the GoN to strengthen the integrity of financial management where DFID delivers through government systems. In conjunction with an independent third party monitoring mechanism currently being developed, the programme will also perform a critical role in DFID Nepal’s enhanced approach to programme management supporting supported with expert advice on fiduciary and corruption risk analysis and assessment.

GoN reform priorities

In recent years, Government has demonstrated leadership in implementing critical PFM and revenue reforms. A clear reform programme is set out in the PFMRP2 (2016/17 – 2025/26). GoN leadership of the PEFA II process and report has meant that there is strong recognition and ownership of key PFM challenges that enables constructive dialogue on reform priorities.

GoN PFM Reform Programme, Phase II – Outcomes

Outcome 1 Improved budget credibility

Outcome 2 Improved comprehensiveness and transparency of budgeting

Outcome 3 Improved policy-based budgeting

Outcome 4 Strengthened predictability and control in budget execution

Outcome 5 Improved accounting, recording and reporting

Outcome 6 Improved external scrutiny and audit

Outcome 7 Improved human resource management and capacity development

Outcome 8 Improved donor practices

In contrast, reforms at the sectoral and local levels have been much more ad hoc and more work is needed to ground the national-level reform agenda at sectoral and local levels. Such reforms often miss opportunities to align with and benefit from, centrally-driven reforms. This programme will help to drive coordination vertically between central, sector and local reform plans, as well as horizontally across sectors. It will build on analysis and reform priorities identified in the forthcoming sub-national PEFA and sectoral FRAs.

DP engagement

Recent successful DP engagements in the areas of PFM, revenue and accountability have been largely focused at central level reforms. As noted above, the most significant PFM reform mechanism is the MDTF on PFM, managed by the World Bank. This was supported by the UK from 2010 to 2015 through 11 DFID Nepal, Anti-corruption and counter fraud strategy, 2016.

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a £3.5 million contribution. MDTF donors including the UK are currently in discussion with the World Bank about extending the MDTF for a second phase. Other central level PFM work currently includes small-scale TA from the Royal Norwegian Embassy to the Office of the Auditor General; an upcoming USAID programme that will focus principally on IT-driven PFM reforms in selected line ministries; and peripatetic advice from the India-based IMF adviser (largely on macro fiscal elements of budget reforms).

At the local level, the principal PFM reform mechanism is the joint DFID-EU-ADB Strengthening Public Management Programme (SPMP), managed by ADB (2012 – 2016). This is an aligned programme of the nation-wide Local Governance and Community Development Programme (LGCDP) and focuses on improved local budget and fiscal management and strengthened fiduciary risk management at the sub-national level, as well as enhanced public procurement systems and strengthened institutions of oversight and accountability. This programme will close in December 2016.

Support to sector level reforms has been less well-coordinated, both between central government and sector ministries, and among DP programmes of support. DFID Nepal has supported PFM analysis and the design and implementation of reform plans in several sectors, as well as support to specific interventions such as audit improvements in the health sector. DFID Nepal is currently developing a programme of support for independent third party monitoring. The analysis and technical assistance interventions supported through this Business Case will provide DFID Nepal with a mechanism to help implement the recommendations that emerge from third party monitoring of programmes, maintaining the independence of the monitoring activities and utilising the technical expertise outlined in this Business Case.

Lessons on programming experience

This intervention builds on the experience and learning from DFID Nepal’s PFM portfolio over the past five years on what works in this political and institutional context. The programme of support at the central level (funding to the Multi Donor Trust Fund on PFM managed by the World Bank) scored an A in the Project Completion Review conducted in February 2016, and an A for Annual Reviews in 2014 and 2013. The programme of support at local and sectoral levels scored an A for its two most recent Annual Reviews (2015 and 2014), and the component/output focusing on sectors reforms scored an A+. These programmes have emphasised what work for PFM reforms in Nepal and key lessons learned include:

A responsive, flexible approach is critical. The political economy environment of PFM reform in Nepal is highly challenging. This is most clearly manifest in the high frequency of staff turnover in the Nepal civil service, and ongoing context of political instability. Successful PFM reform interventions need to remain flexible enough to respond to windows of reform opportunity.

Strike the right balance between compliance and technical assistance: A key feature of the current PFMA programme has been the strength of fiduciary risk analysis delivered through the programme. However, at times the focus on the compliance regime (i.e. FRAs and ASPs) has overshadowed a focus on identifying key problems and working through solutions (at sector and central levels). In this intervention, greater attention will be paid to putting high quality analysis to better use in identifying and exploiting opportunities for reforms that deliver system wide change.

Reinforce reforms across central, sectoral and local levels. Vertical alignment of reforms between the central and sector/local levels contributes significantly to the reach and sustainability of PFM reforms. Central level reforms need traction at sector and local levels to take root. This alignment also capitalises on the political will and political capital at the central level, as well as resources for PFM reforms that are not always available to sector/local PFM stakeholders. It is also recognised that PFM reforms are by their nature long-term and incremental. The proposed timeframe for this intervention (four years) builds on valuable work carried out since 2010. However, to see a sustained shift in the ratings outlined in Table 1 (above) from High/Substantial to Moderate/Low is likely to be require a 10-15 year timeframe.

Rolling, consistent analysis and embedded experts. The high quality and practically-focused fiduciary risk analysis and advice that has been delivered as part of the DFID Nepal’s PFM portfolio in the past three years has been founded on the principle of strong contextual understanding on the part of experts, and carefully fostered relationships with key GoN, DFID and DP counterparts. This approach has enabled greater tailoring of sector and local level PFM reform initiatives, and has positioned DFID Nepal to identify and support windows of reform opportunity as they emerge.

Responding to emerging reform opportunities: National internal control frameworkIn September 2015, the current PFMA programme was approached by the PEFA Secretariat in the Financial Comptroller General’s Office (FCGO) to provide advice and technical assistance in the development of a GoN policy framework on internal control. Although not identified as an area of focus in the original Business Case, this represented an critical opportunity to help government to establish a

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Impact and outcomesThe overall impact of UK funding will be increased transparency, accountability, and effectiveness in Nepal’s systems of public expenditure and revenue. At the outcome level, the programme aims to support and influence reforms in government policies, processes and activities that will contribute to increasing transparency and accountability, effective functioning and credibility in Nepal’s revenue and sector PFM systems.

Compliance with the Gender Equality Act

The way that governments raise, allocate and spend money has the potential to reduce or amplify existing gender based inequality. In Nepal, such decisions – whether at central, sector or local levels – continue to be made nearly exclusively by men. This is particularly critical in sector PFM decision making where choices that are made based on financial management considerations without the inputs of women and girls can have very real impacts on the services and support available to them. Poor accountability in public sector service delivery (shaped in part by PFM systems) can also be different for men and women as women are particularly vulnerable because of their disadvantaged position in the society. Through support to sectors programmes such as within the Ministry of Women, Children and Social Welfare, this intervention will have an indirect benefit to women and girls by building planning and PFM capacity of sector agencies that have a core gender equality focus. More broadly, DFID Nepal investments in local government reforms (of which PFM has been a part) have increased the transparency, accountability and effectiveness of budgeting systems at the local level and have contributed to an increased role for women in budget accountability (e.g. through the mandated inclusion of women in Citizen Ward Forums and through the creation of mostly female Citizen Awareness Centres).

Do no harm

The programme’s proposed approach to analysis and learning around fiduciary risk in sector programmes is aimed at ensuring that GoN, DFID and other DPs are best positioned to make well-informed decisions and choices about risk, mitigation and reform opportunities. This focus on detailed contextual understanding reflects the OECD DAC principles on effective donor engagement in fragile states. Perceptions of inequity and the dynamics of patronage and corruption in the delivery of public resources and services were a contributory factor in the Nepal Maoist conflict. Such perceptions were particularly acute at sub-national levels and, as the violent and sustained protests in several areas in Nepal following the promulgation of the 2015 Constitution attest, they remain a live issue. This programme will enable DFID Nepal to be more informed of the fiduciary and corruption consequences of programme and policy choices, and of revenue and expenditure decisions in key sectors, which will inform and reinforce our do no harm approach.

Major structural changes brought about by Nepal’s transition to a federal state structure will have a significant effect on the way public finances (both expenditure and revenue) are managed. These changes will require DFID Nepal to be flexible and be able to respond to and work within a changing PFM environment at central, sector and local levels, particularly around the understanding and management of fiduciary risks associated with the transition.

Appraisal CaseCritical success criteriaThe proposed programme design aims to address systemic and capacity issues within Nepal’s systems of sectoral public expenditure and revenue to drive greater accountability, transparency and effective functioning. This Business Case identifies the following five critical success criteria (CSC) to appraise potential options to deliver these objectives. Each CSC is weighted 1 – 5, with 1 being least important and 5 most important based on the relative importance of each criterion to the success of the intervention.

CSC Description Weighting (1-5)

1 Provides analysis of to inform effective sector strategy and programme design and delivery.

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Responding to emerging reform opportunities: National internal control frameworkIn September 2015, the current PFMA programme was approached by the PEFA Secretariat in the Financial Comptroller General’s Office (FCGO) to provide advice and technical assistance in the development of a GoN policy framework on internal control. Although not identified as an area of focus in the original Business Case, this represented an critical opportunity to help government to establish a

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2 Provides independent technical advice on sector PFM, fiduciary risk mitigation and revenue topics.

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3 Promotes cross-sector learning on PFM and accountability (to GoN, DFID, DPs). 4

4 Provides tailored technical capacity building services in sector ministries. 5

5 Promotes a flexible and adaptive way of working, responsive to changes and opportunities in sectors.

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Feasible options1. Do nothing.2. Delivery of sectoral public expenditure and revenue results through existing DFID sector

programmes.3. Delivery of sectoral public expenditure and revenue results through a contracted service provider.4. Delivery of sectoral public expenditure and revenue results through the MDTF5. Delivery of sectoral public expenditure and revenue results through provision of financial aid to

GoN

Appraisal of options1. Do nothing .

By not investing in the analysis, technical assistance and assurance activities targeted by this intervention, DFID Nepal would save some of the financial and human resources necessary to deliver the programme.

However, a number of the analysis/assurance tasks are mandatory for DFID programmes delivering financial aid (FA) and will therefore be borne in some way by the office over the life of sector programmes. Further, by doing nothing and by spreading these services across multiple contracts there is a risk that DFID Nepal derives worse value for money by not securing economy savings. AS outlined in the Strategic Case, the PFM and fiduciary risk environment in Nepal presents serious challenges and risks. By doing nothing, DFIDN risks pursuing a counter-productive strategy that may adversely affect the portfolio broadly. By doing nothing, DFID Nepal risks a lack of coordination of analysis/learning across sector programmes on fiduciary risk and mitigation and systemic reform opportunities. By doing nothing DFID Nepal will have limited ability to influence PFM reforms in sectors in ways that align with and build on central reforms which will limit the effectiveness of reform at central and sectoral levels. Finally, given that most sector interventions have already been largely programmed, there is limited scope for the flexibility in approach that experience suggests is critical to securing PFM reforms.

2. Delivery of sectoral public expenditure and revenue results through existing DFID sector programmes.

DFID Nepal has at least five large-scale sector financial aid programmes currently operational or in final stages of pipeline (i.e. procurement or negotiation with GoN). One option considered in this appraisal is to deliver the PFM and revenue results through these programmes. This would build limited elements of fiduciary risk oversight/assurance built into some of these sector programmes. This approach would save costs spent on a separate contract and delivery modality by diffusing proposed activities within sector programmes. It would also save on the human resources required to manage and quality assure a separate intervention.

However, this option is considered to have several costs and risks implicit:

By relying on sector programmes to carry out PFM analysis and assurance work, DFID Nepal runs the risk of not coordinating adequately and learning lessons across sectors. Many of the PFM challenges faced at sectoral levels are similar and it is important that wherever possible, lessons on common challenges and opportunities for reforms are identified to drive system-wide improvements. Relying on individual sector programmes runs the risk of silo-ing response.

There is currently limited technical capacity within sector programme teams on PFM, revenue and accountability topics (given that sector programmes are not designed to respond to these challenges). By seeking to carry out PFM and accountability work through sector programmes,

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DFID Nepal runs the risk of diverting required technical capacity away from the core focus of sector programmes or requiring additional resources to be added to sector programmes to ensure adequate capacity on PFM and accountability. Relatedly, there are potential transaction costs to delivering PFM, revenue and accountability results through sector programmes. By relying on this modality, DFID Nepal programme teams and SROs would be required to establish and manage effective PFM and accountability components within already-complex sector programmes, components that are likely to be outside of their areas of expertise. This runs the risk of limiting the effectiveness of such components and constraining the effectiveness of sector outcomes also. Such an approach would also likely require amendments to the scope of sectoral work agreed with GoN and ministers in the UK, and would impose a cost through programme staff inputs and time delays for such amendments.

DFID Nepal’s PFM and accountability programme experience since 2012 clearly underscores the importance of a flexible, agile approach to fostering and sustaining reforms at sector levels. Successive Annual Reviews (ARs) of the PFM portfolio have pointed to the need to be responsive to context and able to adapt to changes in context to capitalise on windows of reform when they emerge. By relying on large sector programmes to carry out PFM and accountability work, this ability to be flexible and agile is likely to be significantly limited as most such interventions are already fully programmed.

3. Delivery of sectoral public expenditure and revenue results through a contracted service provider.

Delivery through a contracted service provider will respond to several of the concerns raised in other appraisal options. As with any delivery through a contracted service provider, this option will incur financial and human resource costs to DFID Nepal: additional resources will be required to contract a service provider (though some of these resources would need to be spent if Option 2 is pursued) and staff time will be required to adequately contract, manage and quality-assure the intervention.

The technical skills (both nationally and internationally sourced) needed to deliver this kind of programme are widely available in the market. This is evidenced both through DFID Nepal’s existing PFM portfolio and through the limited fiduciary risk and PFM inputs built into existing sector programmes. The approach – pursued over the past four years – of combining national consultants with international consultants has increased over time the availability of expertise in the Nepali market. This intervention intends to pursue a similar approach and by strengthening the market it will contribute to driving competition over the medium term. This is considered to be an important measure of the VfM of the service provider option.

This option is also most likely to deliver DFID Nepal VfM economy savings through the bundling of contracts for common assurance and assessment tasks (such as Fiduciary Risk Assessments and Annual Statements of Progress). Experience over the past four years has indicated that there are no concerns regarding conflict of independence in the conduct of this type of assessment. By collecting the range of sectoral PFM, accountability and revenue work within one contracted service provider, DFID Nepal is also likely to derive VfM benefits of coordinated learning and synergies across sectors in areas of fiduciary risk and assurance, PFM system reforms, and accountability improvements. A focus on identifying shared challenges across the portfolio and coordinating responses to them across sectors will be built into the terms of reference for a service provider and incentives established to ensure that opportunities to reinforce improvements across sectors are exploited throughout the lifetime of the programme. Further, if contracted appropriately and overseen with appropriate management arrangements, experience since 2012 indicates that this delivery option will provide a high degree of flexibility and responsiveness in delivery. As outlined above, the ability to rapidly respond to changes in context or to demands by GoN and other sector stakeholders is critical to capitalising on windows of reform opportunity and therefore to the successful delivery of programme outcomes and impacts.12 For these reasons, it is the assessment of this Business Case that the benefits of this option outweigh the costs.

12 In addition to the Nepal-specific experience of this over the past four years (cf. PFMA Annual Review 2015; MDTF Project Completion Review 2016), see also DFID, Governance Portfolio Review, 2011; Brian Levy, Working with the Grain¸ Oxford University Press, 2013; David Hudson and Adrian Leftwich, “From Political Economy toPolitical Analysis”, DLP, 2014; David Booth and Diane Cammack, Governance for Development in Africa: Solving Collective Action Problems, Zed Books, 2013.

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4. Delivery of sectoral public expenditure and revenue results through the MDTF

As outlined above, DFID Nepal is currently working with other DPs, the World Bank and GoN to identify priorities, a strategy and a set of sub-projects that will form the basis of the second phase MDTF. A fourth option considered in this appraisal is the delivery of the results through this second phase MDTF. This would have the benefit of strongly harmonising central and sector PFM reforms and of capitalising on the existing strengths of the MDTF, particularly its convening power and the political capital it has generated over the past five years.13

However, this option is considered to have several costs and risks implicit:

Early design discussions for the next phase of MDTF support have indicated that the overall programme will not contain a significant focus on sectoral reform issues, which is both the principle intention of this programme and a key priority for reforms for maximising VfM of DFID Nepal’s sector programmes more broadly.

Likewise, the next phase of MDTF support is unlikely to cover any issue of revenue administration reform (though may cover tax policy topics in part), which remains an area of priority for DFID globally and in Nepal.

Obtaining detailed cost breakdowns of WB operations (e.g. individual consultant rates) is difficult and makes direct cost comparisons complicated. However, this appraisal referred to a recent increase in the WB cost recovery framework (from 14% - 17% from July 1, 2016), and noted high overall consultant rates in MDTF1. It is the assessment of this Business Case that the unit costs of delivery through the WB MDTF are likely to be higher than those of a contracted service provider over whom DFID Nepal is able to exercise a greater degree of control (both during contracting negotiation process over fee rates, and during implementation over selection of appropriate consultants). Further, as noted above, the World Bank approach to PFM reforms has demonstrated significant value in driving large, centre of government initiatives, it is considered unlikely to deliver value for money efficiency or effectiveness for these type of sector reforms.

As noted above in the CSC, this Business Case also places a high value on flexible and highly responsive ways of working as critical to achieving significant PFM reforms in sectors. This type of approach does not match with the WB’s comparative advantage of larger-scale, traditional technical assistance over a longer-term period. As such, the inability to deliver reforms in a more agile, responsive and politically-oriented manner makes the WB MDTF an unsuitable delivery vehicle for this intervention.

This Business Case considers that it is not possible to meet the proposed outcome and impacts of this intervention through the MDTF. However, as is clear in the Strategic Case, there will be a focus placed by the SRO and by supplier on aligning GoN PFM reforms supported at the centre level by the MDTF and those supported by this intervention at sector levels. DFID Nepal’s ongoing engagement through both proposed programmes will mean that it is possible to influence and to drive greater alignment between central and sectoral reform in PFM, revenue, and accountability.

5. Delivery of sectoral public expenditure and revenue results through provision of financial aid to GoN

A final option considered by this Business Case is the delivery of expected results through the provision of financial aid to GoN. This would bring potential benefits by anchoring reforms within GoN, but is considered not to be appropriate for several reasons. Firstly, the proposed sectors of focus of this intervention all currently receive financial aid from DFID Nepal, and it is the provision of this financial aid that helps to focus the reform activities that the intervention proposes. In fact, it is the intention of the programme that the provision of technical assistance, advice and analysis will improve performance, service delivery, and accountability in these sectors that will enable further increases in financial aid through GoN systems. Secondly, although not delivered as financial aid through GoN systems, the programme will provide TA directly to GoN ministries and in support of GoN-identified and endorsed reform plans and activities in the FCGO, PEFA Secretariat, MoFALD, MoHP, MoWCSW, MoPE, and Central Bureau of Statistics. As such, the programme activities are very clearly anchored in GoN priorities and plans and are owned by a broad range of GoN bodies and are not limited to one ministry/department as would likely be the case in the provision of financial aid.

13 DFID Nepal, MDTF Project Completion Review, 2016.

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Critical Success Criteria: weighted scoring

Option 1 Option 2 Option 3 Option 4 Option 5

CSC Weight Score Weighted Score

Score Weighted Score

Score Weighted Score

Score Weighted Score

Score Weighted Score

1 5 2 10 4 20 4 20 3 15 2 10

2 5 2 10 3 15 5 25 5 25 1 5

3 4 1 4 1 4 5 20 3 12 2 8

4 5 2 10 2 10 4 20 4 20 4 20

5 4 1 4 1 4 4 16 1 4 1 4

Total 38 53 101 76 47

EvidenceGlobal evidence suggests that support for PFM reforms has delivered results but at a slow pace and when supported over a sustained period of time. This reflects DFID Nepal’s programme experience over the past five years particularly in relation to central PFM reforms which have been slow to foster but which are observably taking hold, as evidenced by moderate improvements in FRA/ASP scores outlined above, the second PEFA assessment, and the MDTF PCR of February 2016.

PFM reforms and reforms in sectors: The 2010 Review of DFID’s governance portfolio14 noted a net improvement in PFM in the countries in which DFID engaged in this area of reform, and a cross-country study by ODI from 201015 showed that on average countries that received more PFM-related technical assistance have better PFM systems. A 2012 multi-country evaluation of PFM reforms identified three key conditions for the delivery of results:

when there is a strong political commitment to their implementation, when reform designs and implementation models are well tailored to the institutional and capacity

context; and when strong coordination arrangements – led by government officials – are in place to monitor

and guide reforms. 16

The emphasis on coordination and tailoring to context reflects the priority that this Business Case places on alignment between central and sectoral PFM reforms, and on the importance of an approach that is flexible and responsive to reform opportunities within GoN as they emerge.

The evidence of impact of PFM reforms on sector performance is more mixed. A 2013 review of PFM literature by GSDRC suggests that “that good PFM systems are a necessary but not sufficient precondition for good service delivery performance, whereas poor PFM systems are sufficient to result in poor service delivery performance.”17 DFID Nepal is currently engaging with a research project run by ODI that is examining the evidence behind links between PFM reforms and sector service delivery improvements (specifically health sector). The findings when complete will be used to inform programme decision in the future. The ODI study from 2010 also suggests that coordination failures between stakeholders is one of the top five reasons for failure and recommends that “PFM engagement should be extended more systematically beyond concentrated groups of actors at central government level.”18

Finally, evidence from the past several years also stresses the importance of flexibility, learning and context-specificity in driving successful reforms. Lawson19 and Andrews20 recommend the promotion of active lessons learning and adaptation in the process of reform as critical for favourable outcomes.

14 DFID, Governance Portfolio Review, 2011. 15 ODI, “Does donor support to public financial management reforms in developing countries work? An analytical study of quantitative cross-country evidence”, 2011.16 Andrew Lawson, Evaluation of Public Financial Management Reform, 2012, p 12.17 Sumedh Rao; “Measuring the impact of PFM reforms on service delivery”, GSDRC, 2013. This is supported by Bryn Welham, Philipp Krause and Edward Hedger, “Linking PFM dimensions to development priorities”, ODI, 2013.18 ODI, “Does donor support to public financial management reforms in developing countries work? An analytical study of quantitative cross-country evidence”. 2011. 19 Andrew Lawson, “PFM Reading Pack”, GSDRC, 2015.20 Matt Andrews et al, “This is PFM”, CID Working Paper No. 285, 2014.

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PFM and anti-corruption: The extensive 2015 DFID evidence paper on corruption notes that unlike the record of under-delivery of direct anti-corruption interventions, “there is a large body of consistent evidence which shows that PFM reforms are effective in reducing corruption in public administrations, particularly bribery and fraud.”21 This covers PFM reforms including decentralisation, public expenditure tracking, revenue administration, procurement and central budgeting and planning. The evidence review also indicates that support for bodies of external audit (Supreme Audit Institutions) was found to be effective in curbing corruption in a small number of observational studies. Most effective PFM reforms often involve a combination of two or more interventions, pursuing an “integrated approach” to anti-corruption through PFM reforms.

Cost benefit analysisExpected costs: Total resources are £5 million over four years. Other DFID contributions are: Governance Adviser (35% FTE), Programme Manager (30% FTE), and small inputs from sector advisers (approx. 5% FTE).

The forecast annual spending is as follows22:

PFMA forecast spend 2017/18 – 2020/21

2017/18 2018/19 2019/20 2020/21

1,000,000 1,000,000 1,800,000 1,200,000

Expected benefits: The expected benefits of this programme will be reforms in government policies, processes and activities that contribute to increases transparency and accountability, effective functioning and credibility of Nepal’s sector systems of public revenue and expenditure. The focus of activities on fiduciary risk assurance, and flexible technical advice and capacity building are expected to translate into system benefits that include:

Greater allocative efficiency within sectors resulting in better prioritisation of development resources

Decreased leakages, wastage or misuse of development resources Greater fiscal control and planning capacity within sector ministries and departments Increased capacity of GoN civil servants working on public expenditure and revenue tasks Decreased transactions costs of aid (as a result of increased donor confidence and so increased

use of budget support) Improved scrutiny of sector spending (external and internal) that contributes to reduced diversion

of funds for political or financial motives and in turn releases resource to be spent on other development priorities.

Increased own source revenue (as a result of revenue reform programmes) and reduced reliance on aid.

Quantifying these benefits presents a significant challenge as DFID Nepal is not currently able to make a reliable estimate of losses to fraud and corruption within sectors, or access data on allocative efficiency within sectors. DFID Nepal is serious about embedding VfM in its programmes, as recognised by the 2016 Internal Audit Department (IAD) report. As part of the procurement process for this intervention DFID Nepal will require bidders to develop and embed a structured and systematic approach to VfM measurement and analysis. Bidders will be expected to outline VfM metrics with key indicators for assessment and comparisons for VfM gains over the life of the programme. This will also be a key criterial for assessment of bids.

Commercial CaseProcurement/commercial requirements

21 DFID, “Why corruption matters: understanding causes, effects and how to address them”, 2015.22 This forecast reflects the pipeline spend forecast outlined in the DFID Nepal Business Plan 2016/17 – 2019/20.

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In order to meet the above outlined programme needs, it is proposed that the programme be delivered through direct procurement of a contracted service provider. Based on recent experience in Nepal, we expect high value for money (VfM) for this intervention. Key VfM savings will be driven by supporting increased competitiveness of expertise in the local market, and economy savings accrued through the ‘bundling’ of contracts for the delivery of mandatory fiduciary and corruption risk assessments in one commercial supplier. This bundling of work on PFM and risk mitigation will also generate cross-sector learning on reform opportunities that will deliver efficiency savings, enabling DFID Nepal to reinforce progress across sectors. We will seek to ensure that maximum funds are going directly to programme costs and will push bidders on budget transparency to specify costs down the delivery chain, and between the split of programme and management costs.

Use of competition to drive commercial advantage and current state of the market to supply services

Delivery by a contracted service provider, sourced through competitive procurement will drive commercial advantage and VfM for DFID. We will pursue an OJEU direct restricted procurement process (PQQ and ITT).23

DFID Nepal’s PFM programme experience since 2012 indicates that there are both international and national service providers capable of delivering the kind of services outlined in this Business Case. DFID globally also has extensive experience in procuring similar services around PFM, fiduciary risk assurance and mitigation, revenue administration reform and accountability improvements. Importantly, the contracted service provider will be expected to demonstrate how they intend to use and to build the capacity of Nepali consultants as part of the delivery of technical advice, analysis and capacity building activities over the lifetime of the programme. This is intended to both drive VfM for DFID by working to reduce over time the use of international consultants, as well as strengthen the market in Nepal through the strategic use and enhancement of Nepali expertise for the long-term. Implementation payments will be pre-financed by the service provider and reimbursed by DFID Nepal, based on proof of delivery and expenditure.

Key cost drivers and performance management

The main components (with approximate cost breakdown) will be:

1. Public Financial Management and Accountability (Components 1 and 2): £3.5 million will be delivered through direct OJEU restricted procurement process. This will be delivered by a contracted service provider who will be responsible for day-to-day management, monitoring and reporting, procurement of goods and services.

2. Flexible fund for institutional support (Component 3) : £1.5 million will be reserved as a flexible fund within the programme to enable scale-up on specific institutional support initiatives that relate to sector or revenue functions of GoN. These will build on the analysis and initial technical assistance and capacity building undertaken in Components 1 and 2. These resources are reserved for larger pieces of discrete, stand-alone support separate from the ongoing TA/capacity building and analysis activities. NB. The governance arrangements (including development of proposal and approval) that will determine the use of this fund are detailed in the Management Case below.

The key requirements for the contracted service provider will include the ability to:

Operate in Nepal from the outset of the programme Provide (or secure service to provide) high quality PFM, fiduciary risk, revenue and financial

accountability advice and analysis, including political economy analysis in these areas Provide (or secure service to provide) high quality sector-specific analysis and technical advice

on these topics Build and sustain strong working relationships across GoN, including within sectors and with core

central economic entities Build synergies between DFID Nepal sector programmes, with a specific view to identifying

opportunities to promote reforms across sectors. Demonstrate commercial capability and VfM

23 An alternative procurement strategy – the use of an existing Framework Agreement – was considered in the development of this BC. However, the relevant (Governance) Framework expired in early 2016 and is not being renewed.

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Demonstrate flexibility and responsiveness to changing contexts (i.e. political, environmental, security) in programme and operations.

The main cost drivers for the programme will be unit costs of the contracted service provider. These include:

Consultant fees (national and international) Reimbursable fees Office set up/running costs in Kathmandu

Costs to DFID are expected to be significantly reduced through the clustering in this contract of the multiple assignments required to deliver fiduciary and corruption risk assessments, required as part of financial aid programme delivery. It is anticipated that this clustering will enable the contracted service provider to drive down the overall price of unit costs around staffing, travel and accommodation. As outlined above, efficiency savings are also expected as a result of repeated use of experts (national and international) in each sector, maximising efficiencies of expertise through repeat use of consultants already familiar with sector dynamics. Further, international fee days are expected to be the most significant cost driver in the programme. Drawing on experience over the past five years, the intervention proposes to gradually reduce the balance of international days used to deliver the activities outlined above. This will be achieved by the repeated use of experts and the related building of capacity and expertise of national consultants so that in the outer years of the programme there is a tapering of the use of international consultant days towards more use of national expertise, thus driving down the expense related to the largest programme cost driver (international fees).

A set of detailed VfM metrics will be developed with assistance of the DFID Nepal Commercial Adviser and the DFID Nepal VfM Hub in conjunction with the development of service provider TORs at the procurement stage. As part of the contracting process, bidders will expected to submit VfM indicators and statement tied to their proposals. This will be assessed as part of the procurement bidding process and will be monitored in the programme delivery plan and tracked monthly as part of regular programme management by DFID Nepal. Performance more broadly will be monitored through DFID Nepal’s established contract management systems. Bidders will be expected to submit a proposed/indicative logframe that responds to the three components during the procurement process that may be further developed jointly with DFID Nepal during the inception period and revisited regularly.24 The service provider will also take part in the regular country-level ‘key supplier management’ review process to assess VfM, delivery, and performance quality.

Value for Money

EconomyA core VfM economy saving as part of the programme will be generated through the clustering of contracts for mandatory programme management processes (e.g. FRAs). The SRO and programme management team will closely monitor services provided to maximise opportunities for cross-sector synergies within the programme. PFM programme experience since 2012 has also demonstrated the VfM of the approach of pairing international and national consultants on TA advice and capacity building work: over time, this has demonstrably built the capacity of national consultants and reduced the need to use more expensive international consultants. It is anticipated that this intervention will pursue a similar approach, using national consultants as much as possible before mobilising international support.

Efficiency The proposed delivery modality – a contracted service provider working across DFID Nepal’s sectors of operation – will be able to drive greater efficiency by sharing learning across sector interventions. This is a function that other proposed options are highly unlikely to be able to perform effectively, and reflects evidence and experience in Nepal about the aligning and reinforcing of PFM reforms across sectors. A further VFM learning from recent programme experience is around the repeated use of experts (international and national) in each sector, maximising efficiencies of expertise by bringing back consultants already familiar with sector dynamics. The intervention will continue to prioritise this approach to drive further efficiency savings. Further, as noted in the Appraisal Case above, the 24 Particular consideration will be given in the development of the logframe and results targets to how GoN policy and practice is being positively influenced and how this can be measured. This necessarily means a focus on outcome level change and discussion will be needed to balance ambition in the logframe between output indicators and outcome level changes anticipated.

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intervention will help to drive competition in the market in Nepal by building the expertise of Nepali consultants over the lifetime of the programme and thereby strengthening the market in Nepal for future GoN, DFID or DP interventions in these sectors. It is also expected that the contracted service provider will base a full time team leader in Kathmandu to provide overall management, assurance and guidance. This approach has worked well since 2012 and has generated considerable efficiency savings by deepening the institutional knowledge within the programme team and by enhancing the technical expertise of in-coming consultants with detailed country context understanding and awareness of DFID Nepal needs.

Effectiveness Beyond the core fiduciary risk assessment, assurance and sector PFM reform activities to be identified during the inception period, this Business Case proposes to retain some programme resources and time for use as a flexible and agile fund. This approach builds on successes over the past five years and is intended to enable an ability to focus on emerging windows of reform opportunity in a responsive way. Given the nature of the reform context in Nepal, this is expected to contribute significantly to programme effectiveness. A related point will be an enhanced focus on the political economy analysis (PEA) of reform opportunities. While remaining responsive to demand from GoN sector and central PFM stakeholders, the programme will develop the capacity and system for rapid PEA (building on solid grounding of fiduciary and corruption risk analysis). In addition to the flexible and responsive function, this proactive focus on PEA is intended to enhance the programme ability to ‘spot’ reform opportunities and to target appropriately where it is judged both technically sounds and politically feasible. Being able to identify early and foster reform opportunities within sectors will contribute to overall programme effectiveness and achievement of programme outcomes.

VfM savings are also expected to accrue to GoN over the lifetime of the programme through enhanced effectiveness of delivery within sector Ministries and departments as a result of the cross-sector learning that the programme will drive. As noted above in the Appraisal Case, cross-sector learning is one of the critical success criteria for the programme. This will involve learning and analysis, advice and solutions around common PFM and accountability problems in social sectors in Nepal, as well as the sharing of innovative and creative solutions fostered in one sector and shared across GoN. It is expected that this approach will contribute to an overall upgrade of VfM within GoN.

Financial Case

High level budget and disbursement projection

The total costs of this Business Case will be up to £5 million over four years (2017/18 – 2020/21). The overall spend projection is below.

Delivery Modality

DFID Nepal Business Plan period (2016/17 – 20/21)

2017/18 2018/19 2019/20 2020/21

Component 1: Analysis of fiduciary and corruption weaknesses in key sectors

Contracted service provider

£200,000 £200,000 £425,000 £225,000

Component 2: Flexible analysis and technical assistance £425,000 £425,000 £1,000,00

0 £600,000

Component 3: Flexible fund for scaled-up institutional support

Modality not specified at

outset £375,000 £375,000 £375,000 £375,000

Total £1,000,000 £1,000,000

£1,800,000

£1,200,000

The programme will be funded from DFID Nepal programme resources (resource departmental expenditure limit – RDEL). It covers the final four years of the DFID Nepal Business Plan and aligns with DFID Nepal’s current and upcoming sector programmes. This timeframe also recognises lessons learned from the current PFM portfolio regarding the length of time required to establish, foster, and

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sustain critical PFM and accountability reforms. The overall budget amount and spend profile follows the pattern of similar spend in a component of an existing DFID Nepal PFM intervention but reflects a greater level of appetite among sector programmes for PFM and accountability work going forward, and on ambition around specific pieces technical assistance envisioned over the course of the Business Plan period. Funding for this has been included in the DFID Nepal Business Plan (2016/17 – 2019/20).

Monitoring of expenditure

For Components 1 and 2 (contracted service provider), implementation payments will be pre-financed by the service provider and will be reimbursed by DFID Nepal, based on proof of delivery and expenditure. The service provider will be expected to submit monthly invoices to DFID Nepal for approval by SRO and programme team. They will also be expected to submit quarterly financial statements and detailed quarterly progress reports (which will include progress against logframe indicators). They will be expected to submit quarterly forecasts and workplans. Details of acceptable goods and services to be invoiced will be included in the contracting arrangements.

The activities of Component 3 (flexible fund) are not yet defined as the intention is to retain flexibility so as to capitalise on significant windows of reform opportunity within GoN by scaling-up technical assistance or capacity building support rapidly as required. The requirements for financial monitoring and reporting arrangements specific to Component 3 cannot therefore be identified here. However, they will be determined by the governance arrangements for the component (detailed in the subsequent section of the Business Case), and will be required to apply the same level of scrutiny and oversight as expected from the contracted service provider.

Use of funds for the intended purpose

Given the direct implementation by a contracted service provider and the monitoring arrangements outlined above, the fiduciary and fraud risks of this intervention are judged to be low. This is based on several key assumptions. An assessment of these will be built into the contracting process and they will be reported on and monitored over the lifetime of the programme.

That the contracted service provider has appropriate financial management structures in place (e.g. internal control policy; adequate accounting and reporting standards)

That the contracted service provider follows transparent procurement practices in identifying and securing consultancy services (both national and international)

That the contracted service provider has appropriate counter fraud policies/processes in place (i.e. counter fraud and whistle blowing strategy; fraud reporting processes)

The substantive focus of the programme on fiduciary and corruption risks will also contribute significantly to a strengthened external awareness and response to fraud risks in the programme.

As part of DFID Nepal’s 2016 Anti-Corruption and Counter Fraud strategy, contracted service providers are subject to a range of counter fraud measures in addition to regular processes that are part of the competitive procurement. The selected service provider will undergo DFID Nepal contract performance reviews. The DFID programme team (SRO and programme manager) will develop cash flow diagrams/assurance and control frameworks as appropriate, and will conduct internal monthly programme meetings as well as frequent programme meetings with the service provider. Programme risks (detailed in the Management Case below) will be assessed on a monthly basis through the programme Delivery Plan. Assets maintained by the service provider will be lodged on an asset register and will be verified through DFID Nepal monitoring processes. DFID Nepal will decide on the disposal of assets at the end of the programme. The service provider will provide annual audited statements of accounts to DFID Nepal. Counter fraud zero tolerance awareness raising of contractors is also a standard part of DFID Nepal’s programme management and will be applied to this intervention.

Management CaseManagement arrangements

For Component 1 and 2 , DFID Nepal will manage the service provider contract. Detailed arrangements for this will be established through the contractual process, based on the detailed TORs that will be developed with the DFID Nepal Commercial Adviser during the procurement stage. However, several core management arrangements and principles are identified at this stage:

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Methodical planning and forecasting of core fiduciary risk and assurance work: Ongoing assurance and fiduciary risk work should be clearly planned out across the year, taking advantage of the set and predictable deadlines for FRAs/ASPs and other analysis and assurance work.

Flexible and responsive approach to demand-driven opportunities: As detailed above, the programme will pursue a flexible and responsive approach to supporting demand-driven reforms from GoN sector and PFM stakeholders. This will require fostering and maintaining strong and effective relationships with key sector PFM stakeholders as well as several critical central-level stakeholders such as OAG or the Financial Comptroller General Office (FCGO).

Politically informed proactive identification of reform opportunities: In addition, the programme will apply rapid political economy analysis (drawing on fiduciary and corruption analysis) so as to proactively ‘spot’ reform opportunities and to leverage those that are both technically sound and politically feasible. The programme will draw on the principles of the problem driven iterative adaptation (PDIA) approach to enable a structured process to identifying and pursuing reform opportunities.

Cross-sector coordination and learning : Delivery of results targeted in this Business Case will require close coordination between PFM and accountability reforms within sectors. The contracted service provider will be responsible for identifying areas of reform commonality and opportunities to proactively reinforce individual sector reforms through system-wide activities.

It is anticipated that the contracted service provider will use the first three months of the contract as an inception period to establish planning and reporting procedures, complete immediate analysis and assurance tasks and identify short-to-medium term reform priorities with key stakeholders. The contract will include breakpoints25 at the 12 month and 36 month marks to enable review of performance and adaptation of programme priorities as required by context changes.

The flexible fund for institutional support outlined in Component 3 is intended to enable scale-up of specific reforms in sector or revenue functions of GoN and support larger pieces of discrete, stand-alone reform, separate from the ongoing TA/capacity building and analysis activities undertaken by the service provider. This function will enable DFID Nepal to build on the analysis and initial technical assistance within the programme and to leverage system-wide changes as they emerge.

The use of the flexible fund will be proposed by the programme team (SRO and Programme Manager) and will be assessed and approved by the DFID Nepal Governance Adviser and the Team Leader (TL) for the Governance and Service Delivery Team (GSDT). The utilisation of the fund for scaled-up institutional support will require a brief (4 page minimum) concept note that details:

Analysis (e.g. PEA, fiduciary risk, corruption analysis) of the specific institutional reform challenge

Objectives of intended support Delivery modality (i.e. technical assistance; joint DP support; support to existing programme of

institutional reform; specific capacity building activities) Success criteria/indicators

This concept note should be discussed and approved by the Team Leader (GSDT) and the DFID Nepal Governance Adviser and minutes of the discussion and decisions recorded and kept on file. Once approved, the additional area of support should be added to the logframe, using the objectives and indicators outlined in the concept note to enable monitoring and reporting over the lifetime of the programme. Approval by the TL GSDT and DFID Nepal Governance Adviser will provide a challenge and oversight function on the use of flexible funds. The use of this fund will be determined by this process and be focused on areas where there is considered to be a strong likelihood that the application of scaled-up support will make significant progress on strategic institutional reforms. As such it is considered that the implementation of this fund will be separate from the service provider contracted to deliver Components 1 and 2. Both components are intended to run simultaneously (pending the decision to utilise the reserve fund of Component 3), rather than sequentially. However, the analysis delivered

25 Breakpoints are defined for this programme as related to: HR/staffing of intervention; assessment of balanced achievement against three components; assessment of learning/coordination elements of the programme. A formal assessment and discussion with the service provider (using the analysis in the Annual Review) will be conducted and programme revisions will be agreed. Payment may be halted pending the outcome of these assessments at the break points.

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under Component 1 will be a critical element of the technical assistance, advice and capacity building provided under component 2 and 3.

The DFID Nepal programme team will consist of the SRO and the Programme Manager, supported by the Team Leader (GSDT) and the senior Programme Manager (GSDT). DFID human resource contributions are expected to be: Governance Adviser/SRO (35% FTE), Programme Manager (30% FTE), and small inputs from sector advisers (approx. 5% FTE). The time inputs of sector advisers will be determined as part of the standard process for engaging PFMA support that will be developed by the SRO during the inception period. This will spell out the time requirements and expectations of sector advisers to avoid the risk of ‘outsourcing’ PFM reform requirements to this intervention and to build up ownership and capability on these topics within the DFID Nepal office over the lifetime of the programme.

The intervention programme team will be responsible for:

Contract management: In line with DFID’s Smart Rules, the SRO will be responsible for overall management and technical oversight of the programme. The Programme Manager (GSDT) will be responsible for financial and compliance matters in line with Smart Rules. This will include the application of DFID Nepal’s key supplier management approach.

Cross-office coordination: The programme team will be responsible for developing and communicating simple and clear standard processes by which DFID Nepal sectoral teams are able to draw upon programme expertise. This will ensure clear accountability in regard to sectoral reform activities, appropriate technical expertise and programme oversight in the delivery of analysis and advice, and appropriate ownership of the reform agendas within sector programmes and Ministries. As flagged above, there is a strong link between the work of the proposed independent third party monitoring (3PM) mechanism currently being established by DFID Nepal and the analysis and technical assistance outlined in this proposal. This programme will work with the 3PM mechanisms, run by the DFIDN Portfolio Effectiveness Team (PET), to identify and implement solutions to fiduciary, fraud and corruption issues that emerge from third party monitoring.

Cross-sector learning and opportunities: The SRO will be responsible for working with the contracted service provider and with sector programme teams to identify learning around common fiduciary and PFM challenges faced by DFID Nepal programmes. They will identify system-wide reform opportunities within and across sectors that are complementary and reinforcing which can be pursued by the service provider.

Sector coordination : As outlined in the Strategic Case, sustainable delivery of the intended programme outcomes will require alignment and coordination with GoN priorities and reforms at the central and other levels to ensure that sector reforms generate necessary traction. Similarly, as much as possible, sector reforms pursued by this programme should align with the priorities and reform activities supported by other DPs. To this end, the SRO will be responsible for working with GoN central leadership on PFM (including the PEFA Secretariat at the FCGO, the OAG Ministry of Finance). The SRO will also work to ensure an active International Development Partner Group on PFM that drives coordination of externally-supported PFM reform activities.

Programme monitoring and reporting

Subject to finalising reporting processes and timelines in the inception period, the contacted service provider will provide DFID Nepal with a range of monitoring and reporting material including: monthly invoices detailing financial activity and progress on key outputs on which to base DFID reimbursements; detailed progress and financial reports on a quarterly basis; monthly/quarterly budget forecast and cost projections; and progress updates against agreed logframe indicators. A standard procedure for engaging the DFID Nepal programme team and sector teams in relevant assignments will be developed that will involve introduction and de-brief meetings as appropriate. Progress will be monitored on a yearly basis through the programme Annual Review for which the programme team will seek inputs from across DFID sector programmes to gauge performance. The supplier will also conduct an annual audit which will be submitted to DFID Nepal.

Risks

The overall risk rating is Moderate. Given the context and recent experience of PFM and accountability reforms in Nepal, there are several risks that have the potential to moderately constrain the programme’s achievement of intended outcome and impact. However, the approach identified for the programme is

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intended to mitigate several of these risks. An outline risk matrix (including main risks and mitigating actions) is on the next page. This will be developed further through the

procurement process and during the inception period of the programme. Risk will be assessed as part of the monthly Delivery Plan updating process throughout the life of the programme. Critical risks likely to jeopardise achievement of the programme objectives will follow a risk escalation process (detailing roles, responsibilities and required actions) that will be developed during the inception period (involving contracted service provider, DFID Nepal programme team, and DFID Nepal senior management as required).

Almost certain

Likely

Possible

Unlikely

Rare

Insignificant Minor Moderate Major Severe

Like

lihoo

d of

occ

urre

nce

Scale of Impact

R7

R7

R6

R6

R3

R3

R1

R1

R11

R11

R9

R9

R2

R2

R4

R4

R5

R5

R8

R8

R10)

R10

R12

R12

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PFMA Risk Matrix

 Summary of Risk Gross Risk Mitigating Actions Net Risk

External Context

R1. Political instability (e.g. federalism transition) constrains

delivery or renders assignments/programme objectives

unattainable

Major

continuous analysis; high-level dialogue with BE on national-level risks; direct engagement of fiscal

federalism policy/planning issues by DFIDN to influence positively.

Moderate

R2. Earthquake/large natural disaster Major

programe preparedness through contingency plans; back-up of govt

IT systems for PFM Moderate

Delivery

R3. Lack of cross-GoN ownership and support/engagement (central

PFM stakeholders and sector agencies)

Moderate

proactive PEA and analysis to identify opportunities for politically smart reforms; regular dialogue at different levels (by DFIDN, service provider and by like-minded DPs);

understand incentive systems within ministries; align reforms with GoN

priorities; demonstrate value through flexible/responsive approach; identify assignments that deliver incremental

progress to demonstrate ongoing value; focus on incentives of GoN to

influence behaviour change and support for reform activities.

Moderate

R4. Frequent GoN staff transfers moves reform champions and/or

undermines institutional memory/progress for reform

Major

continuous analysis; ensure broader ownership of reforms (top 3 senior levels in ministries); engage early

with in-coming staff to build institutional memory; support

handover; develop and support development of clear and agreed documentation detailing reform

activities; remain flexible to support emerging needs of in-coming staff;

align with stated GoN priorities

Moderate

R5. Lack of engagement on PFM reforms by sector ministries/reform

gatekeepers within ministries.

Major

articulation of and alignment with GoN/sector minstry priorities

(support for priorities to engender engagement); training to senior

leaders within sectors to demonstrate value; build confidence and support within sectors ministries

through training, workshops, communication; link PFM reforms to

sector programme priorities (in support of); utilise partnership

principles; focus on incentives of GoN to influence behaviour change

and support for reform activities.

Major

R6. Sector ministries with low capacity or at different stages of

PFM development

Major

Proactive analysis (fiduciary, corruption, political economy etc) to

accurately identify stages/commitment/capacity for reform within sector ministries;

support for interventions that are fit for GoN agencies (not solely donor-driven); direct capacity building of

agencies; embedded TA; close monitoring by contracted service

provider

Moderate

Safeguards N/A Minor   MinorOperational R7. Inadequate management by

contracted service providerModerate inception period and report (after 3

months); contract break points at 12 month and 36 month to assess

progress; joint reporting and management processes established and agreed during inception period; frequent informal meetings DFIDN-

Minor

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service provider/continuous dialogue.

R8. Levels of demand for technical assistance/analysis/advice (from

GoN or DFIDN sector programmes) outstrips programme capacity to

deliver (at quality). Moderate

Detailed planning of predictable assurance/fiduciary risk; clear

communication to DFIDN stakeholders on support available; frequent assessment of outputs-

outcomes linkages to ensure balance of intervention activities.

Minor

R9. Lack of alignment/coordination between development partner PFM reform programmes (central, local, sectoral) counteracts programme

objectives or leaves significant gaps in supported reforms.

Major

Pro-active leadership of PFM working group by DFIDN; service

provider team leader in-country with coordination/communication as one

of core KPIs; regular proactive communication/outreach to DPs by

service provider team.

Moderate

Fiduciary

R10. Misutilisation of funds, corruption and fraud (in both service

provider and govt systems) Moderate

Competitive contracting processes (recruitment/procurement); monthly financial invoicing on reimbursable

basis; monitoring and reporting (annual reviews, field trips); no money through gov't systems.

Minor

R.11 Poor value for money (through service provider); cross-sector

learning/synergies are not derived; unit costs within clustered contract

outweigh separate contracts.Minor

Central VfM assurance as part of competitive contracting process;

close and regular monitoring (financial and progress); relying on

competitive internal contractor processes; flexible & responsive delivery approach spreads risk of

poor VfM (balance demand-driven, proactive identification of opportunities, and core

assurance/fiduciary risk activities)

Minor

Reputational

R.12 Failure to deliver, or reform successes compromise trusting

relationship with GoN Moderate

being responsive to GoN demands; proactive coordinaton function by

service provider; invest in relationship building; alignment with

GoN reform priorities.

Moderate

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Smart GuideThe Business Case

- Sets out the case for a programme, adapted to suit the context- Explains very clearly what the programme will do within what timeframe and is explicit about the risks and

uncertainties and how they will be managed- Records an understanding for DFID, our partners and intended beneficiaries about what we are planning to do

and the results we expect to achieve- Allows DFID to report to the UK public on what we are doing with taxpayers’ funds

The Business Case is structured around the Treasury 5-case model. Within this broad framework the design should be adapted to suit different contexts and investment types. The content is indicative, not prescriptive and teams are encouraged to use judgement in making a logical argument to make the case in a way that suits the individual investment. There is also a set of questions in the Smart Rules that design teams should consider during the process. This is not a checklist and only the questions relevant to the context should be answered.

Teams should refer to the considerations below as a guide to writing the business case

Intervention Summary (2 Pages)

A succinct and unambiguous description of what the project will do. The summary sets out the problem the programme will address, what it will do and what the money will be spent on. It sets out the expected results in the context of the Operational Plan and DFID’s wider priorities and a summary of risks. The accompanying submission should set out any sensitive information that supports the case (e.g. risk tolerances and escalation measures)

Strategic Case

This section makes the case for DFID intervention by setting out the overarching context and the problem to be addressed. It should be clear what the programme will do and how with evidence. It should link to – but not repeat – the Operational Plan with a clear illustration of how the programme contributes to DFID global and portfolio priorities of poverty reduction.

Appraisal Case

The Appraisal Case explores how we will address the need in the Strategic Case in a way that optimises value for money. It appraises genuinely feasible options for achieving the objectives, including high level commercial choices , with a summary of the quality of evidence. The appraisal considers delivery mechanisms including capability and capacity, costs and benefits, risks and likelihood of success. It concludes with a preferred option.

Commercial Case

This section provides more detail on implementation and how value for money will be achieved. It sets out the procurement approach and requirements, proposed funding instrument and how the choice of instrument will be used to ensure vfm. It considers the market place response to this intervention with an explanation of how supplier performance would be managed. It sets out the procurement policies, capabilities and systems of the third party entity to ensure we get vfm.

Financial Case

This section sets out issues of affordability and the sources of funding. It includes a high level budget which does not impair VfM in procurement exercises for individual contracts. It sets out how funds will be disbursed and how expenditure will be monitored, reported and accounted. It highlights the evidence underpinning a judgement that funds will be used for the intended purposes.

Management Case

This section focuses on governance and management arrangements and the ability to deliver. It sets out the management implications for the business unit/ level of effort with realistic timings for mobilisation and start up. It outlines out the expected roles and responsibilities, including DFID’s own resourcing strategies (SRO, project team etc).

It sets out how it will respond to changes in context and the key elements of the Delivery Plan, key milestones and decision points where we can course correct. It includes a clear illustration of the risks, tolerances and approach to

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escalating problems and issues as well as exit and possible closure scenarios.

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