Document of The World Bank

FOR OFFICE USE ONLY

Report No: PAD738

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 3.6 MILLION (US$5.5 MILLION EQUIVALENT)

TO THE

KINGDOM OF LESOTHO

FOR THE

PUBLIC FINANCIAL MANAGEMENT REFORM SUPPORT PROJECT

January 10, 2014 Financial Management Core Operations Services Africa Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 30 November, 2013)

Currency Unit = Maloti (LSL) US$1 = 10.49 US$1 = SDR 0.6545

FISCAL YEAR

April 1 – March 31

ABBREVIATIONS AND ACRONYMS AfDB African Development Bank

AIDS

ART

Acquired Immune Deficiency Syndrome

Anti-Retroviral Treatment

BLNS Botswana, Lesotho, Namibia and Swaziland

BoS Bureau of Statistics

CAS

CBEP

CBL

CIPFA

CIPS

CLs

CMA

COSO

CQS

CPAF

Country Assistance Strategy

Capacity Building in Economic Planning

Central Bank of Lesotho

Chartered Institute of Public Finance and Accountancy, UK

Chartered Institute of Purchasing and Supply, UK

Component Leaders

Common Monetary Area

Committee of Sponsoring Organizations of the Treadway Commission

Consultants Qualifications (CQS)

Common Performance Assessment Framework

DFID Department of International Development from United Kingdom

DPO Development Policy Operation

ECF

EFT

Extended Credit Facility

Electronic Funds Transfer

EU European Union

FDI Foreign Direct Investment

FIRST

GBS

Financial Sector Reform and Strengthening Initiative

General Budget Support

iii

GDP Gross Domestic Product

GNI Gross National Income

GoL Government of Lesotho

HBS

HIES

Household Budget Survey

Household Income and Expenditure Survey

HIV Human Immunodeficiency Virus

HMIS Health Management Information Systems

IBRD

ICB

International Bank for Reconstruction and Development

International Competitive Bidding

ICT Information and Communication Technologies

IDA

IDF

International Development Association

Institutional Development Fund of the World Bank

IFMIS Integrated Financial Management Information System

IMF

IPF

IRSC

LCAS

International Monetary Fund

Investment Project Finance

PFM Integrated Reform Steering Committee

Lesotho Centre for Accounting Studies

LDHS Labour and Demographic Health Survey

LNDC Lesotho National Development Corporation

LRA

MDAs

Lesotho Revenue Authority

Ministries, Departments and Agencies

MDGs Millennium Development Goals

M&E Monitoring and Evaluation

MDP Ministry of Development Planning

MoF Ministry of Finance

MoH Ministry of Health

MoSD Ministry of Social Development

MTEF

NCB

Medium-Term Expenditure Framework

National Competitive Bidding

NSDP National Strategic Development Plan

PAF Performance Assessment Framework

PEFA Public Expenditure and Financial Accountability

PPAD Procurement Policy and Advice Division

PFMRAP Public Finance Management Reform Action Plan

iv

PFM Public Finance Management

PRS

PRSP

PSIRP

QBS

QCBS

RTC

Poverty Reduction Strategy

Poverty Reduction Strategy Paper

Public Service Improvement and Reform Program

Quality-based Selection

Quality and Cost-Based Selection

Reform Technical Committee

SACU Southern African Customs Union

SADC Southern African Development Community

SME

SOE

SSS

TA

UPS

WAN

Small and Medium Size Enterprises

Statement of Expenditure

Single Source Selection

Technical Assistance

Uninterrupted power supply

Wide-Area Network

Regional Vice President: Makhtar Diop Country Director: Asad Alam

Sector Director: Edward Olowo-Okere Sector Manager: Patricia Mc Kenzie

Task Team Leader: Gert van der Linde

v

KINGDOM OF LESOTHO

PUBLIC FINANCIAL MANAGEMENT REFORM SUPPORT PROJECT (P143197)

TABLE OF CONTENTS

I. STRATEGIC CONTEXT .................................................................................................1

A: Country Context ............................................................................................................. 1

B: Sectoral and Institutional Context .................................................................................. 3

C: Higher Level Objectives to which the Project Contributes ............................................ 7

II. PROJECT DEVELOPMENT OBJECTIVE ..................................................................8

A: Project Development Objective ..................................................................................... 8

B: Project Beneficiaries ...................................................................................................... 8

C: PDO Level Results Indicators ........................................................................................ 9

III. PROJECT DESCRIPTION ..............................................................................................9

A: Project Components ....................................................................................................... 9

B: Project Financing ......................................................................................................... 15

C: Lessons Learned and Reflected in the Project Design ................................................. 16

IV. IMPLEMENTATION .....................................................................................................17

A: Institutional and Implementation Arrangements ......................................................... 17

B: Results Monitoring and Evaluation .............................................................................. 18

C: Sustainability ................................................................................................................ 18

V. KEY RISKS AND MITIGATION MEASURES ..........................................................19

A: Risk Ratings Summary Table ...................................................................................... 19

B: Overall Risk Rating Explanation ................................................................................. 19

C: Key Mitigation Measures ............................................................................................. 20

VI. APPRAISAL SUMMARY ..............................................................................................20

A: Economic and Financial Analysis ................................................................................ 20

B: Technical ...................................................................................................................... 21

C: Financial Management ................................................................................................. 22

vi

D: Procurement ................................................................................................................. 23

Annex 1: Results Framework and Monitoring .........................................................................24

Annex 2: Detailed Project Description .......................................................................................28

Annex 3: Implementation Arrangements ..................................................................................42

A: PFMRAP Institutional and Implementation Arrangements ......................................... 42

B: IFMIS Project implementation arrangements .............................................................. 47

C: Financial Management, Disbursements and Procurement ........................................... 50

C: Procurement ................................................................................................................. 56

D: Results Monitoring & Evaluation ................................................................................ 62

Annex 4: Operational Risk Assessment Framework (ORAF) .................................................63

Annex 5: Implementation Support Plan ....................................................................................69

A: Strategy and Approach for Implementation Support ................................................... 69

Annex 6: Summary of the 2012 PEFA PFM Performance Assessment ..................................71

A: Context of this assessment ........................................................................................... 71

B: Integrated Assessment of PFM Performance ............................................................... 71 Table 1: Selected Social Indicators ………………………………………………………….….2 Table 2: PFM Reform Action Plan - Components and results ....................................................... 6 Table 3: Project cost and financing ............................................................................................... 15 Table 4: Project cost and financing ............................................................................................... 39 Table 5: IFMIS Chart of Accounts ............................................................................................... 51 Table 6: Financial Management Risk Assessment and Mitigation ............................................... 52 Table 7: FM implementation support plan.................................................................................... 55 Table 8: Procurement Risk Assessment and Mitigation ............................................................... 57 Table 9: Prior Review Threshold: Good, works and non-consulting services ............................. 60 Table 10: Procurement Packages - Supply and Installation Contracts and Non-Consulting Services ......................................................................................................................................... 61 Table 11: Prior Review Threshold: Consultants ........................................................................... 61 Table 12: Procurement Packages - Consultancy Assignments ..................................................... 62 Figure 1: Current IFMIS and TSA architecture ............................................................................ 36 Figure 2: Future IFMIS and TSA Architecture............................................................................. 37 Figure 3: Estimated project disbursements ................................................................................... 40 Figure 4: Project timeline .............................................................................................................. 41 Figure 5: PFMRAP Implementation Arrangements ..................................................................... 46

vii

PAD DATA SHEET Lesotho

LS-PFM Reform Support Project (P143197) PROJECT APPRAISAL DOCUMENT

.

AFRICA AFTME

Report No.: PAD738 .

Basic Information Project ID EA Category Team Leader P143197 C - Not Required Gert Johannes Alwyn Van Der

Linde Lending Instrument Fragile and/or Capacity Constraints [ ] Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date 06-Feb-2014 03-Mar-2017 Expected Effectiveness Date Expected Closing Date 03-Mar-2014 03-Jul-2017

Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Patricia Mc Kenzie Edward Olowo-Okere Asad Alam Makhtar Diop .

Borrower: Ministry of Finance and Development Planning

Responsible Agency: Ministry of Finance and Development Planning Contact: Title: Telephone No.:

(266) 2232-3703 Email: mkhethisa@finance.gov.ls

.

Project Financing Data(in US$ Million) [ ] Loan [ ] Grant [ ] Guarantee [ X ] Credit [ ] IDA Grant [ ] Other Total Project Cost: 6.09 Total Bank Financing: 5.50 Financing Gap: 0.00 .

Financing Source Amount(US$ Million)

viii

BORROWER/RECIPIENT 0.59 International Development Association (IDA) 5.50 Total 6.09 .

Expected Disbursements (in US$ Million) Fiscal Year 2014 2015 2016 2017 2018 Annual 3.27 1.90 0.32 0.01 0.00 Cumulative 3.27 5.17 5.49 5.50 5.50 .

Proposed Development Objective The project development objective (PDO) is to improve the quality and timeliness of public financial management information in support of the Government’s PFMRAP to improve budget execution. .

Components

Component Name Cost (US$ Millions) Support for improving the stability and reliability of existing IFMIS

0.75

Support for expansion and modernization of IFMIS platform 3.91

Support for change management, training and project management

0.83

.

Institutional Data Sector Board Financial Management .

Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation

Co-benefits % Mitigation Co-benefits %

Public Administration, Law, and Justice

Central government administration

100

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .

Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Public sector governance Public expenditure, financial

management and procurement 100

Total 100

ix

.

Compliance Policy Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .

Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants Name Recurrent Due Date Frequency Counterpart Funding 31-Mar-2015 Description of Covenant The Recipient shall provide in its FY 14/15 budget, adequate funds to carry out specific activities as contained in Schedule 2 Section IV (C) of the Financing Agreement .

Team Composition Bank Staff Name Title Specialization Unit Zoe Kolovou Lead Counsel Lead Counsel LEGAM

Marie J. Bolou Senior Program Assistant

Program Assistant AFTME

Mabel Nomsa Mkhize Program Assistant Team Assistant AFCS1

Jose C. Janeiro Senior Finance Officer Senior Finance Officer CTRLA

x

Gert Johannes Alwyn Van Der Linde

Lead Financial Management Specialist

Team Lead AFTME

Ismaila B. Ceesay Lead Financial Management Specialist

Lead Financial Management Specialist

AFTMW

Cem Dener Sr Public Sector Spec. Sr Public Sector Spec. PRMPS

Ikechi B. Okorie Senior Operations Officer

Senior Operations Officer

AFTME

Chitambala John Sikazwe

Procurement Specialist Procurement Specialist AFTPE

Tandile Gugu Zizile Msiwa

Financial Management Specialist

Financial Management Specialist

AFTME

1

I. STRATEGIC CONTEXT

A: COUNTRY CONTEXT

1. Lesotho is a lower middle-income country with per capita gross national income of US$1,380.1 It is a small country, mostly mountainous and largely rural with about 2 million people and completely surrounded by South Africa. Lesotho has an open economy traditionally centered on trade. Its main exports are textiles, water, and diamonds. Lesotho’s main trading partners are the United States and South Africa. It is a member of the Southern African Customs Union (SACU) and the Southern African Development Community (SADC) and, as a member of the Common Monetary Area (CMA); its currency is pegged to the South African rand.

2. Lesotho has undergone political and economic changes over the last two decades. The political system has evolved towards open and competitive elections. The economy has grown at an annual rate of 3 percent in per capita terms, which, though modest for its income level, compares well with the rest of the SACU region and the African continent as well as other small states.2 The economy has been able to adapt itself to new realities and has taken advantage of new growth opportunities. The changes have involved shifts from subsistence agriculture and remittances toward mining, water exports, manufacturing exports, and services. 3. The country now finds itself at a crossroads, requiring new growth engines, a more streamlined role for the state, and the need for a dynamic private sector to seize opportunities in the Southern African market. Public spending grew from 45 percent of GDP in FY2004/05 to about 62 percent in FY2011/12, one of the highest ratios in the world. This level is unsustainable, and public spending can no longer be relied upon to drive growth.3 The effectiveness of public spending has also been low, weakening its effect on growth and social outcomes.4 The fiscal consolidation needed to strengthen fiscal and external sustainability would weigh on future growth, especially if not matched by greater effectiveness of spending and service delivery institutions. 4. Economic growth has not been adequately inclusive, resulting in high concentration of poverty in rural areas, persistent high levels of inequality, and widespread unemployment. Unemployment stood at 24 percent in 2008, among the highest in the world. Only 230,000 of the 608,000 employed people engage in formal wage employment. The rest are informal activities, and they are often paid in-kind. Preliminary Government’s estimates based on the 2010/11 Household Budget survey show that the national poverty head count rate stood at 57.1 percent and the Gini Coefficient based on consumption stood at about 0.53 (Table 1). Both these figures are virtually the same as those obtained in the 2002/2003 Household Budget survey. However, in comparison with the 2010/11 figures, poverty decreased in urban areas while increasing in rural areas (see Table 1). Given that about three quarters of the population live in the rural areas, addressing this poverty incidence will require greater inclusiveness of

1 2012 Atlas GNI per capita. 2 Small states are defined as sovereign countries with a population of 2 million or less. Favaro, Edgardo M., (2008), Small States, Smart Solutions, World Bank Press, Washington D.C. 3Lesotho Public Expenditure Review 2012 (Report No. 71973-LS). 4Lesotho Public Expenditure Review 2012 (Report No. 71973-LS).

2

growth, a sustainable and effective public sector, and access to quality service delivery. At the heart of this development agenda, is job creation, particularly in low-skilled sectors. Table 1: Selected Social Indicators

1995

2000

2010 (or latest

available)

National headcount poverty ratio (% of population)

56.6* 57.1** National headcount poverty ratio- urban (% of population) 39* 36.6** National headcount poverty ratio- rural (% of population) 60.9* 61.8** Gini coefficient 0.51* 0.53** Primary school enrolment (% net) 68 76 73.4 Secondary school enrolment (% gross) 30 30 46 Life expectancy at birth (years) 56.9 47.6 46.7 Under-5 mortality rate (per 1,000 live births) 99.4 126.8 85 Maternal mortality rate ( modeled per 100,000 live births) 340 470 530 Prevalence of HIV (% of population ages 15-49) 14.3 24.5 23.6 *Information from 2002/03 HIES **Preliminary Government estimate based on the 2010/11 HIES Source: World Bank World Development Indicators

5. Much of the expansion of Government spending over the past decade has been directed toward the social sectors, but social outcomes have not improved significantly. Lesotho spends close to 30 percent of GDP, or more than half the Government’s budget, in three social sectors: education, health, and social protection. The country's health systems have been overwhelmed by HIV/AIDS, with the adult prevalence rate climbing to the world’s third highest at 23.6 percent. However, overall coverage of key HIV/AIDS interventions has improved, including Prevention of Mother to Child Transmission (PMTCT) and Anti-Retroviral Treatment (ART).5 Maternal mortality is among the highest in Sub-Saharan Africa. In the education sector, learning outcomes and coverage have improved, but quality remains low at the primary level. In terms of social protection, Lesotho spends close to 9 percent of GDP on social transfers and most of them do not target the poor. 6. Deep-rooted inefficiencies in Public Financial Management (PFM) have minimized the effectiveness of public spending, especially in the social sector. Since as far back as 2000 the Government does not have timely and reliable in-year and annual financial information to support budget execution, monitoring and oversight. An investment is therefore required in order to provide Government the necessary financial information that is required to help improve the effectiveness of its public spending. Improving the effectiveness of public spending in Lesotho, especially to improve social outcomes, will directly support the Bank’s twin goals of poverty reduction and shared prosperity.

5 Through the HIV and AIDS Technical Assistance Project (P107375), the Bank has continued to support the Government’s efforts to build the capacity of ministries, departments, and agencies (MDAs) and civil society organizations (CSOs) to implement the Second HIV/AIDS National Strategic Plan in a coordinated manner.

3

7. Lesotho’s National Strategic Development Plan (NSDP) FY2012/13-FY2016/17 serves as the Poverty Reduction Strategy Paper (PRSP) and is the second PRSP that the Government has produced. With the central objective of faster growth and poverty elimination, the Government has set out its approach towards a stable democracy, a united and prosperous nation at peace with itself and its neighbours by 2020. The strategy is based on the (i) pursuit of shared and job-creating economic growth; (ii) development of priority infrastructure; (iii) enhancement of the country’s skills base, technology adoption, and foundations for innovation; (iv) improvement in health outcomes including combating HIV/AIDS and reducing (social) vulnerability; (v) reversal in environmental degradation and adaptation to climate change; and (vi) promotion of peace and democratic governance and build effective institutions. This governance pillar includes a focus on enhancing the public sector’s effectiveness and efficiency in delivering services, improving public financial management, and maintaining the rule of law. In view of the importance of PFM to the effective implementation of the NSDP, to minimize inefficiencies in government spending; and provide a platform for budget support assistance from development partners (DPs), the effective functioning of PFM institutions and systems at central and local levels of government in Lesotho has been identified as a high priority.

B: SECTORAL AND INSTITUTIONAL CONTEXT

8. Lesotho’s initiated a Public Service Improvement and Reform Program (PSIRP) in 2003/04 of which the first (of three) component was aimed at improving government financial management (the other two addressed decentralization and government management). Under the auspices of this program DFID undertook research into the state of government financial management and determined that it was heavily dysfunctional, concluding that it operated to a ‘cultural norm of fiscal indiscipline’. Due in part to these findings, DFID was nominated by development partners to lead the assistance to the Government of Lesotho (GoL) in addressing the challenges in the sector. As a consequence, the ‘DFID Foundation Programme’ was launched in 20046 9. The DFID Foundation Programme and the two CBEP projects were intended to address a wide range of PFM reforms covering the following main areas -

a) planning and budgeting – including MTEF, improved macroeconomic forecasting, data collection and tax policy;

b) accounting and reporting – including implementing a new integrated financial management information system (IFMIS), strengthening internal and financial controls and internal audit, improved technical and professional training;

c) audit and oversight – including addressing the backlog of financial reports, strengthening the capacity of the Office of the Auditor General;

6 The program was originally scheduled to run from 2004 to 2008 but it was extended to 2010 to allow more time for some of the activities to be completed. It ended in 2010 when DFID largely withdrew from Lesotho. The EU was also active in the then Ministry of Finance and Development Planning (MFDP) with its Capacity Building in Economic Planning (CBEP – now succeeded by CBEPII project) with Irish Aid also providing assistance to the wider sector.

4

d) administration – restructuring the MFDP, improving pension administration. 10. Another relevant (and ongoing) reform is related to the development of human resource capacity in accounting, auditing and procurement. At an early stage in the DFID Foundation Program, DFID and the GoL agreed that a major brake on raising standards in PFM was the lack of human resource capacity in accounting, audit and procurement. A study carried out by the UK Chartered Institute of Public Finance and Accountancy (CIPFA) in 2006 recommended the introduction of professional training programs aimed at government employees in these disciplines. This recommendation was accepted and the programs commenced in early 2007 with the accountancy and audit courses operated at the Lesotho Centre for Accounting Studies (with examinations for the CIPFA International Certificate and Diploma qualifications conducted joint by CIPFA and the Lesotho Institute of Accountants), and in procurement at the Institute for Development Management with students sitting for the external qualifications of the UK Chartered Institute of Purchasing and Supply (CIPS). Funding for this program from 2007 to 2012 was provided by MFDP using a grant from Irish Aid specifically for this purpose, though Irish Aid has recently indicated that this funding will no longer be available from 2013. Therefore, the CIPFA scheme for professional training in government will be replaced from 2014 by the new professional accountancy qualification scheme recently developed with the support of the Bank, through an IDF grant to the Lesotho Institute of Accountants, with different funding arrangements – currently the European Union (EU) is providing financial support of about EUR 1.2million for the implementation of the new arrangements. The CIPS scheme will be reviewed as part of this initiative. 11. Mixed results of this first phase of the reform program are evidenced in two PEFA PFM Performance Reports conducted in Lesotho in 2009 and 2012. Progress has been made on some fronts - most notably in budgeting and macroeconomic forecasting, the introduction of a new legal framework for PFM, the introduction of a new IFMIS on 1 April 2009 and completion of public accounts from 2005 to 2010 (which was just completed up to FY 2013 and submitted for auditing on 30 September 2013). But several long standing problems are yet to be resolved - a sufficient strategic overview of the allocation of resources is currently lacking, inadequate planning of services, insufficiently competitive procurement, weak cash management, the IFMIS is not yet effective in supporting good financial management and timely and reliable in-year and annual reporting, weak accounting processes and disciplines, weak payroll controls, ineffective internal and external auditing systems. Fuller details of the PEFA PFM Performance assessments are provided in Annex 6.

12. Most notably the IFMIS platform has only been partially utilized to support key budget execution functions of the Central Government since its introduction in April 2009. Due to a number of technical and adaptive challenges, the system does not support daily operations effectively, and the timely production of reliable in-year and annual financial information is not possible. Some of the core PFM functions (requisitions, orders, commitment control and payments) were initially not performed through the IFMIS - budgets that were not loaded, users that were not properly trained and system unavailability are all contributing factors. Frequent system unavailability still continues (up to two days a week) and causes bypassing of the IFMIS in order to continue operations with no controls to ensure timely capture of transactions created outside of the IFMIS. Other PFM functions (e.g. budget preparation & asset management) are still performed manually or through parallel systems in line ministries and

5

district sub-accountancies. Good practice accounting disciplines, such as month-end closures and bank reconciliations, are also not yet fully functional. These deficiencies severely limit revenue and expenditure control, budget execution, reliable and timely reporting, and ultimately financial accountability. 13. At an early stage in the history of PSIRP the stakeholders in the PFM component established - within the framework of PSIRP – a steering committee under the title of the PFM Improvement and Reform Steering Committee (PFM IRSC) with membership drawn from across all stakeholders (government, development partners and others) and chaired by the Principal Secretary of the then MFDP. This Committee continues in existence and provides a regular opportunity for interface between Government and other stakeholders, having met roughly every six weeks over the last year. Whilst the existence of IRSC has provided some stability to the management of the reform process, it has yet to deliver the level of program planning and coordination expected of it and, to a degree, since the end of the DFID Foundation Program has lost its sense of direction with no central program driving the reforms. 14. The Government and development partners have however committed to move to a new phase of the reforms founded on greater implementation of the new rules and regulations, tighter internal controls and greater attention to the benefits of PFM reforms for Ministries, Departments, Agencies (MDAs) and sectors. In preparation for this new phase, Government and development partners have been working together since late 2011, through the IRSC, on creating a future reform program. An initial program was approved in principle by the IRSC in May 2012, and then further refined and finalized with technical assistance from the International Monetary Fund (IMF) during the last quarter of calendar 2012. A final version of the Government Public Financial Management Reform Action Plan (PFMRAP) 2012-2017/18, with a foreword by the Minister of Finance, was approved by the IRSC in March 2013. A High Level PFM Workshop was also hosted by the Minister of Finance on 11 November, 2013 with representation from Parliament (specifically the chairperson of the Public Accounts Committee); several Ministers (including Finance, Development Planning, Health, Education and Social Development); Development Partners (DPs, including the IMF, EU, AfdB and UNDP); several Principal Secretaries, Component Leaders for the PFM Reform Action Plan (PFMRAP), and other key staff involved in its implementation. The GoL provided an overview of the PFMRAP, and the associated implementation arrangements, and the workshop concluded with overwhelming support for its implementation and appreciation to the DPs for their support. 15. The approved PFMRAP covers a number of strategic actions, that have been structured into 8 components and linked to key results (with reference to the associated PEFA performance indicators where possible). Key outputs have been defined for each of the components and are financed as reflected in Table 2 below:

16. This operation will support the GoL with the implementation of key result (b) of component 5 of its PFMRAP. Essentially this will entail stabilization and improving the effectiveness of the IFMIS platform.

6

Table 2: PFM Reform Action Plan - Components and results Component / Results Financed by 1. Modern PFM regulatory framework implemented a) Regulatory framework updated to underpin PFM reforms EU b) Capacity developed to implement and sustain the PFM regulatory framework EU 2. Transparency and effectiveness of policy orientation of the budget assured a) Demonstrable links between development plans, fiscal strategy and budget

appropriations EU

b) Budget process redesigned to provide space for enhanced engagement by policymakers

EU

c) Effectiveness of macro-fiscal management enhanced EU d) Comprehensiveness and quality of information included in budget

documentation progressively improved EU

3. Cash flow forecasts a major determinant of internal debt and financial investment

a) Cash Management Unit and Liquidity Committee established GoL b) Access to consolidated information on government cash balances GoL c) Cash forecasts accurate to 90% GoL 4. Internal Controls ensure strengthened operational efficiency and

effectiveness

a) Ex-ante controls on non-salary expenditures compliant with contextually relevant components of the COSO framework

GoL

b) Compensation of employees and pension payments consistent with employee/pensioner number and entitlements

GoL

c) Internal audit compliant with COSO and IIA controls and standards AfDB 5. Accounting and fiscal reporting fully compliant with the regulatory

framework and accounting standards

a) Government accounting cadre reform implemented GoL b) Accounting systems and application software upgraded to comply with

regulations and standards World Bank

c) In-year and annual fiscal reports published in accordance with regulations and standards

GoL

6. Public Procurement aligns with international best practice in efficiency and transparency

a) Legislative and regulatory framework revised and upgraded AfDB b) Management and operations of the public procurement system re-engineered and

reconfigured AfDB

c) Public procurement achieves transparency through outreach to public and suppliers

AfDB

d) Human resource capacity within public procurement is significantly increased AfDB 7. External audit and oversight compliant with INTOSAI standards (ISSAI) a) Legal and regulatory framework updated to comply progressively with

international standards AfDB

b) HR capacity to deliver on prescribed external audit mandate established AfDB c) Legislature empowered to perform oversight functions AfDB 8. Governance and institutional management of PFM reforms improved to

facilitate ownership, monitoring and evaluation of progress

a) Management of PFM reform institutionalised GoL / AfDB / EU

17. Table 2 above summarizes the financing arrangement for components / activities of the PFMRAP. In addition to this investment by the Bank, the implementation of the PFMRAP will be supported by the EU, African Development Bank (AfDB) and IMF,

7

under oversight and coordination from the IRSC. The AFDB7 will be providing financial support approximating US$ 3.9million primarily for activities related to procurement, internal audit and external audit. Its operation will also fund PEFA assessments envisaged for 2015 and 2017. The EU will be supporting components 1, 2 and 8 of the PFMRAP with financial support and technical assistance in total approximating EUR 10million8. IMF is in discussion with the EU to receive funding to provide such technical assistance, including on cash management and PFMRAP coordination.

18. Since the IFMIS has already been in operation since 1 April 2009, the planned interventions are quite distinct from other PFMRAP activities. However, IFMIS dependencies on and links to the regulatory framework, processes, controls, standards and data requirements will be coordinated through the PFM Reform Technical Committee (RTC), a sub-committee of the IRSC. This will be focused in particular on the activities related to the following key outputs – (i) Regulatory framework updated to underpin PFM reforms; (ii) Cash Management Unit; (iii) Access to consolidated information on government cash balances; (iv) Ex-ante controls on non-salary expenditures compliant with contextually relevant components of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework; (v) In-year and annual fiscal reports published in accordance with regulations and standards; and (vi) Management and operations of the public procurement system re-engineered and reconfigured. 19. This project’s deliverables are directly complementary to the PFM policy actions of the current series of World Bank development policy operations. The Development Policy Operation (DPO) series have a focus on the following key areas of reform embedded in the PFMRAP – (i) introducing a medium term budget policy statement and a medium term fiscal framework approved by Cabinet; (ii) eliminating the backlog of audited public accounts; (iii) improving the quality and timeliness of public financial management information, to support better budget execution and financial accountability (to which this project directly links); (iv) strengthening the transparency in public procurement; (v) further strengthening of the legal framework through the finalization of new PFM regulations; and (vi) improving responsiveness of key ministries to audit findings, in order to help improve the control environment. A General Budget Support Group (GBS – currently chaired by the EU) is in operation, which has joint annual reviews and an agreed Common Performance Assessment Framework (CPAF). The last joint review was in February 2013.

C: HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES

20. The rationale for the proposed PFM reform support project is consistent with, and aligned with Pillar 6 of the NSDP (2012-2016). The emphasis under this Pillar on PFM related

7 Institutional Support for the Enhancement of Public Financial Management (ISEP) Project Appraisal Report, African Development Bank, 14 October 2013 8 As reported in the speech by H.E. Ambassador Hans Duynhouwer at the GoL High Level PFM Workshop, 11 November 2013, as well as his speech at the 5th Annual Conference of the Lesotho Institute of Accountants, 23 October 2013

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interventions is primarily focused on efficient delivery of quality, timely services in an accountable and transparent manner; and political governance, including decentralization and local government transformation. This pillar also recognizes the fact that a sound PFM is crucial to achieve the national development goals of promotion of peace, democratic governance and building effective institutions. 21. In this phase of the PFM reform agenda, the government seeks to improve its capacity to utilise public resources towards meeting the NSDP targets and ultimately those of Vision 2020 through the strengthening of human resource capacity; development of systems and procedures for effective financial management and reporting, strengthening an institutional framework that is transparent and ensures accountability in the public sector. To this end, the Project will support the Government’s efforts towards ensuring aggregate fiscal discipline, more strategic allocation of resources, and greater financial accountability. The achievement of these broader goals will not only be critical to a more efficient delivery of basic services but also serve as a major step towards the achievement of the NSDP goals of poverty reduction and shared prosperity through broad-based economic growth.

22. Strengthening of PFM systems to support the development of the public sector capacity and efficient service delivery is consistent with the foundational pillar of the World Bank’s Strategy for Africa: governance and public sector and aligned with the Bank’s twin objectives of poverty reduction and shared prosperity. The relevance of strengthening the PFM system cannot be overemphasized in a country like Lesotho if more 50 percent of the budget currently being spent in three social sectors - education, health, and social protection - is to be translated into greater human development and economic transformational outcomes. This project serves as a platform for resolving these challenges as it will support the rebuilding of institutions and the PFM systems and practices that provide timely and reliable financial information. Without such information the ability of GoL to improve service delivery in support of the goals for poverty reduction and shared prosperity will continue to be greatly impeded.

II. PROJECT DEVELOPMENT OBJECTIVE

A: PROJECT DEVELOPMENT OBJECTIVE

23. The project development objective (PDO) is to improve the quality and timeliness of public financial management information in support of the Government’s PFM Reform Action Plan (PFMRAP) to improve budget execution.

B: PROJECT BENEFICIARIES

24. The main beneficiaries of this project are – the core IFMIS team, PFM staff who depends on the IFMIS for the execution of their functions, Program Managers and Heads of Ministries, District Councils, the Auditor-General, Cabinet, the Public Accounts Committee, Parliament, the Central Bank, development partners and citizens and suppliers who transact with the Government.

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25. Government hosted a High Level PFM Reform Workshop on 11 November 2013, to ensure broad stakeholder consultation and ownership for the PFMRAP. In particular the opportunity was also used to initiate a change process for the key IFMIS stakeholders, by clarifying the current situation, objectives, envisaged benefits, timeline, roles and responsibilities for project implementation. As part of project preparation several IFMIS specific consultations were also held with the financial controllers and other key staff of line ministries, including Local Government and Chieftainship, Health, and Education.

C: PDO LEVEL RESULTS INDICATORS

26. Achievement of the PDO will be assessed through its impact on relevant PEFA PFM performance indicators. PEFA assessments of central government were carried out in Lesotho in 2009 and 2012 (refer to Annex 6 for a summary of the results). The PEFA assessments have made an important contribution to the shaping and implementing of reforms and improvements to the PFM system, and the GoL has expressed strong interest in using the results of the 2012 PEFA assessment to help shape its future reform agenda and to track its progress. 27. The achievement of the project's overall development objective will be measured by regular focused assessments of the following key indicators of the PEFA PFM Performance Assessment Framework:

(i) Quality and timeliness of PFM Information • Quality and timeliness of in-year budget reports as measured by PI-24 • Quality and timeliness of annual financial statements as measured by PI-25.

(ii) Improved Budget Execution

• Stock and monitoring of expenditure payment arrears as measured by PI-4 • Predictability of the availability of funds for commitment of expenditures measured

by PI-16

III. PROJECT DESCRIPTION

A: PROJECT COMPONENTS

28. The Bank and donor partners’ PFM engagement in Lesotho across sectors, including through budget support operations, focuses to a considerable extent on strengthening fiscal management institutions, accountability and oversight for improved service delivery. The ability to put in place adequate systems, policies and good practices in both revenue and expenditure management is a prerequisite for a sustainable path for good governance. While there are complementary support operations provided by development partners (the EU, the AfDB and the IMF) for the other components of the PFMRAP (refer Table 2), the activities to be financed under this project will avoid overlaps. Their implementation will be coordinated in a manner that ensures that project spending is directed to unfunded outcome areas.

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29. The Project will be implemented through 3 distinct components, related sub-components and core activities as defined below: Component 1: Support for improving the stability and reliability of the existing IFMIS platform (US$ 0.883 million, of which IDA US$ 0.752million) 30. Objective: The objective of this component is to improve the stability, performance and reliability of the existing IFMIS platform. Government plans to go-live with an upgrade of its existing software on 1 April 2015, and the existing IFMIS platform will need to be operationally and technically sound through to the closing of FY15 (which could be as late as December 2015). 31. Current situation: Most of the operational issues experienced today stem from the rapid deployment of IFMIS in April 2009, coupled with a decision by the GoL to allow more than 700 untrained users access to the system whilst key staff to operate and maintain the system was not ready and / or departed shortly after go-live. The IFMIS implementation was initiated in November 2007, through a turn-key contract (EUR 7.3 million, including a 3-year warranty period - funded by the EU) with the authorized supplier of the selected software in Africa (see Annex 2 for the details). The system implementation was completed in a relatively short time (16 months), however, a number of contract management and system support challenges emerged afterwards. For instance, despite training of 16 Application, 16 Technical and 16 Help Desk support personnel, the numerous problems and frustrations after go-live and a weak retention strategy have resulted in almost all of these team members leaving within a short time after system go-live. 32. A recent evaluation of the IFMIS9 and World Bank staff assessment during project preparation confirm that several key problems with the configuration and operation of the IFMIS remain to be addressed. These include amongst others: (i) severe Wide Area Network (WAN) downtime; (ii) inadequate system performance; (iii) non-support of payment processing by an Electronic Funds Transfer (EFT) system; (iv) revenue receipting by cashiers of MDAs not performed on the IFMIS; (v) district spending units of MDAs are not connected to the IFMIS, but supported through Sub-accountancies connected to the IFMIS with cumbersome payment processes through commercial bank accounts; (vi) time-consuming bank reconciliation processes, which is the result of failure to originate some transactions directly in the IFMIS and data capture errors by the Central Bank of Lesotho (CBL); (vii) non-existent help desk function; (viii) lack of month-end closing procedures for the IFMIS resulting in inconsistency of financial information in reports; (ix) bypass of commitment controls in the IFMIS. The resolution of these problems, the details of which are contained in Annex 2 - have informed the design of the project components and sequencing of activities as further described below. 33. In addition, there are several adaptive challenges and policy decisions which require high level attention from the Government, to ensure the successful resolution of the current problems. For example, IFMIS roles and responsibilities must be clearly defined; the Office of 9 Evaluation of Public Financial Management – Integrated Financial Management Information System (FMIS), Pohl Consulting & Associates, European Union, May 2013

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the Accountant-General and the broader Ministry of Finance (MoF) management do not routinely rely on IFMIS to support their core functions and decision making, and several others detailed further explained in Annex 2. In order to lay a proper foundation for a stable and effective IFMIS going forward these shortcomings should be addressed urgently and have been incorporated in the design of the project components and sequencing of activities as described below. 34. Activities: The project will support the implementation of the following key activities in order to address existing technical and operational challenges, and lay a solid foundation for the expansion and modernization of IFMIS platform through Component 2:

a) Activity 1.1 - Improvement of existing wide-area network connectivity: A joint effort by

the IFMIS Information and Communication Technology (ICT) team at the MoF and that of Ministry of Communications Science and Technology (MCST) has been initiated. However, further support is needed for the rapid resolution of existing network issues affecting the IFMIS operations;

b) Activity 1.2 - Improvement of primary and backup IFMIS data centers: This will include immediate server and UPS upgrades. The Ministry of Finance will contribute to this activity by undertaking other urgent ICT infrastructure improvements, including the electrical works, upgrade of generators and improvement of the cooling systems;

c) Activity 1.3 - Activation of the EFT interface with the CBL: This activity is expected to support activation of the IFMIS EFT interface with the CBL;

d) Activity 1.4 –Cleaning IFMIS databases and improving accounting controls: This activity will support the correction/cleaning of database records in the current IFMIS system and transfer of reliable opening balances to the upgraded version of the existing software. In addition, technical assistance will be provided to the Office of the Accountant-General to strengthen accounting controls such as reconciliations.

35. The following priority actions are recommended to facilitate more effective use of IFMIS for daily operations and reporting:

a) Ensure daily recording of all revenue in IFMIS by connecting cashiers of line ministries

to the existing IFMIS. b) Enforce monthly closing of IFMIS (for example, 15 days after month-end) for data

capture, monitor data quality, provide training support and enforce basic accounting disciplines.

c) Enforce year-end closing of IFMS for data capture (for example, 30 days after year-end). d) Re-affirm the directive to highlight the requirements for using IFMIS on a daily basis in

all line ministries and sub-accountancies. e) Strengthen the MoF Application Support team with additional staff, training, equipment

and office space. f) Activate the issue tracking portal of the software supplier to record all IFMIS technical

and functional issues and record the solutions promptly. g) Complete the reorganization of the MoF ICT Department and define the roles and

responsibilities of all technical specialists.

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Component 2: Support for expansion and modernization of IFMIS platform (US$ 4.375 million, of which IDA US$ 3.913million) 36. Objective: The objective of this component is to upgrade, configure and deploy the latest version of the existing IFMIS Software to support a simplified business architecture from a stable and well performing technology platform. 37. Current situation: The MoF is of the view that the existing IFMIS software is sound and relevant to the perceived needs of Lesotho. An upgrade of its existing IFMIS software, including to a web-based architecture, is required as the current version will no longer be maintained. This upgrade will assist to resolve some of the configuration issues such as separate databases, budget preparation, commitment control, cash management, and support for Treasury Single Account (TSA) operations. In addition, the implementation of the current IFMIS is bedeviled by an overly complex architecture and process design, capacity weakness in the management of the Treasury function, control weaknesses and a general lack of clarity of and compliance with rules and regulations governing financial management practices (including timeliness of data collection and fiscal reporting). 38. Activities: In order to address these challenges, the project will finance the following activities:

a) Activity 2.1 - IT Audit of the IFMIS platform: A technical and operational assessment (IT Audit) of existing IFMIS software and data centers will be completed through this activity, before any system upgrade or modernization effort. The IT Audit is also expected to assist the GoL to update the necessary system design documentation and provide the necessary justification for the hardware to be procured.

b) Activity 2.2 - PFM business process re-engineering: Apart from the process and architecture issues already identified and addressed in Component 1, a more detailed business process review needs to be completed rapidly in order to clarify and implement possible further improvements and simplifications before the IFMIS upgrade / modernization;

c) Activity 2.3 - Expansion and modernization of the IFMIS platform: This activity is expected to enhance the functional support by the IFMIS software (e.g., improved commitment management and budget execution, TSA operations, better cash management, etc.), modernize the technical architecture (transition to web-based application through an upgrade of the existing software), enhance the relevant ICT infrastructure and extend the IFMIS to all Ministry offices in Districts and District Councils (estimated at 122 offices) with the necessary capacity building. The Ministry of Finance will contribute to this activity by procuring the necessary servers to support the upgraded version of the existing software.

39. In addition, the project will support MoF to introduce the following policy and architecture changes before or during the expansion and modernization of IFMIS to simplify processing and prevent operational IFMIS problems. The key changes to the IFMIS and TSA architectures are presented graphically in Figure 1 and Figure 2 in Annex 2 -

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a) Several key policy decisions should be made in consultation with relevant stakeholders on: (i) transition to centralized TSA operation benefiting from an interface with the CBL systems for electronic payments and reconciliation of accounts (which will require all staff, suppliers and beneficiaries transacting with government to open bank accounts); (ii) supporting the operations of District Councils (DCs) through IFMIS web portal extensions; (iii) supporting the operations of district spending units of line ministries, and cashier’s functions through IFMIS web portal extensions; and (iv) initiating the establishment of digital signature infrastructure (benefiting from ongoing e-Government initiatives of the MCST).

b) One general ledger should be created for the Consolidated Fund and all line ministries operating against the TSA. This will also require district spending units of line ministries to be connected to the central IFMIS, operating against the TSA (using EFTs) and no longer through commercial bank accounts managed by the sub-accountancies. This will also require a review of the Chart of Accounts.

c) Only one District Council (Maseru) currently uses a commercial accounting package for financial control, accounting and reporting. The other nine run manual systems, and a recent diagnostic assessment10 of decentralization in Lesotho found that “Only limited audits of local Authorities have been undertaken since 2005. The Auditor General explained that only 3 district councils namely Botha Bothe, Mafeteng and Mohale Hoek have had their accounts audited over the period. In all cases, the accounts returned qualified opinions pointing to significant weaknesses in their financial management systems”. A key challenge therefore is the absence of reliable and timely financial statements. To support their obligations under the Public Financial Management and Accountability Act, 2011, District Councils urgently require access to the IFMIS to bring this situation under control. From the dimensions of cash flow management, capacity, cost effectiveness and maintaining data integrity, they are to be connected to the central IFMIS, preferably as cost centers under the Ministry of Local Government and Chieftainship (MLGC) and also operating against the TSA. It is also proposed that the current sub-accountancies in districts are utilized to support the DCs, to support their financial management functions.

d) The Budget Department must be equipped to use the Active Planner module for the FY16 budget preparation process. This will eliminate additional work and controls to ensure reliable transfer to and maintenance of the budget in the IMFIS.

Component 3: Support for change management, training and project implementation (US$ 0.834million) 40. Objective: The objective of this component is to facilitate the provision of technical assistance in support of change management and capacity building requirements of the Office of the Accountant-General, the core IFMIS team, the PFM staff of selected Line Ministries, , the Cabinet, the Public Accounts Committee, the Central Bank, development partners, and other stakeholders.

10 Diagnostic Assessment of Decentralization in Lesotho, UNDP, October 2013

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41. Current situation: Given the poor IFMIS implementation record thus far, high levels of frustration and distrust in the system exist. These challenges are largely driven by the several adaptive problems that now require attention at the highest levels in Government to ensure their resolution and in turn, the effective implementation of the PFMRAP and its associated components. As detailed in paragraph 3 of Annex 2, these specifically relate to such issues as the: (i) definition and clarification of IFMIS roles and responsibilities; (ii) development of capacity and retention strategy for sustainability of IFMIS operations and maintenance; (iii) routine reliance on IFMIS as a management tool – both within the Office of the Accountant-General and broader MoF – rather than just an accounting system; (iv) broad consultations with stakeholders across and within MDAs on key PFM policy decisions; amongst others. 42. Activities: This component will implement several adaptive initiatives to ensure sustainable capacity to run the system, stakeholder backing /enforcement and sound project implementation. Key activities include the following:

a) Activity 3.1 - Support for change management and training. This will include – (i) Provision of IFMIS operations and maintenance training/capacity development to the core IFMIS team (IFMIS custodian, super users, administrators, application support team, ICT support team, training team, etc.). (ii) Support to the MoF in the development of the requisite capacity and skills amongst the IFMIS stakeholders; the assignment of IFMIS training function to the Lesotho Centre for Accounting Studies (CAS); and strengthening the capacity and training capability of the Application Support team to deliver the necessary accounting and systems training to end users on a sustainable basis, with the support from CAS as needed. (iii) User database clean-up to ensure that only valid users remain registered for access to the IFMIS software. A training program will be structured to deliver the right training at the right time. A core training team will be equipped in all respects to carry out training of end users and managers. (iv) Full PFM and relevant IFMIS training for management of Ministries and DCs, Cabinet and the Public Accounts Committee will also be delivered - this should include the full PFM cycle and how the IFMIS supports the objectives of fiscal discipline, strategic allocation of resources, efficient service delivery and financial accountability. (v) Technical Assistance to the Government for the development and implementation of a retention and succession plan for the core IFMIS team. In particular, assistance will be provided to develop the skill and competency profiles for all functions required to support the continued operation and maintenance of the IFMIS, together with a training plan for staff in post. Assistance will also be provided to explore options for GoL to appoint key IFMIS staff on performance contracts as a means to support better retention of staff in such positions.

b) Activity 3.2 - Support for project implementation. This activity will support the project implementation costs, including – (i) technical assistance to set-up and run the project in IFMIS, and financial management and procurement assistance; (ii) basic office and IT equipment for the core IFMIS team; (iii) technical assistance to supplement capacity gaps in the core IFMIS team; and (iv) monitoring and evaluation, and reporting progress on all components.

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c) Activity 3.3 - Audit of project/financial activities. This activity will support the annual

audit and reporting of project activities.

B: PROJECT FINANCING

43. The lending instrument is Investment Project Financing (IPF). An IPF is selected as it is a flexible instrument that allows for the financing of different activities (consultants, equipment and works). Investment Project Financing supports projects with defined development objectives, activities, and results, and disburses the proceeds of Bank financing against specific eligible expenditures.

44. The total project cost is US$6.09 million, of which IDA will be financing 90% as summarized in Table 3 below:

Table 3: Project cost and financing

45. GoL will be executing and financing the following activities as their 10% contribution to the total project costs -

a) Component 1 - IFMIS data center electrical works - estimated at US$ 50,000 b) Component 1 - IFMIS data center upgrade of generators - estimated at US$ 40,000 c) Component 1 - IFMIS data center upgrade of cooling systems - estimated at

US$40,000 d) Component 2 - Upgrade of IFMIS primary and backup data center servers for

upgraded version of IFMIS Software - estimated at US$ 461,737

US$ US$ US$Total Project Cost GoL Financing IDA Financing

1 Support for improving the stability and reliability of existing IFMIS platform 882,101 130,000 752,101 85%

1.1 Improvement of existing wide-area network connectivity 200,000 0 200,0001.2 Improvement of primary & backup IFMS data centers 282,101 130,000 152,1011.3 Activation of the IFMIS EFT interface with the CBL 100,000 0 100,0001.4 Cleaning IFMIS databases & improving accounting controls 300,000 0 300,0002 Support for the expansion and modernization of IFMIS 4,375,164 461,737 3,913,427 89%

2.1 IT Audit of the IFMIS platform 100,000 0 100,0002.2 PFM business process re-eningineering 200,000 0 200,0002.3 Expansion and modernization of the IFMIS platform 4,075,164 461,737 3,613,427

3 Support for change management, training and project implementation 834,472 0 834,472 100%

3.1 Support for change management and training 572,735 0 572,7353.2 Support for project implementation (operating costs) 120,000 0 120,0003.3 Audit 50,000 0 50,0003.4 Unallocated 91,737 0 91,737

6,091,737 591,737Planned

Disbursement5,500,000 90%

Lesotho IFMIS stabilization and upgrade project % IDA financing

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C: LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN

46. The IFMIS system, although not entirely failed and limping along, display most of the classical failure factors that the Bank11 found in reviewing past IFMIS project supported:

a) Inadequate capacity / training of users: More than 700 untrained users were allowed access to the IFMIS upon its go-live date of 1 April 2009. No sustainable training function was established and the help desk was disbanded. A large core of untrained users still exists, which must be addressed. Component 3 will specifically address this.

b) Inadequate capacity / training and retention of the core IFMIS team: Transfer of the more advanced skills through formal and on-the-job training to the Application and IT Technical Team to fully participate in the configuration and operation of the existing IFMIS software was not properly managed. This has left the IFMIS system and core staff extremely vulnerable, especially in light of the sheer number of untrained users that were allowed access to the system and the original problems associated with go-live as well as the high level of system instability that has occurred since. Since the original go-live date most of the original Government IFMIS core team has also left. These matters are critical to resolve and Component 3 will specifically address the capacity building needs of the core IFMIS team. The Government also needs to consider a retention strategy for key IFMIS staff, possibly through performance contract appointments which could allow for market related remuneration.

c) Inadequate ICT infrastructure: A lack of investment in system maintenance and basic failures to maintain support agreements led to the infrastructure issues that crippled the IFMIS. The operation will invest to resolve current server, network and related issues. It will also invest in setting up the required infrastructure for the upgrade of the existing IFMIS software. In addition risks and costs of end-user equipment, and its future maintenance, will be lowered through the deployment of network computers, rather than full PCs. This will be supported through Component 2.

d) Institutional / organizational resistance: Resistance reared its head upon the failed go-live on 1 April 2009. The lack of investment in training, change management, support systems - such as the help desk and core IFMIS team - as well as in maintenance of the infrastructure, has further fuelled the resistance to near resentment. The basics have to be fixed in order to address the resistance. This project has at its core the resolution of the basic configuration and technical problems that have occurred, coupled with significant investment in capacity and change management. All components will assist to address this particular issue. In addition, change management will be proactively be provided to all stakeholders in order to clarify the benefits of the stable, upgraded and expanded IFMIS. Capacity building will be provided to the Office of the Accountant-General to monitor line ministries that continue to originate transactions outside of the IFMIS, in order to address such loopholes and provide the necessary capacity building and incentives to ensure as extensive use as possible of the IFMIS for financial control, accounting and reporting. Continued non-compliance will be sanctioned in terms of the regulatory framework. Incentives such as more flexible budget execution parameters will also be explored with GoL as part of the BPR activities.

11 Financial Management Information Systems - 25 Years of World Bank Experience on What Works and What Doesn’t, Cem Dener, Joanna Alexandra Watkins and William L Dorotinskty, World Bank, Washington DC, April 2011

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e) Lack of business process reengineering to align with the IFMIS: Key business processes (especially for payment processing, receipting and reconciliations) were not simplified and aligned to the IFMIS functionalities. Other PFM functions (e.g. budget preparation & asset management) are still performed manually or through parallel systems in line ministries and district sub-accountancies. Good practice accounting disciplines, such as month-end closures and bank reconciliations, are also not yet fully functional. These are all addressed with technical design and implementation assistance through Component 1 and 2, and Component 3 will supply the necessary change management and training.

IV. IMPLEMENTATION

A: INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS

47. The GoL implementation arrangements for the PFMRAP consist of two tiers, as follows - (i) an oversight/steering committee as the top tier (the IRSC); (ii) a reform technical committee (RTC) as the second tier, consisting of Component Leaders (CLs) and their support teams who will be involved in delivering the necessary outputs. A central PFM Reform Secretariat will provide overall monitoring, coordination and support for the implementation of the PFMRAP by the CLs. 48. The IRSC has been reconstituted12 under authority of the Minister of Finance as the oversight/steering committee for the implementation of the PFMRAP. Its membership include - PFM Development Partners; Chairperson of the Parliamentary Public Accounts Committee; Ministry of Public Service; Representatives from key Line Ministries, Departments and Agencies (Education, Health, Agriculture, Local Government, etc.); Component Leaders; and a PFM Reform Coordinator, who will serve as the IRSC Secretariat. It will meet under chairmanship of the Minister of Finance at least three times a year with the purpose to drive the reform process; inform the relevant partners and raise support for the reform; and decide on critical conceptual issues and recommendations related to the reform. 49. The day-to-day PFMRAP activities will be supported / coordinated by a PFM Reform Technical Committee (RTC), which comprise of all Component Leaders. It will be chaired by the Principal Secretary, Ministry of Finance, with the support of the PFM Reform Secretariat. 50. The MoF, through the Accountant-General as Component Leader, and the Deputy Accountant-General (Cash Management) as Sub-component leader, will be the executing agency for this operation. A new Accountant-General has been announced at the High Level PFM Workshop hosted by the Minister of Finance on 11 November, 2013. He is expected to assume position in January 2014. The core IFMIS team, under the leadership of the Deputy Accountant-General (Cash Management), will be responsible for implementation and coordinating of all project activities.

12 High Level PFM Workshop, 11 November 2013

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B: RESULTS MONITORING AND EVALUATION

51. The Monitoring and Evaluations (M&E) framework will be a key instrument for tracking progress towards the achievement of the project’s development objective and providing reports on performance including potential bottlenecks as they emerge. The M&E framework presented in Annex 1 captures the high and medium level results that are expected to be achieved during the life of the PFMRS project. A mid-term evaluation (informed by a PEFA PFM Performance Assessment to be funded by the AfDB13) will be carried out during 2015 to ensure that the project is on track. The evaluation will serve as a basis for examining progress on expected project outcomes and will recommend actions needed to address implementation challenges. A final PEFA evaluation of the project will be carried in 2017.

C: SUSTAINABILITY

52. Establishing an equitable balance between delivering tangible project outcomes and establishing sustainable capacity in a low capacity environment such as Lesotho, is a challenging exercise. Nevertheless, the underlying rationale deployed in the design of the project is consistent with the cardinal requirement for ensuring the presence of in-built sustainability of project outcomes with regard to the influence of local political economy considerations. The proposed project will further develop and nurture the basic capacity in financial management through a more rigorous implementation and strategic deployment of resources in priority areas. This approach will not only reinforce the requisite skills needed for a strong PFM foundation, but would also minimize roll-backs in the core PFM reform arena supported under the project. Systematic training of staff responsible for implementing the core financial management functions within Government, while ensuring the introduction of more robust and modern systems and tools, will provide a sound basis for ensuring that capacity is retained after the project closure. Equally, leveraging development policy operations to introduce policy and institutional actions that will create the political and executive environment necessary for the implementation of project actions will be a considered option during implementation. This will help to secure policy and institutional changes supportive of critical implementation successes impacting such areas as financial reporting and fiscal discipline.

53. The project envisages the use of technical assistance to support the development of on-the-job capacity of IFMIS beneficiaries. This will ensure that skills and competencies developed in the implementation of the IFMIS are sustainable. The implementation of the initial IFMIS, to some extent, has led to foundational skills and capacity especially in the areas of application support and database management. Therefore, skills development under this project is not expected to start from ground zero but will rather focus on deepening, expanding and enhancing. Complementary capacity building activities are supported by a number of development partners including the AfDB, EU, and the IMF.

13 Institutional Support for the Enhancement of Public Financial Management (ISEP) Project Appraisal Report, African Development Bank, 14 October 2013

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54. The proposed project also makes provision for the establishment of a coherent maintenance and support organizational structure that caters to both the technical and functional aspects of systems maintenance and support during project implementation and after project closure. This is reflected in the site preparation and support, applications, and training team that constitute the backbone for the IFMIS implementation. These teams – as part of the functional and technical infrastructure - will ensure the sustainable maintenance and upkeep of the systems at participating MDA level.

55. In terms of the recurrent cost for implementation of the reforms, post project closure, the GoL is already funding, and will continue to fund the required infrastructure, software licenses and maintenance costs, staff to operate and support the IFMIS, and other related operations costs.

V. KEY RISKS AND MITIGATION MEASURES

A: RISK RATINGS SUMMARY TABLE

Risk Category Rating

Stakeholder Risk Moderate

Implementing Agency Risk

- Capacity Substantial

- Governance Moderate

Project Risk

- Design Moderate

- Social and Environmental Low

- Program and Donor Moderate

- Delivery Monitoring and Sustainability Moderate

Overall Implementation Risk Moderate

B: OVERALL RISK RATING EXPLANATION

56. Financial management reforms involve changes in rules, processes and systems that affect the incentives of the decision makers in allocation and use of scarce public resources. This reform process therefore is a venture with moderate risk. However, these risks are not unique to the Lesotho program and are faced in many countries implementing similar reform programs. In the case of Lesotho, the risks which might affect the successful implementation and sustainability of this program are:

a) Weak implementation capacity, a lack of functional skills, resistance to change and non-compliance with rules and regulations.

b) Weak coordination, project management and governance capacity.

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c) Weak ownership and resistance to implement the key architecture and process changes. d) Retention of trained staff.

C: KEY MITIGATION MEASURES

57. The project design addresses key technology, architecture and process issues that have severely constrained the effective running of the IFMIS, given the available skills and capacity. GoL is in agreement with the technology, architecture and process changes embedded in the project design. The design further includes extensive implementation support, and investment in training and change management. The project management and governance structures will further ensure adequate risk management. 58. A High Level PFM Workshop was hosted by the Minister of Finance on 11 November, 2013, with representation from members of Parliament (specifically the chairperson of the Public Accounts Committee); several Ministers (including Finance, Development Planning, Health, Education and Social Development); Development Partners (DPs, including the IMF, EU, AfdB and UNDP); several Principal Secretaries, Component Leaders for the PFM Reform Action Plan (PFMRAP), and other key staff involved in its implementation. The GoL provided an overview of the PFMRAP, and confirmed the implementation arrangements as detailed in Annex 3. The workshop concluded with overwhelming support for its implementation and appreciation to the DPs for their support.

59. As part of the PFMRAP the GoL also aims to implement an accounting cadre reform, which aims to address systemic issues related to attraction and retention of staff.

VI. APPRAISAL SUMMARY

A: ECONOMIC AND FINANCIAL ANALYSIS

60. The economic and financial benefits from the project are expected to be much higher than US$ 5.5 million investment. Identifying and quantifying the direct and indirect economic and financial benefits of PFM capacity building interventions is not a straightforward exercise, since it is difficult to carry out credible and rigorous cost-benefit and financial analyses. However, there is broad consensus on the benefits of such reforms. 61. While the costs are quantifiable (as depicted in the project financing table), the benefits are largely indirect, ultimately seen in improved public financial governance, service delivery and better performance of the public financial management institutions. For example, in FY13 grants to District Councils amounted to about M 202 million (US$ 20.4 million). These resources are managed in a very weak capacity environment, outside of the IFMIS and with weak governance arrangements. Inadequate information is available on the control and use of these resources, and the impact of such spending. The cost associated to extend the IFMIS to District Councils is estimated at US$ 1.8million, which is a once-off investment equal to 8.8% of the FY13 recurrent cost of these entities. Thereafter the recurrent license cost of the software for use by the District Councils will only be about 0.8% of their total

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recurrent cost budget.

62. The economic justification of the proposed operation is however not so much the initial investment or the low recurrent cost implications, but its contribution to a better functioning government through improved PFM and capacity to implement the national development strategy – the NDSP and its successor strategies. The benefits of the project will flow from improved budget credibility, strengthened budget execution, better internal controls, enhanced oversight and increased financial accountability in the management of public resources, now also at the district levels. These benefits will largely be driven by the improvements in the quality and timeliness of public financial management information – which is the objective of this project. Lessons from the more than 25 years of World Bank support to the development of PFM systems suggest that the proposed intervention could lead to: (i) efficient, transparent, and accountable fiscal and budget management; (ii) better program implementation and service delivery as a result of improved credibility and predictability of budget; (iii) improved budget credibility will also improve resource allocation and budget execution in line with NDSP priorities; and (iv) improved revenue administration capacity will provide more resources for implementation of growth and poverty reduction activities. The program will also support the development of sustainable financial management capacity, thereby ensuring availability of capacity. The project’s design that is based on first stabilization the existing IFMIS platform, followed by the modernization and expansion of the platform. This is a least-cost design that leverages the progress made in the 2009 IFMIS deployment as against a complete systems overhaul.

B: TECHNICAL

63. The team assessed the current status of IFMIS prerequisites and the readiness of the MoF to implement relevant ICT solutions during the appraisal stage, in order to clarify the details of capacity and infrastructure improvements needed. The MoF team is expected to focus more on the improvement of key functional requirements before the IFMIS expansion and modernization, including: (i) the improvement of budget classification and unified chart of accounts structure to support multi-year budgeting and capturing key performance indicators; (ii) introduction of an automated treasury single account (TSA) operations; (iii) the development of commitment control and monitoring mechanisms; and (iv) the establishment of cash forecasting and management functions. The MoF has already initiated several corrective actions in order to stabilize the ICT infrastructure, and improve the effectiveness of IFMIS, including: (i) the improvement of network connectivity; (ii) the expansion of central server capabilities to support the existing IFMIS platform; and (iii) strengthening the technical and functional support team for supporting daily operations effectively. The team suggested a number of short-term actions (quick wins) to support the MoF’s efforts in addressing the existing technical and operational challenges. The MoF’s decision to upgrade its existing IMFIS software appears to be feasible, subject to the achievement of these quick wins. Improvement of the existing ICT infrastructure and network connectivity will also be supported through project activities. The MoF technical capacity should be expanded and strengthened to be able to maintain the new system. The team also identified several adaptive challenges and policy decisions which require high level attention from the Government, and will be supported through the project as detailed in Annex 2.

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C: FINANCIAL MANAGEMENT

64. The PFM Reform Secretariat within the MoF will be accountable for the broader PFMRAP and the project’s financial management. The overall responsibility for financial management (including budgeting, accounting, payments, internal controls, transaction processing and quarterly and annual financial reporting) rests with the dedicated Project Accountant who will be supported by finance and administrative assistants. The FM assessment of the Secretariat’s capacity to implement the project revealed weak capacity, which the GoL is currently addressing (notably ensuring the existence of a dedicated project accountant with the requisite qualification and experience in donor projects and acceptable to the Bank, and the set-up of the project within the current IFMIS to control, process and report the project’s financial transactions). The Project Accountant, with the support of other accounting staff will process all project financial transactions in line with the GoL payment approval procedures. In accordance with the Bank’s financial reporting and audit requirements, the project will be required to prepare and submit to the Bank Interim Financial Reports (IFRs) not later than 45 days after the end of each FY quarter. The Bank will endeavor to align reporting requirements with that of other donors (particularly the African Development Bank and EU) supporting the implementation PFMRAP in order to reduce the burden of reporting on the Secretariat. 65. Disbursements under the project would be in accordance with rules and procedures as set out in the Bank’s disbursement handbook. The various disbursement methods available for use by the project include - (i) Advances to a Designated Account (DA); (ii) Reimbursement; and (iii) Direct Payment. The Accountant-General will authorize the opening and use of a Designated Account (as part of the GoL Development Fund), denominated in United States Dollars, at the CBL to receive the funds from IDA. Local project expenditures will be paid from the normal Treasury Bank accounts, through normal IFMIS supported processes, and reimbursed by transfers from the Designated Account. Foreign currency project expenditures will be paid directly from the Designated Account at the CBL. Preparation of withdrawal applications and justification of funds into the DA, as well as documentations for all direct payments would be the responsibility of the dedicated project accountant following Bank requirements. The Bank will issue a Disbursement Letter of which the content will be discussed and agreed during negotiations. Disbursements will be based on Statements of Expenditure (SOE).

66. The annual project audited financial statements, including the auditor’s opinion and a management letter, will be submitted to the Bank not later than six (6) months after the end of each fiscal year. Given that the Office of the Auditor General (OAG) will be a direct beneficiary under the PFMRAP, it was agreed with GoL that the audit of the project be subcontracted to an independent private audit firm, to be procured in agreement with the African Development Bank and EU and conforming to normal Bank requirements. The cost of the audit will be financed from the credit. 67. The overall conclusion of the financial management assessment is that the project’s financial management arrangements have an overall “Moderate” risk rating.

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D: PROCUREMENT

68. All procurement to be financed under the proposed project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under the International Bank for Reconstruction and Development (IBRD) Loans and IDA Credits” dated January 2011, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, as well as the provisions stipulated in the Legal Agreement. For International Competitive Bidding (ICB) and National Competitive Bidding (NCB), all procurement of goods, works and non-consultant services will be done using the Bank’s Standard Bidding Documents. All consultant selection undertaken for firms will be done using the Bank’s Standard Requests for Proposals. The project will carry out implementation in accordance with the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD and IDA and Grants” dated October 15, 2006 and revised January 2011 (the Anti-Corruption Guidelines). 69. An assessment has been made of the procurement capacity of the PFM Reform Secretariat. The key procurement issues identified are: (a) the need for the PFM Reform Secretariat to ensure integration of the assigned Procurement Officer; (b) limited capacity of the new PFM Reform Secretariat and project staff to assure adherence to World Bank Procurement and Consultant Selection Guidelines.

70. Proposed corrective measures to mitigate the overall risks include: (a) The PFM Reform Secretariat to integrate and capacitate the assigned Procurement Officer; (b) training of new PFM Reform Secretariat and project staff in World Bank Procurement and Consultant Selection Methods and Procedures; (c) selected contracts to be subject to prior review. An acceptable Procurement Plan covering the first 18 months of the project has been prepared whilst a PFMRP Procurement Manual is under development.

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Annex 1: Results Framework and Monitoring

.

Country: Lesotho Project Name: LS-PFM Reform Support Project (P143197)

.

Results Framework .

Project Development Objective .

PDO Statement The project development objective (PDO) is to improve the quality and timeliness of public financial management information in support of the Government’s PFMRAP to improve budget execution.

These results are at Project Level .

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End

Target Frequency Methodology

Data Collection

• Quality and timeliness of in-year budget reports (PI-24)

Text D (2012) B(2017) Biennial

PEFA Assessment either self or external

M&E Function of the PFM Reform Secretariat

• Quality and timeliness of annual financial statements (PEFA PI-25)

Text D (2012) B(2017) Biennial

PEFA Assessment either self or external

M&E function of the PFM Reform Secretariat

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Stock and monitoring of expenditure payment arrears (PEFA PI-4)

Text NR (2012) A (2017) Biennial

PEFA Assessment either self or external

M&E Function of the PFM Reform Secretariat

Predictability of the availability of funds for commitment of expenditures (PI-16)

Text D (2012) B (2017) Biennial

PEFA Assessment either self or external

M&E Function of the PFM Reform Secretariat

.

Intermediate Results Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End

Target Frequency Methodology

Data Collection

Wide-area network downtime

Days 2.00 0.20 Quarterly WAN monitoring Reports

IFMIS ICT work group

IFMIS server downtime

Days 0.50 0.20 quarterly

IFMIS data center monitoring reports

IFMIS ICT work group

Use of commercial bank accounts to support district operations of line ministries and District Councils

Number 20.00 0.00 Bi-Annual

Approved Bank Accounts for Treasury Operations

Deputy Accountant General (Cash Management)

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Number of untrained IFMIS Users

Number 450.00 0.00 Bi-annual

IFMIS Project reports

IFMIS user training & change management work group

Line ministry revenue transactions generated outside of the IFMIS

Number 15000.00 100.00 Annual

Bank Reconciliation Statements

Deputy Accountant General (Revenue)

.

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Annex 1: Results Framework and Monitoring .

Country: Lesotho Project Name: LS-PFM Reform Support Project (P143197)

.

Results Framework .

Project Development Objective Indicators Indicator Name Description (indicator definition etc.)

• Quality and timeliness of in-year budget reports (PI-24)

Dimension (iii): In-year budget reports with some data issues that are highlighted but that do not compromise overall consistency /usefulness.

• Quality and timeliness of annual financial statements (PEFA PI-25)

Dimension (i), (ii) and (iii): Annual preparation of consolidated government statement in compliance with IPSAS cash based standards (or corresponding national standards); and submission for external audit within at least 10 months of the end of the fiscal year.

Stock and monitoring of expenditure payment arrears (PEFA PI-4)

Dimension (i) and (ii): Routine IFMIS generation of reliable and complete arrears data, in order to keep the stock of arrears low (below 2% of total expenditure).

Predictability of the availability of funds for commitment of expenditures (PI-16)

Dimension (i): Preparation of FY cash flow forecast and quarterly updates based on actual IFMIS recorded and reconciled inflows and outflows

.

Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Wide-area network downtime IFMIS downtime resulting from WAN problems

IFMIS server downtime IFMIS Downtime resulting from server problems Use of commercial bank accounts to support district operations of line ministries and District Councils

No description provided.

Number of untrained IFMIS Users Extent of training provided to currently untrained users Line ministry revenue transactions generated outside of the IFMIS

Elimination of revenue transactions generated outside of the IFMIS

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Annex 2: Detailed Project Description

LESOTHO: PFM Reform Support Project (P143197) A. Situational analysis

1. Most of the operational issues experienced today stem from the rapid deployment of IFMIS in April 2009, coupled with a decision by GoL to allow more than 700 untrained users access to the system whilst key staff to operate and maintain the system was not ready and/or departed shortly after go-live. The IFMIS implementation has been initiated in November 2007, through a turn-key contract (EUR 7.3 million, including a 3-year warranty period - funded by the EU) signed with the authorized supplier of the selected software in Africa. The IFMIS application software is an off the shelf solution, licensed for 275 concurrent users. The main data center is located in the MCST, and the MoF operates the backup data center (both located in Maseru). The system implementation, including the installation of central IFMIS application and database servers, 574 workstations, registering access for about 1,200 users, peripherals, and local area network connections (112 offices of 27 line ministries in Maseru), has been completed in a relatively short time (16 months), and a number of contract management and system support challenges have emerged afterwards. Despite training of 16 Application, 16 Technical and 16 Help Desk support personnel, a weak retention strategy resulted in almost all of these team members leaving within a short time after system go-live. 2. A recent evaluation of the IFMIS14 and World Bank staff assessment during project preparation (September, 2013) confirm that several key problems with the configuration and operation of the IFMIS remain to be addressed. These are -

a) Severe Wide Area Network (WAN) downtime. It has been reported that the IFMIS system is often not accessible, sometimes up to 2 days a week. The results are that transactions and data are created outside of the IFMIS, manual processing is perpetuated, IFMIS commitment controls are bypassed, transactions are subsequently not timely recorded in the IFMIS, IFMIS data is not reliable, and because no month end closures are yet enforced in the system, information on a specific item (such as expenditure for a certain period) from the IFMIS keeps changing as data corrections are made, which further destroys user confidence in the IFMIS. A number of causes contribute to the continuation of this situation:

(i) Frequent electricity fluctuations at the primary data center at MCST, which results

in the crash of the campus core switch 6509. The switch is the main connection between Econet and the MCST primary data center, and also connects the secondary data center at the MoF.

(ii) There is a lack of capacity to use network monitoring tools to pro-actively detect and manage the downtime and to provide notifications to users whenever the network is down. The IFMIS technical team and IT department at MCST need

14 Evaluation of Public Financial Management – Integrated Financial Management Information System (FMIS), Pohl Consulting & Associates, European Union, May 2013

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skills on network areas such as load balancing, application prioritization, traffic management, identification of weak areas of networks and identification of internal and external threats.

(iii)There are no standby network components for the IFMIS data centers to avoid single points of failure.

(iv) The backup generator at MCST is connected and operational but not sized for the total load as required today. It was originally sized for IFMIS equipment and cooling requirements. Furthermore, power outages over weekends (when no one attends to the data centers) and the generators that are not switched on lead to draining of the UPS and systems shutting down abruptly.

(v) IFMIS workstations are not installed with latest anti-virus updates.

b) System performance is inadequate. Most of the IFMIS equipment installed (servers, routers, switches, workstations, etc.) have only been maintained until 2012 (when the original maintenance contract lapsed), and are close to their end of life. No provision was made for upgrading of equipment.

c) Payment processing is not supported by an Electronic Funds Transfer system. Currently line ministries authorize payments against the TSA and submit source documents to the Treasury, for final control and issue of a uniquely referenced transfer letter to the Central Bank of Lesotho (CBL). This adds unnecessary work flow and need for controls, which further slow the payment process. Incorrect data capture at the CBL also results in many bank reconciliations exceptions, which put further strain on the capacity to effectively run the IFMIS.

d) Line ministries receiving revenue are not connected to the IFMIS for issuing of receipts. Cashiers of about 18 line ministries are not connected to the IFMIS. They receive payments outside of the IFMIS, deposits the receipts in the TSA, but the controls to ensure timely capturing of the transactions are ineffective. Only after a lengthy period of investigating TSA bank reconciliation exceptions are the transactions recorded in the IFMIS. No procedures exist for the interim recording and classification of such revenue, again resulting in IFMIS data not being reliable.

e) For decentralized cost centers of Ministries operating outside of Maseru, commercial bank accounts have been opened (outside of the TSA) to support their operations. Sub-accountancies of the Office of the Accountant-General provide support for processing transactions on these accounts, on an “imprest” basis. This requires budget, warrant and cash transfer processing by the HQ Ministries to support transacting on these commercial bank accounts by the sub-accountancies on their behalf, and subsequent reconciliation by them of advances made, payments processed and balances on hand.

f) Although physically the IFMIS databases are installed on one central server, the current version of the software operates separate databases for each ministry and each sub-accountancy. However, payment transactions created and authorized by the Maseru-based Ministries are processed through the four main Treasury bank accounts at the CBL, which are accounted for in the Consolidated Fund general ledger. This creates a need for “inter-departmental” reconciliation of the separate databases. The present configuration creates inter-departmental transactions which require clearance and reconciliation.. Furthermore the accounting discipline and skills to handle all the reconciliation requirements have not yet been established.

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g) Bank reconciliation processes are cumbersome and time consuming, mainly caused by a lack of EFTs for payment processing, unrecorded receipts by line ministries and data capture problems by the CBL. Reconciliation of the four main Treasury bank accounts is the responsibility of the Office of the Accountant-General, with sub-accountancies responsible for the commercial bank accounts used to support district operations of Ministries. However, reconciliation of revenue and expenditure bank accounts has not been completed in nearly all sites - in some sites no reconciliation has been conducted since April 2009. This directly impedes the reliability of the IFMIS data.

h) There is a lack of consistency of figures in some reports - there are cases where the same report for the same period using the same parameters provides different results. This is the result of no enforcement of month-end procedures in the IFMIS, and the ongoing process of recording transactions created outside of the IFMIS but traced through the cumbersome bank reconciliation process.

i) Opportunity continues to exist for commitment controls in the IFMIS to be bypassed. This is the result of several issues – system unavailability, transactions initiated outside of the IFMIS, payment arrears, and weak financial discipline.

j) Budget department is not using the Active Planner for the budget preparation process. Budgets are prepared outside of the IFMIS on excel worksheets, which require additional work and controls to ensure reliable transfer to and maintenance in the IMFIS.

k) There is no help desk function in operation. The Help Desk function established under MoFDP (at the time) was closed at the early stages of the implementation, and the function was not re-established elsewhere. Therefore there has been no streamlined and managed process in which the users can submit their issues for resolution or access to higher levels of technical support. In practice, the Application Team has, to the extent of their capability, taken up some of the help desk function, i.e. assisting line ministry operators on requests.

3. There are also several adaptive challenges and policy decisions which require high level attention of the Government, to ensure the successful resolution of the current problems. It is recommended that the MoF management addresses these adaptive challenges urgently, in order to improve the stability and effectiveness of IFMIS:

a) IFMIS roles and responsibilities are not clearly defined: With the implementation of IFMIS a new IFMIS ICT team was introduced at the MoF. This team was assigned to deal with IFMIS ICT issues only, and not broader MoF ICT issues. Some of the team members were later allocated to the MCST to support the primary data center. The introduction of the IFMIS ICT team led to MoF having two IT teams, and the same applies at the MCST. The lack of proper working relations between these teams means that it is difficult to consolidate the IT skills available to solve technical IFMIS problems. Specialization and responsibilities for each team are not defined. A reorganization of the ICT function in the MoF is underway to consolidate the separate IFMIS ICT support function with that of the broader MoF needs.

b) IFMIS vision and concepts are not adequately known: IFMIS (as a result of the implementation and operational issues experienced) has become and is mainly seen as an accounting software, instead of an integrated PFM system supporting core budget

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preparation, execution, accounting, and reporting needs. High level meetings should be organized regularly, to share the IFMIS vision and ensure support from all line ministries.

c) Several key policy decisions on architecture and processes should be made in consultation with relevant stakeholders on the following issues: (i) transition to centralized Treasury Single Account (TSA) operations benefiting from an interface with the CBL systems for electronic payments and reconciliation of accounts (which will require all staff, suppliers and beneficiaries transacting with government to open bank accounts); (ii) supporting the operations of DCs through IFMIS web portal extensions; (iii) supporting the operations of district spending units of line ministries, and cashier’s functions through IFMIS web portal extensions; and (iv) initiating the establishment of digital signature infrastructure (benefiting from ongoing e-Government initiatives of the MCST).

d) A further business process re-engineering needs to be completed rapidly, to determine and implement improvements and simplifications in addition to those identified above before the IFMIS upgrade/modernization.

e) A technical and operational assessment (IT Audit) of existing IFMIS software and data centers should also be completed before any system upgrade or modernization effort. This is also required to update the system documentation and to prepare the necessary procurement justifications.

f) A change management plan is required to ensure that resistance to the IFMIS is minimized. A leadership development program can be used to assist in changing the culture of government entities to benefit from new web-based IFMIS and avoid the resistance to use the system for daily operations.

g) More capacity and a retention strategy are needed for the core IMFIS team to ensure sound IFMIS management and support. In this regard it is advised that the core IFMIS team and other key staff are appointed on performance contracts. Additional specialists are also required to ensure proper skills transfer to the core IFMIS team.

h) Management in the Office of Accountant-General and broader MoF is not yet relying routinely on the IFMIS to support their core functions. The use of IFMIS reports by management for financial control and monthly, quarterly and annual reporting activities has not yet been institutionalized. Although end-user report facilities are available in the IFMIS (build-in and in the Crystal Report Writer), only a few members of the Technical Team are capable of designing reports on their own.

B. Project Components

Support for improving the stability and reliability of the existing IFMIS platform (US$ 0.883 million, of which IDA US$ 0.752million 4. Objective. The objective of this component is to improve the stability, performance and reliability of the existing IFMIS platform. Government plans are to go-live with the upgrade of its existing IFMIS Software on 1 April 2015. If this go-live date is successfully achieved, the existing IFMIS platform will have to remain operational through to the closing of FY15 (which could be up to December 2015).

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5. The following key activities must be achieved to address existing technical and operational challenges. Also, these are all required in order to lay a solid foundation for the upgrade and reconfiguration of the IFMIS through Component 2:

a) Activity 1.1 - Improvement of existing wide-area network connectivity: GoL has

initiated a joint effort by MoF (IFMIS ICT) and MCST for the rapid resolution of existing network issues affecting the IFMIS operations. This includes an immediate solution for the electricity supply issue to the campus core switch 6509 at the primary data center at the MCST, which establishes the main connection between Econet and the MCST primary data center and also connects the secondary data center at the MoF. MCST and the core IFMIS team also need to implement the necessary tools and develop capacity (through a study tour to SA’s State Information Technology Agency) for monitoring the IFMIS WAN. These improvements will be implemented within a period of 6 months through an NCB package (estimated budget is US$ 0.2million). These activities can also be financed under retroactive finance should the GoL so request.

b) Activity 1.2 - Improvement of primary and backup IFMIS data centers: The MoF is expected to complete the server upgrades and other urgent ICT infrastructure improvements through this activity. The Bank will finance the upgrade of the existing servers and UPS. These improvements are expected to be implemented within a period of 6 months through a NCB supply and installation contract for the upgrade of servers and the UPS (estimated budget is US$ 0.152million). These activities can also be financed under retroactive finance should the GoL so request. The Ministry of Finance will contribute to this activity by undertaking the other urgent ICT infrastructure improvements, including the electrical works, upgrade of generators and improvement of the cooling systems (estimated at US$ .130million).

c) Activity 1.3 - Activation of the EFT interface with the CBL: This activity is expected to support activation of the IFMIS Electronic File Transfer (EFT) interface with the CBL, to initiate electronic payments on the existing IFMIS platform. This will assist quicker, more reliable and more secure processing of payments, reduce the workload and information flows between line ministries and Treasury, provide improved information for cash management purposes and will reduce the number of bank reconciliation exceptions. This interface will be implemented within a period of 6 months through a Consultants Qualifications (CQS) package (estimated budget is US$ 0.1million). These activities can also be financed under retroactive finance should the GoL so request.

d) Activity 1.4 - Support for cleaning IFMIS databases and improving accounting controls: This activity will support the correction/cleaning of database records in the current IFMIS system and transfer of reliable opening balances to the new upgraded version. At the time of preparation of this project the Government has presented the public accounts for FY 2010/11, FY 2011/12 and FY 2012/13 for auditing. However, several underlying data problems in the IFMIS still need to be managed, in order to provide a firm basis for achieving clean audit opinions from the new IMFIS. These mainly include a lack of opening balances on 1 April 2009, and un-reconciled revenue transactions of line ministries. It is also important that the accounting controls supporting the production of reliable IFMIS data are improved, including the effectiveness of controls such as reconciliations. The relevant technical assistance is expected to be

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provided within a period of 30 months through a CQS package (estimated budget is US$ 0.3million). Specific actions will include the following: (i) A new TSA will be opened and prepared for use from 1 April 2015. To ensure a

smooth go-live, several factors must be in place and tested –the existing IFMIS must have a stable and well performing technical platform, EFTs and automatic bank reconciliations must be in place, cashiers of line ministries must be connected and able to issue receipts from the IFMIS, all users in spending units of line ministries, as well as DCs, must be connected and trained in the use of the upgraded version of the software, the approved budget must be in the IFMIS, and controls need to be in place to ensure capturing of data created outside of system in case of unforeseen downtime.

(ii) All cash balances as at 31 March 2015 in the existing TSA and sub-accountancy commercial bank accounts will be transferred to the new TSA, and recorded in the IMFIS. The old bank accounts will also be frozen against further use and closed after finalization of the FY15 audit.

(iii)The Office of the Accountant-General will continue to oversee the process to clean and reconcile transactions up to FY15 on the old TSA and commercial bank accounts against the current version of the IFMIS software until the public accounts has been prepared. Technical assistance will also be provided to the Office of the Accountant-General to strengthen accounting controls such as reconciliations.

(iv) The audited balances as at 31 March 2015 of other financial assets and liabilities will be brought forward into the upgraded version of the IFMIS. Specific agreement is required with the Auditor-General to ensure that all balances of financial assets and liabilities as at 31 March 2015 will be verified in order to achieve a clean audit opinion on such balances.

6. The following priority actions are recommended to facilitate more effective use of IFMIS for daily operations and reporting:

a) Ensure daily recording of all revenue in IFMIS by connecting cashiers of line ministries

to the existing IFMIS, which will assist in reducing the number of un-reconciled revenue transactions.

b) Enforce monthly closing of IFMIS for data capture, monitor data quality, provide training support and enforce basic accounting disciplines. This will improve the financial discipline and also address user perceptions of unreliable and ever changing information from the system.

c) Enforce year-end closing of IFMS for data capture. It was agreed to “freeze” the data sets for the fiscal years that have been submitted for external audit. Any corrections to data will be recorded in the current financial year, but with adequate disclosure of the impact on the already disclosed financial performance and position of previous years. This will also assist to address user perceptions of unreliable and ever changing information from the system.

d) Re-affirm the directive to highlight the requirements for using IFMIS on a daily basis in all line ministries and sub-accountancies to support core budget execution, accounting and reporting functions.

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e) Strengthen the MoF Application Support team with additional staff, training, equipment and office space. Reactivate the help desk system, and designate operators to record and monitor the IFMIS issues, and user questions/comments.

f) Activate the issue tracking portal of the software supplier to record all IFMIS technical and functional issues and record the solutions promptly. Train the MoF Application Support (30 staff) and IT teams (6 specialists) on the use of this issue tracking system.

g) Complete the reorganization of the MoF IT Department and define the roles/responsibilities of all technical specialists. Finalize the IT Department work plan, and strengthen the capacity with additional staff and training (currently, there are 6 IT Specialist).

Component 2: Support for expansion and modernization of IFMIS platform (US$ 4.375 million, of which IDA US$ 3.913million) 7. The MoF is of the view that the existing software is sound and relevant to the perceived needs of Lesotho. An upgrade of its existing IFMIS software, including to a web-based architecture, is required as the current version will no longer be maintained. This upgrade will assist to resolve some of the configuration issues such as separate databases, budget preparation, commitment control, cash management, and support for Treasury Single Account (TSA) operations. In addition, the current IFMIS is bedeviled by an overly complex architecture and process design, capacity weakness in the management of the Treasury function, control weaknesses and a general lack of clarity of and compliance with rules and regulations governing financial management practices (including timeliness of data collection and fiscal reporting).

a) Activity 2.1 - Support for an IT Audit of the IFMIS platform: A technical and operational assessment (IT Audit) of existing IFMIS software and data centers will be completed through this activity, before embarking on any system upgrade or modernization effort. The IT Audit is also expected to assist the GoL to update the necessary system design documentation, and to assist with the development of the necessary procurement justifications. It is to be completed within a period of 6 months through a CQS package (estimated budget is US$ 0.1million).

b) Activity 2.2 – PFM business process re-engineering: A further business process review needs to be completed rapidly, to clarify and implement possible additional improvements and simplifications before the IFMIS upgrade/modernization. The BPR is expected to be completed within a period of 6 months through a CQS package (estimated budget is US$ 0.2million). These activities can also be financed under retroactive finance should the GoL so request.

d) Activity 2.3 - Expansion and modernization of the IFMIS platform: This activity is expected to enhance the functional support by the IFMIS software (e.g., improved commitment management and budget execution, TSA operations, better cash management, etc.), modernize the technical architecture (transition to web-based application through an upgrade of the existing software), enhance the relevant ICT infrastructure and extend the IFMIS to all Ministry offices in Districts and District Councils (estimated at 122 offices) ) with the necessary capacity building. The proposed activity will be implemented within a period of 33 months through NCB by the GoL for the necessary hardware, installation and commissioning (estimated budget US$ 2.315million), and a contract with the authorized

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IFMIS supplier for additional licenses, development, configuration, training of trainers, implementation support and 1 year after go-live support for the application and technical architecture (estimated budget is US$ 1.298million). The Ministry of Finance will contribute to this activity by procuring and commissioning the necessary servers to support the upgraded version of the existing software (estimated at US0.462million). The total estimated cost for this activity is US$ 4.075million.

8. In addition, the project will support MoF to introduce the following policy and architecture changes before or during the expansion and modernization of IFMIS to simplify processing and prevent operational IFMIS problems:

a) Several key policy decisions should be made in consultation with relevant

stakeholders on the following issues: (i) transition to centralized Treasury Single Account (TSA) operation benefiting from an interface with the CBL systems for electronic payments and reconciliation of accounts (which will require all staff, suppliers and beneficiaries transacting with government to open bank accounts); (ii) supporting the operations of DCs through IFMIS web portal extensions; (iii) supporting the operations of district spending units of line ministries, and cashier’s functions through IFMIS web portal extensions; and (iv) initiating the establishment of digital signature infrastructure (benefiting from ongoing e-Government initiatives of the MCST).

b) One general ledger should be created for the Consolidated Fund and all line ministries operating against the TSA. This will also require district spending units of line ministries to be connected to the central IFMIS, operating against the TSA (using EFTs) and no longer through commercial bank accounts managed by the sub-accountancies. This will also require a review of the Chart of Accounts.

c) Only one District Council (Maseru) currently uses a commercial accounting package for financial control, accounting and reporting. The other nine run manual systems, and a recent diagnostic assessment15 of decentralization in Lesotho found that “Only limited audits of local Authorities have been undertaken since 2005. The Auditor General explained that only 3 district councils namely Botha Bothe, Mafeteng and Mohale Hoek have had their accounts audited over the period. In all cases, the accounts returned qualified opinions pointing to significant weaknesses in their financial management systems”. A key challenge therefore is the absence of reliable and timely financial statements. To support their obligations under the Public Financial Management and Accountability Act, 2011, District Councils urgently require access to the IFMIS to bring this situation under control. From the dimensions of cash flow management, capacity, cost effectiveness and maintaining data integrity, they are to be connected to the central IFMIS, preferably as cost centers under the Ministry of Local Government and Chieftainship (MLGC) and also operating against the TSA. It is also proposed that the current sub-accountancies in districts are utilized to support the DCs, to support their financial management functions.

15 Diagnostic Assessment of Decentralization in Lesotho, UNDP, October 2013

36

d) The Budget Department must be equipped to use the Active Planner module for the FY16 budget preparation process. This will eliminate the additional work and controls to ensure reliable transfer to and maintenance of the budget in the IMFIS.

9. The changes to the IFMIS and TSA architectures are presented in Figure 1 and Figure 2 below -

Figure 1: Current IFMIS and TSA architecture

37

Figure 2: Future IFMIS and TSA Architecture

Component 3: Support for change management, skills development and project implementation (US$ 0.834million) 10. This component will implement several adaptive initiatives to ensure sustainable capacity to run the system, stakeholder backing /enforcement and sound project implementation. Appropriate technical assistance will be provided to facilitate change management and capacity building as required for – the Office of the Accountant-General, the core IFMIS team, the PFM staff who depends on the IFMIS for the execution of their functions, Program Managers and Chief Accounting Officers, the Auditor-General, Cabinet, the Public Accounts Committee, the Central Bank, development partners and citizens and suppliers who transact with the Government. 11. Current situation. Given the poor IFMIS implementation record thus far, high levels of frustration and distrust in the system exist. These challenges are largely driven by the several adaptive problems that now require high level attention from the Government to ensure their resolution and in turn the effective implementation of the PFMRAP and its associated components. These issues specifically relate to: (i) the definition and clarification of IFMIS roles and responsibilities; (ii) development of capacity and retention strategy for sustainability of IFMIS operations and maintenance; (iii) routine reliance on IFMIS as a management tool – both within the Office of the Accountant-General and broader MoF – rather than just an accounting system; (iv) broad consultations with stakeholders across and within MDAs on key PFM policy decisions.

38

a) Activity 3.1 - Support for change management and training: This will include the

following: (i) Provision of IFMIS operations and maintenance training/capacity development to

the core IFMIS team (IFMIS custodian, super users, administrators, application support team, ICT support team, training team, etc.).

(ii) Support to the MoF in the development of the requisite capacity and skills amongst the IFMIS stakeholders; the assignment of IFMIS training function to the Lesotho Centre for Accounting Studies (LCAS); and strengthening the capacity and training capability of the Application Support team to deliver the necessary accounting and systems training to end users on a sustainable basis, with the support from CAS as needed.

(iii)User database clean-up to ensure that only valid users remain registered for access to the upgraded version of the software. A training program will be structured to deliver the right training at the right time. A core training team will be equipped in all respects to carry out training of end users and managers.

(iv) Full PFM and relevant IFMIS training for management of Ministries and DCs, Cabinet and the Public Accounts Committee will also be delivered. This should include the full PFM cycle and how the IFMIS supports the objectives of fiscal discipline, strategic allocation of resources, efficient service delivery and financial accountability.

(v) Technical Assistance to the Government for the development and implementation of a retention and succession plan for the core IFMIS team. In particular, assistance will be provided to develop the skill and competency profiles for all functions required to support the continued operation and maintenance of the IFMIS, together with a training plan for staff in post. Assistance will also be provided to explore options for GoL to appoint key IFMIS staff on performance contracts as a means to support better retention of staff in such positions.

Relevant advisory support is expected to be provided within a period of 21 months through a QCBS package, individual consultants and various trainings and workshops (estimated budget is US$ 0.573 million).

b) Activity 3.2 - Support for project implementation: This activity will support the project implementation costs, including the following – (i) technical assistance to set-up and run the project in IFMIS, and financial management and procurement assistance; (ii) basic office and IT equipment for the core IFMIS team; (iii) technical assistance to supplement capacity gaps in the core IFMIS team; and (iv) monitoring and evaluation, and reporting progress on all components. The relevant technical assistance is expected to be provided within a period of 36 months through individual consultants and shopping contracts for goods (estimated budget is US$ 0.12million).

c) Activity 3.3 - Audit of project/financial activities: This activity will support the annual audit and reporting of project activities. Relevant advisory support is expected to be provided during project implementation through a LCS package (estimated budget is US$ 0.05million).

d) .

39

C. Project Financing

Lending Instrument

12. The lending instrument is Investment Project Financing (IPF). An IPF is selected as it is a flexible instrument that allows for the financing of different activities (consultants, equipment and works). IPF supports projects with defined development objectives, activities, and results, and disburses the proceeds of Bank financing against specific eligible expenditures.

Project Cost and Financing

13. The total project cost is US$6.09 million, of which IDA will be financing 90% as summarized in Table 4 below:

Table 4: Project cost and financing

14. GoL will be executing and financing the following activities as their 10% contribution to the total project costs -

a) Component 1 - IFMIS data center electrical works - estimated at US$ 50,000 b) Component 1 - IFMIS data center upgrade of generators - estimated at US$ 40,000 c) Component 1 - IFMIS data center upgrade of cooling systems - estimated at

US$40,000 d) Component 2 - Upgrade of IFMIS primary and backup data center servers for

upgraded version of IFMIS software - estimated at US$ 461,737

US$ US$ US$Total Project Cost GoL Financing IDA Financing

1 Support for improving the stability and reliability of existing IFMIS platform 882,101 130,000 752,101 85%

1.1 Improvement of existing wide-area network connectivity 200,000 0 200,0001.2 Improvement of primary & backup IFMS data centers 282,101 130,000 152,1011.3 Activation of the IFMIS EFT interface with the CBL 100,000 0 100,0001.4 Cleaning IFMIS databases & improving accounting controls 300,000 0 300,0002 Support for the expansion and modernization of IFMIS 4,375,164 461,737 3,913,427 89%

2.1 IT Audit of the IFMIS platform 100,000 0 100,0002.2 PFM business process re-eningineering 200,000 0 200,0002.3 Expansion and modernization of the IFMIS platform 4,075,164 461,737 3,613,427

3 Support for change management, training and project implementation 834,472 0 834,472 100%

3.1 Support for change management and training 572,735 0 572,7353.2 Support for project implementation (operating costs) 120,000 0 120,0003.3 Audit 50,000 0 50,0003.4 Unallocated 91,737 0 91,737

6,091,737 591,737Planned

Disbursement5,500,000 90%

Lesotho IFMIS stabilization and upgrade project % IDA financing

40

D. Estimated project disbursements

Figure 3: Estimated project disbursements

41

E. Project timeline

Figure 4: Project timeline

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42

ANNEX 3: IMPLEMENTATION ARRANGEMENTS

LESOTHO: PFM Reform Support Project (P143197)

A: PFMRAP INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS

1. The GoL implementation arrangements for the PFMRAP consist of two tiers, as follows - (i) an oversight/steering committee as the top tier (the IRSC); and (ii) a reform technical committee (RTC) as the second tier, consisting of Component Leaders (CLs) and their support teams who will be involved in delivering the necessary outputs. A central PFM Reform Secretariat will provide overall monitoring, coordination and support for the implementation of the PFMRAP by the CLs. PFM Integrated Reform Steering Committee (IRSC) 2. The IRSC has been reconstituted16 under authority of the Minister of Finance as the oversight/steering committee for the implementation of the PFMRAP. Its membership will include - PFM Development Partners; Chairperson of the Parliamentary Public Accounts Committee and Economic Cluster; Ministry of Public Service; Representatives from key Line Ministries, Departments and Agencies (Education, Health, Agriculture, Local Government, etc.); Component Leaders; and a PFM Reform Coordinator, who will serve as the IRSC Secretariat. It will meet under chairmanship of the Minister of Finance at least three times a year with the purpose to drive the reform process; inform the relevant partners and raise support for the reform; and decide on critical conceptual issues and recommendations related to the reform. 3. Responsibilities of the IRSC include the following:

a) Approve the overall vision, goal, strategy and action plans of the PFM Reform Action Plan.

b) Ensure political support for and ownership of the PFM Reform Action Plan c) Review and approve annual action plans d) Approve annual budgets e) Monitor implementation of the action plan against targets and indicators in order to

determine the impact and success. f) Provide guidance on implementation; g) Resolve any coordination issues arising among Stakeholders.

16 High Level PFM Workshop, 11 November 2013

43

h) Facilitate the policy dialogue with Development Partners. i) Approve major re-allocations within key interventions in line with funding regulations

and conditions j) Decide on additional financial requests during the period k) Receive and review progress reports from the Reform Technical Committee l) Monitor reform progress and take action on the quarterly and annual progress reports m) Decide on major institutional, legal, investment or conceptual questions related to the

reform n) Organize Annual Joint PFM Reviews to discuss progress in PFM.

PFM Reform Technical Committee (RTC) 4. The day-to-day PFMRAP activities will be supported / coordinated by a PFM Reform Technical Committee (RTC), which comprise of all Component Leaders. It will be chaired by the Principal Secretary, Ministry of Finance, with the support of the PFM Reform Secretariat. The RTC shall meet at approximately four week intervals, but not more than six weeks, to review reform progress at key intervention levels. It is a forum for coordinating all reform activities between components and sharing experiences and for enhancing visibility of reforms, and ensuring change management activities are adequately rolled out to support the reforms at different levels. Its responsibilities include among others, reviewing budget allocations and making proposals for the approval of the IRSC. It is the role of the RTC to ensure strong ownership of the program activities and enhance their sustainability beyond the relevant donor support. Furthermore, decentralization of the program management and implementation (by sub-component) to agency/department level, will reduce bureaucratic delays in implementation and ensure that all technical assistance required and procured is directed to the appropriate area with close monitoring. 5. An Annual Joint PFM Review will be organized by the GOL, where possible, in conjunction with Joint Annual review(s) of budget support program. Its objective is to provide an opportunity to the GOL and all development partners to discuss progress in PFM reforms and propose recommendations in respect of future implementation plans and coordination and oversight arrangements. Development partners have organized and met regularly in the past in preparation for these processes, and will continue this collaboration. Component and Sub-component Leaders 6. A Component Leader (CL) has been assigned to each of the eight (8) components under the PFMRAP. Each component is broken down into key result areas, with objectives, outputs, strategies, activities and inputs clearly defined. Activities are sequenced in a coordinated manner to reflect government priorities over the medium term period as well as inter-dependencies between activities. For the purposes of ensuring greater ownership and sustainability of the reform program, activities are to be undertaken by the respective Sub-component Leaders (SCL) under supervision and coordination of the Component Leaders (CLs).

44

7. For all technical assistance, the relevant SCL will be responsible to identify the required inputs and the specific profile of the assistance required, prepare detailed and specific terms of reference for the recruitment of expert(s) and will supervise, review the output (reports, documents, training delivered, etc.) of the assignment and be responsible for ultimately endorsing the final product as well as providing feedback on the quality of the technical assistance. 8. The SCLs will be responsible for the planning, management and monitoring of reforms at the level of each key result area, in consultation with and under oversight of their respective CLs, who will have the necessary decision making authority to deliver the agreed outputs. This will include budgeting, procurement planning, commitment and procurement. The PFM Reform Secretariat will provide administrative and financial management and procurement support. The SCLs will be responsible for managing and monitoring budgets of their respective key interventions so that reform activities are mainstreamed.

9. Each SCL will bring on board all stakeholders that are likely to be affected by the reforms under a working group, and will submit feedback to the Technical Committee, and ultimately to the IRSC through the Component Leaders.

PFM Reform Secretariat (Planning Unit, Ministry of Finance) 10. The PFM Reform Secretariat, led by a PFM Reform Coordinator, has been established within the Planning Unit: Ministry of Finance and reports directly to the Principal Secretary: Ministry of Finance. The Secretariat, under the guidance of the PFM Reform Coordinator will be responsible for the day to day monitoring, coordination and support of the implementation of the PFMRAP by the respective CLs. Staffing for the Secretariat is underway and the team will include the following members:

a) PFM Reform Coordinator (government official - appointed)to be responsible for the overall coordination of the PFM reforms activities under the direction of the PS: Finance. The coordinator will under no circumstances pre-empt the delivery, responsibilities and accountabilities of the key intervention managers or in any way become their substitute.

b) Finance Officer/Accountant (government official - appointed) to be responsible for management of the program funds (e.g. the overall utilisation of funds, even where such funds are managed directly by the relevant development partner), and ensure that the key interventions receive the necessary funding and also provide appropriate accountability/preparation of financial reports.

c) Procurement Officer (government official - appointed) who will support procurement activities undertaken by the CLs and SCLs, centralise procurement activities and assist in management of procurement contracts.

d) Monitoring, Evaluation and Quality Control Officer (government official – in process) – responsible for monitoring scheduling of activities and ensuring timely delivery of quality outputs, ensuring sufficient and adequate change management and coordination of HR support throughout the reform activities.

45

e) Support staff, including a Secretary, Messenger/Office Assistant and possibly a bookkeeper (government officials/contract staff as required – in process)

11. Technical Assistance (TA) (funded by the EU) will be required in the following areas:

a) Resident PFM Advisor (appointed) who will assist the coordination and implementation of the PFM Reform action Plan by assisting the PFM Reform Coordinator and component managers. The immediate counterpart of the TA will be the PFM Reform Coordinator

b) Change Management and Capacity Development specialist to support capacity development and make recommendations as and when specialised capacity development experts are required within key interventions. The immediate counterpart of the TA will be the Monitoring, Evaluation and Quality Control Officer

c) Procurement and Accounting specialist(s) to assist the relevant government officials in setting up systems and control mechanisms to ensure transparency and accountability in the implementation of the PFM Reform Action Plan. The immediate counterpart of the TA will be both the Procurement and Financial Officers.

d) Additional expertise, such as Management information Systems Specialist and Capacity Building Specialist may be required for shorter periods to assist across the board with specific expertise.

12. These implementation arrangements seek to move away from the traditional approach of creating isolated project coordination units, towards the integration of implementation across the regular operations of the respective implementing agencies. In addition, the long-term technical assistance is not to be construed to be equal to full-time technical assistance. Thus, the Secretariat will seek the continuity of long-term assistance, but not necessarily full-time support. A graphic representation of the arrangements is depicted in Figure 5 below –

46

(*) Core IFMIS Team – work groups

PS Finance

PFM Improvement and Reform Steering Committee (IRSC)

Chaired by the Hon. Min of Finance

PFM Reform Secretariat

Annual PFM Joint

Development Partners

Reform Technical Committee Chaired by the PS

Component 5 (2) CL: Accountant-General SCL: Deputy AG (Cash Management) – supported by Core IFMIS Team (*)

Component 5 (3) CL: Accountant-General SCL: Deputy AG In-year and annual reports

Figure 5: PFMRAP Implementation Arrangements

Other components

Business process re-engineering & controls

IFMIS configuration & Application Support

User training & change management

Data migration & quality

IFMIS ICT support

Component 5 (1) CL: Accountant-General SCL: Deputy AG Accounting cadre reform

47

B: IFMIS PROJECT IMPLEMENTATION ARRANGEMENTS

13. The MoF, through the Accountant-General as Component Leader, and the Deputy Accountant-General (Cash Management) as Sub-component leader, will be the executing agency for this operation. A new Accountant-General has been announced at the High Level PFM Workshop hosted by the Minister of Finance on 11 November, 2013. He is expected to assume position in January 2014. The Deputy Accountant-General (Cash Management) is accountable to ensure that the current and upgraded IFMIS platform is fully operational, and that it confirms to the GoL PFM requirements. Specific duties of the Deputy Accountant-General (Cash Management) are the following:

• Achieve the project’s objectives within the time, cost and quality/performance constraints imposed by the sponsor;

• Make timely decisions to ensure the project’s success; • Plan, monitor and control the project through to completion; • Select, build and motivate the project team; • Develop project plans and budget; • Establish priorities for critical project tasks; • Monitor project progress and budget; • Keep the sponsor and senior management informed of progress and alert them in case of

problems – especially if these could have an impact on the achievement of the project’s business objectives;

• Serve as the principal point of contact between the sponsor, management and the contractor;

• Prepare for and coordinate weekly team status meetings; • Ensure timely escalation and resolution of issues; • Act as a communication focal point to the project teams and the Steering Committee.

14. The Deputy Accountant-General (Cash Management) is supported by a Core IMFIS Team, which will be responsible for implementation and coordination of all project activities and the eventual daily operation and maintenance of the IFMIS platform. The Core IFMIS Team may consist of staff that is administratively placed and report to other line ministries (such as MCST) but will integrate the team in so far as their support is required to ensure the successful implementation and operation of the IFMIS. The team will meet weekly to discuss progress reports from the various project work groups, as depicted in Figure 5. 15. The Core IFMIS Team will cover the following activities:

• Project scheduling and resource management • Risk management • Communication • Capacity Building, change management and training • Procurement and IFMIS contract management • Site Preparation and readiness issues • Technical liaison with the Contractor

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16. The Core IFMIS Team membership comprises of:

• Deputy Accountant-Ggeneral (IFMIS) (Chair) • Director of Budget Office, or alternate • PFM Advisor (as Representative of the PFMRAP Unit) • Managers of the IFMIS project work groups • Auditor General’s representative • Internal Audit representative • Director of Finance – Ministry of Education, or alternate • Director of Finance – Ministry of Transport • Director of Finance – Ministry of Health, or alternate • Director of Finance – Ministry of Local Government, or alternate • Whenever the need arises, other co-opted members of participating sites for effective co-

ordination.

17. The Core IFMIS Team will form or change membership of work groups and assigns them project implementation activities. The work group structure should not be viewed as static, and where opportunities exist, more members can be co-opted to achieve greater efficiency. 18. The User Training and Change Management work group will be responsible for the following tasks:

• Coordinating and managing the training/capacity building activities directly associated with the IFMIS implementation and ensuring coordination with the overall PFMRAP training/capacity building activities.

• Taking a leadership role in planning, overseeing and coordinating the transition in the GoL to effectively utilize the IFMIS. This includes development and communication of a Change Management Plan, implementation of the Plan and monitoring and assessing the change management processes.

• Responsible for the design and implementation of all IFMIS communication/sensitization strategies as well as the development, maintenance and distribution of IFMIS communication materials as part of the PFMRAP central coordination arrangement.

19. The ICT work group will constitute the MoF and MCST staff dedicated to the IFMIS ICT requirements, and will be responsible for the following:

• IFMIS Data Centre, Disaster Recovery Site and IFMIS Site preparations, as well as ongoing liaison and support during the IFMIS implementation;

• technical aspects of the IFMIS implementation, particularly concerning hardware and communication technology. The Group is responsible for confirming that the supplier’s ICT infrastructure set-up meets the GoL requirements and conforms to acceptable industry standards and practice;

• cross-checking the adequacy and completeness of the supplier’s technical implementation methodology;

• providing assurance on the quality of equipment and related installations by the IFMIS supplier;

49

• maintaining documentation (item lists) of installed software and hardware; • ensuring appropriate ICT skills transfer to IFMIS resources by the supplier; • ensuring that appropriate IT security and internal controls, as recommended by the Audit

and Security Group are implemented; • ensuring the timely resolution of site preparation and ICT-related issues logged with the

IFMIS Helpdesk by the sites. 20. The IFMIS configuration & Application Support work group will be responsible for the following tasks:

• the technical and procedural aspects concerning the configuration and implementation of the Chart of Accounts, and the IFMIS application software, including integration and interfaces with other systems;

• identifying and recommending to the Accountant-General any developments and/or revisions to the extant laws and regulations and any other procedural documentation required to support the IFMIS implementation and operation;

• overseeing the implementation of all the IFMIS modules and work in close liaison with the supplier during the solution design, data conversion, data migration and user acceptance testing stages;

• ensuring that appropriate security and internal controls as recommended by the BPR and control work group are implemented including all application and processing controls;

• ensuring appropriate application/solution design skills transfer to IFMIS resources by the supplier;

• ensuring the timely resolution of application-related issues logged with the IFMIS Helpdesk by the sites.

21. The Business process re-engineering & controls work group will be responsible for the following tasks:

• further reviewing and improving all processes supporting the PFM cycle and their relationship to the IFMIS;

• ensuring best possible fit with good PFM practice, relevant standards and the available IFMIS modules and configuration;

• supporting the development of the necessary materials to support change management and training as regards changes in business processes and IFMIS configuration;

• assisting with the necessary change management and training processes; and • developing the necessary amendments to the legal framework to ensure a legal basis for

the revised processes and reconfigured IFMIS. 22. Data migration & quality work group will be responsible for the following tasks:

• assisting the Accountant-General in developing arrangements for the new TSA to support the go-live of the upgraded IFMIS software;

• assisting the Office of the Accountant-General to oversee the process to clean and reconcile transactions up to FY15 on the old TSA and commercial bank accounts against the current version of the IFMIS software until the public accounts have been prepared ;

• assisting with the provision of audited balances as at 31 March 2015 of other financial assets and liabilities to be brought forward into the upgraded IFMIS software;

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• developing the necessary controls and functions to ensure monitoring of data quality in the upgraded IFMIS.

C: FINANCIAL MANAGEMENT, DISBURSEMENTS AND PROCUREMENT

Financial Management 23. The PFM Reform Secretariat within the MoF will be accountable for the broader PFMRAP and the project’s fiduciary management. The overall responsibility for financial management (including budgeting, accounting, payments, internal controls, transaction processing and quarterly and annual financial reporting) rests with the dedicated Project Accountant who will be supported by two finance and administrative assistants. The FM assessment of the Secretariat’s capacity to implement the project revealed weak capacity, which the GoL is currently addressing (notably ensuring the existence of a dedicated project accountant with the requisite qualification and experience in donor projects and acceptable to the Bank, and the set-up of the project within the current IFMIS to control, process and report the project’s financial transactions). The Project Accountant, with the support of other accounting staff will process all project financial transactions in line with the GoL payment approval procedures. In accordance with the Bank’s financial reporting and audit requirements, the project will be required to prepare and submit to the Bank Interim Financial Reports (IFRs) not later than 45 days after the end of each FY quarter. The Bank will endeavor to align reporting requirements with that of other donors (particularly the African Development Bank and EU) supporting the implementation PFMRAP in order to reduce the burden of reporting on the Secretariat. 24. The conclusion of the assessment is that the financial management arrangements meet the Bank’s minimum requirements under OP/BP10.00. The overall residual risk rating is moderate and the project will have two field supervision missions per annum.

Country issues 25. A recent evaluation of the IFMIS17 and World Bank staff assessment during project preparation confirms that several key problems with the configuration and operation of the IFMIS remain to be addressed. These include amongst others: (i) severe Wide Area Network (WAN) downtime; (ii) inadequate system performance; (iii) non-support of payment processing by an Electronic Funds Transfer (EFT) system; (iv) revenue receipting by cashiers of MDAs not performed on the IFMIS; (v) district spending units of MDAs are not connected to the IFMIS, but supported through Sub-accountancies connected to the IFMIS and cumbersome processes and commercial bank accounts; (vi) time-consuming bank reconciliation processes, which is the result of failure to originate some transactions directly in the IFMIS and data capture errors by the Central Bank of Lesotho (CBL); (vii) non-existent help desk function; (viii) lack of month-

17 Evaluation of Public Financial Management – Integrated Financial Management Information System (FMIS), Pohl Consulting & Associates, European Union, May 2013

51

end closing procedures for the IFMIS resulting in inconsistency of financial information in reports; (ix) bypass of commitment controls in the IFMIS. The resolution of these problems, the details of which are contained in Annex 2 - have informed the design of the project components, which have a direct bearing on the proposed financial management arrangements for the project. 26. The GoL currently manages and accounts for projects (funded through the Development Fund) using the existing IFMIS. The chart of accounts (Table 5 below) makes it possible to, inter alia, track project funding by source and expenditure items –

Table 5: IFMIS Chart of Accounts

Segments Classification Segment Components

Description Characters

Segment 1 Responsibility Head Ministry, Department and Agencies.

2

Cost Centres 2 Sub Cost Centres 2 Program 2 Sub- Program 2 Account Type 1 - Recurrent Exp,

2 - Development Exp, 3 - Recurrent Revenue , 4 - Development Revenue 5- Deposits.

1

Fund Source 1- Government of Lesotho Funds, 2 - Development Partner Grants, 3 - Concessional Loan, 4 - Government of Lesotho Funds – Counterpart Contributions 5 - Commercial Loan 6 - General Budget Support

1

Segment 2 Donor EU, Govt, World Bank, IDA, Kuwait Funds etc

3

Project Govt Development Projects 4 Segment 3 MTEF Objective Set Fiscal Objectives 2

Output Outcomes or achievable economic/financial impacts

2

Activity Actions and tasks to achieve outcomes/outputs.

2

Segment 4 GFS Codes (Economic Classification)

Sub Head 2 Item

4

Total 31

27. The procedures to receive project funding (through the Development Fund bank account at the CBL), to commit and pay project expenditures and to account for project expenses are established. The GoL therefore intends to fully use the IFMIS to support the financial management requirements of this project.

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Financial Management Risk assessment and mitigation 28. Table 6 below summarizes the results of the risk assessment and the mitigation measures: Table 6: Financial Management Risk Assessment and Mitigation Description of Risk Risk mitigation measures

incorporated in project design and implementation arrangements

Condition of Effectiveness (Yes/No)

Residual Risk/ (Risk) rating

INHERENT RISKS

Country Level There are still notable challenges in the PFM reforms, namely, the rollout of the IFMIS and implementation of the enacted PFMA.

The Government has acknowledged these challenges and action plans have been identified with the support of the donors to work on these challenges, including this operation.

No M

Entity Level

Should new different personnel be recruited, they will possess limited experience in the financial management aspects of bank-funded projects.

The project is committed to recruit best suitable qualified personnel, (considering technical expertise and experience in bank funded projects) to handle FM aspects for the project.

No M

Overall Inherent Risk Residual Risk: M

CONTROL RISK

Budgeting The budgeting process may not be comprehensive and realistic to provide an adequate basis for performance monitoring

The budgeting process will be based on approved procurement plans which will be updated regularly and monitored closely.

No M

Accounting and financial reporting New staff to be hired may not be familiar with the IFMIS accounting system and the Bank’s reporting requirements.

The recruitment requirements will include knowledge of the IFMIS accounting system and training will be provided on the Bank’s financial management, procurement and disbursement guidelines.

No M

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Description of Risk Risk mitigation measures incorporated in project design and implementation arrangements

Condition of Effectiveness (Yes/No)

Residual Risk/ (Risk) rating

Internal control

Project funds could be exposed to ineffective controls which could result in its misuse.

Adequate segregation of duties and good audit trails will be ensured through the project implementation arrangements, and the usage of the existing Government processes, controls and the IFMIS for project financial management and accounting.

No M

Funds flow Funds will flow into the Development Fund bank account at the CBL.

The project will have a unique identifier in the IFMIS system and all transactions of the project will be managed using procedures that are designed to ensure authorized and tracked access and use of project funds. Disbursements will be based on SOE.

No M

Auditing

No identified risk. The GoL projects have been submitting acceptable audit reports on time.

No

Overall Control Risk M Overall Risk M

H – High S – Substantial M – Moderate L – Low

29. Strengths: Existing GoL financial management arrangements for projects using the IFMIS are adequate. 30. Weakness: The key weaknesses do not relate to IFMIS software, but to technology, architecture, process and capacity problems, as outlined in Annex 2, which will be addressed through the project.

31. Budgeting arrangements: The IFMIS Core Team will prepare an annual budget for the project, based on approved annual work plans and will be responsible for producing variance analysis reports comparing planned to actual expenditures on a monthly and quarterly basis. The periodic variance analysis will enable the timely identification of deviations from the budget. These reports will be part of the IFRs that will be submitted to the Bank on a quarterly basis. The PFMRAP Project Accountant will coordinate the budgeting process in conjunction with the IFMIS CL.

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32. Accounting arrangements: The project will use the current existing computerized IFMIS for project financial management and the production of accounts. The IFMIS has inbuilt controls to only allow authorized access to project funds, has a unique identifier for the project and all transactions of the project will be managed, using procedures that are designed to ensure authorized and tracked access and use of project funds. The IFMIS is capable of timely transaction processing with adequate accounting controls, production of project annual financial statements, IFRs, and other reports as required for the effective management and monitoring of the project. The project is using a cash basis of accounting as prescribed under the Cash Basis Standard issued by the International Public Sector Accounting Standards Board. The accounting procedures that apply are the normal GoL procedures for projects, supported by cash transfers from the Development Fund.

Internal auditing, internal controls and staffing arrangements 33. Internal Auditing: Due to the low capacity of Internal Audit in the Kingdom of Lesotho to service the donor funded projects, the project will rely on the external audit and supervision missions to enhance the internal control environment. 34. Internal Control Systems: The normal GoL project internal control arrangements will apply to the project. The project envisages using staff from the GoL, complemented by technical assistance in the PFM Reform Secretariat, to execute and control the project.

35. Staffing Arrangements: The PFM Reform Secretariat will provide for overall fiduciary management, monitoring and evaluation, project oversight, and coordination. A dedicated Project Accountant will coordinate all financial management aspects of the project.

Financial reporting arrangements 36. The PFM Reform Secretariat will prepare quarterly un-audited IFRs for the project in a form and content satisfactory to the Bank, which will be submitted to the Bank within 45 days after the end of the quarter to which they relate. The project will use the current formats of the IFRs. 37. The IFRs submitted to the Bank will contain the following statements:

• Statement of Sources and Uses of Funds; • Statement of Uses of Funds by Project Activity/Component; • Designated Account (DA) Activity Statement; • Bank Statements for both the Designated and Project Account; • Summary Statement of DA Expenditures for Contracts subject to Prior Review; and • Summary Statement of DA Expenditures not subject to Prior Review.

38. The project annual financial statements will be prepared using International Public Sector Accounting Standards. These statements shall be submitted to the Bank within 6 months after the end of the accounting year. The financial statements will comprise of:

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• A Statement of Sources and Uses of Funds/Cash Receipts and Payments, which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments by third parties on behalf of the entity.

• The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement of Cash Receipts and Payments being cross-referenced to any related information in the notes; and

• A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement.

Auditing arrangements 39. Annual project audited financial statements, including the auditor’s opinion and a management letter, will be submitted to the Bank not later than six (6) months after the end of each fiscal year. Given that the Office of the Auditor-General will be a direct beneficiary under the PFMRAP, it was agreed with the GoL for the audit of the project to be subcontracted to an independent private audit firm, to be procured in agreement with the African Development Bank and EU and conforming to normal Bank requirements. The cost of the audit will be financed from the credit. 40. The external auditor will be required to express a single opinion on the project financial statements. In addition, a detailed management letter containing the auditor’s assessment of the internal controls, accounting system and compliance with financial covenants in the financing agreement, suggestions for improvement, and management’s response to the auditor’s management letter will be prepared and submitted to management for follow-up actions.

Implementation Support Plan 41. Based on the outcome of the FM risk assessment, the implementation support plan in Table 7 below is proposed. The objective of the implementation support plan is to ensure that the project maintains a satisfactory financial management system throughout the project’s life.

Table 7: FM implementation support plan FM Activity Frequency

Desk reviews Interim financial reports review Quarterly Audit report review of the program Annually Review of other relevant information Continuous as they become available In-field implementation support missions Review of overall operation of the FM system Bi-annually

Monitoring of actions taken on issues highlighted in audit reports, management letters, and other reports

As needed

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Conclusion of the assessment 42. The conclusion of the assessment is that the financial management arrangements are acceptable to the Bank. The overall residual risk rating is moderate hence the project will have in-field supervision missions twice a year. Funds flow and disbursement arrangements 43. Banking arrangements: The Accountant-General will authorize the opening and use of a Designated Account (as part of the GoL Development Fund), denominated in United States Dollars (US$), at the CBL to receive the funds from IDA. Local project expenditures will be paid from the normal Treasury Bank accounts, through normal IFMIS supported processes, and reimbursed by transfers from the Designated Account. Foreign currency project expenditures will be paid directly from the Designated Account at the CBL. 44. Funds flow arrangements: Upon effectiveness of the financing agreement and submission of a withdrawal application, the Bank will disburse an initial amount not to exceed US$ 200,000 based on the work plan for three months. Subsequent disbursements will be made on the basis of withdrawal applications and Statements of Expenditures.

45. The project will also have the option of using: (i) the Direct Payment disbursement method, involving direct payments from the loan account on behalf of the Government and to the suppliers of goods and services that have a value above a set threshold; and (ii) the Reimbursement disbursement method, whereby the Government makes payments for eligible expenditures and submits withdrawal application for reimbursement. 46. Further disbursement details are contained in the project’s Disbursement Letter.

C: PROCUREMENT

47. The key issues identified regarding procurement for project implementation are: (a) the need for the PFM Reform Secretariat to integrate the assigned Procurement Officer; (b) limited capacity of new PFM Reform Secretariat and IFMIS Core Team staff to construct, procure and manage several procurement contracts and adhere to World Bank Procurement and Consultant Selection Guidelines. 48. Proposed corrective measures to mitigate the overall risks include: (a) The PFM Reform Secretariat to integrate and capacitate the assigned Procurement Officer; (b) training of new PFM Reform Secretariat and IFMIS Core Team staff on World Bank Procurement and Consultant Selection Methods and Procedures; and (c) selected contracts to be subject to prior review. An acceptable Procurement Plan covering the first 18 months of the project has been prepared whilst a Procurement Manual for the PFMRP is under development. 49. The Risk Assessment is rated as MODERATE, taking into account the mitigation measures proposed above.

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50. Risk mitigation action plan. The following actions are required to mitigate the procurement risk and facilitate the implementation of the project.

Table 8: Procurement Risk Assessment and Mitigation

Risk Mitigation/Action Responsibility

Procurement Officer not in place leading to inability to manage major procurements and consultant selections

The PFM Reform Secretariat to complete the selection of a qualified and experienced Procurement Officer before the commencement of major procurements and consultant selections.

PFM Reform Secretariat

Limited capacity for new PFM Reform Secretariat and IFMIS Core Team staff to assure adherence to World Bank Procurement and Consultant Selection Guidelines

a) In country training of PFM Reform Secretariat and IFMIS Core Team staff on World Bank Procurement and Consultant Selection Methods and Procedures.

b) Selected contracts to be subject to prior review

c) Completion of PFMRP Procurement Manual

Bank / PFM Reform

Secretariat

51. All procurement to be financed under the proposed project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011 and the provisions stipulated in the Legal Agreement. For International Competitive Bidding (ICB) and National Competitive Bidding (NCB), all procurement of goods, works and non-consultant services will be done using the Bank’s Standard Bidding Documents (SBD). All consultant selection undertaken for firms will be done using the Bank’s Standard Requests for Proposals. The project will carry out implementation in accordance with the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD and IDA and Grants” dated October 15, 2006 and revised January 2011 (the Anti-Corruption Guidelines). 52. A Country Procurement Assessment Report (CPAR) for Lesotho was conducted in 2008. Public Procurement in Lesotho is regulated by the 2007 Public Procurement Regulations. The CPAR noted the considerable progress made in adopting a modern legislation to regulate public procurement. The CPAR also noted areas requiring improvement including (a) allowing for the use of different procurement procedures for projects financed by development partners; (b) harmonizing the conflict between the 2007 Public Procurement Regulations, the 1973 Financial Regulations and the 2007 Local Government Act; (c) reviewing the provision for domestic preference so that it relates to the content of the goods being provided and not to the nationality of the provider; and, (d) developing a procurement manual and accompanying bidding documents.

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53. The 2008 CPAR further highlighted limited capacity of the regulator - the Procurement Policy Advisory Division - under the MOF, and of the Procurement Units at central and district levels. Lack of specific training and experience in public procurement and weak contract management capacity were noted. The private sector reported to perceive public procurement as having limited competition, inadequate information and lengthy payment arrangements and viewed public procurement practices as detrimental to its interest and prone to corruption. Robust procurement oversight systems are still being developed with the 2008 PPR providing for a dispute resolution process managed by an Appeals Panel appointed by the PPAD which may limit its independence.

54. The Government of the Kingdom of Lesotho has started implementing some of the CPAR recommendations: the redrafting of the 2007 Public Procurement Regulations; the finalization of the Procurement Manual and the standard bidding documents; a review of the current Center for International Policy Studies program to consider the introduction of a public procurement module; the recent introduction of the Procurement Tribunal under the PFMA bill to handle procurement disputes; and the implementation of the IFMIS. Other matters still remain to be addressed.

55. National Competitive Bidding shall follow the Government of the Lesotho procurement procedures provided that the following provisions apply – (a) Use of the Banks SBD; (b) Registration/classification of bidders by PPAD, Ministry of Public Works and Transport or any other body shall not be used as a condition of bidding; (c) Preferences will not be granted based on citizen degree of ownership and local content; (d) Bracketing to provide for the rejection of bids which are in excess of 15% of the cost estimate will not be used; (e) Award of contract must be made to the lowest evaluated tender; and (f) Award of contracts shall be publicly disclosed in the media for wide circulation.

Procurement of Supply and Installation Contracts 56. The project will finance 4 supply and installation contracts for the following activities -

a) Improving the existing WAN - estimated at US$ 200,000 (procured through shopping) b) Improving the existing IFMIS platform – servers and uninterrupted power supply

estimated at US$ 152,101 (procured through shopping) c) d) The extension of the WAN for connectivity of Ministry offices in Districts is estimated at

US$ 1.540 million (procured through NCB). e) The supply and installation of 900 Network Computers is estimated to cost no more than

US$ 774,772 (procured through NCB).

57. GoL will be executing and financing the following activities as their 10% contribution to the total project costs -

a) IFMIS data center electrical works - estimated at US$ 50,000 b) IFMIS data center generators upgrade - estimated at US$ 40,000 c) IFMIS data center upgrade of cooling systems - estimated at US$ 40,000

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d) Upgrade of IFMIS primary and backup data center servers for upgraded version of IFMIS Software - estimated at US$ 461,737

Procurement of Services (other than consultants’ services)

58. Services (other than consultants’ services) to be procured under the project are estimated in aggregate at not more than US$ 1.298 million. It will include services related to the development, configuration, installation, implementation support and licensing of the existing IFMIS software, as well as 1 year post go-live support on the IFMIS application and technical architecture. The services will be directly contracted to the authorized supplier of the existing IFMIS software. The contract will be subject to World Bank’s prior review and approval.

Selection of Consultants

59. Consultant services required from firms and individuals are estimated in aggregate at not more than US$ 1.342 million to cover consultancies for: (a) Technical Assistance support to the project; (b) technical reviews and evaluations; (c) training module development; (d) legal reviews; among others. Procurement in accordance with prior thresholds is outlined in Table 11 below.

Other

60. Training. This category would cover all costs related to the carrying out of study tours, training courses and workshops, i.e., hiring of venues and related expenses, stationery, and resources required to deliver the workshops as well as costs associated with financing the participation of community organization in short-courses, seminars and conferences including associated per diem and travel costs. Training projects would be part of the Annual Work Plan and Budget and will be included in the procurement plan. Prior review of training plans, including proposed budget, agenda, participants, location of training, and other relevant details, will be required only on an annual basis.

61. Operating Costs. Incremental operating costs relate to the project implementation services to be provided by the PFM Reform Secretariat to the IFMIS Core Team. These will be procured using the Borrower's administrative procedures, acceptable to the World Bank.

62. Procurement Manual. The procurement procedures and SBDs to be used for World Bank-funded procurement will be presented in the Procurement Manual to be developed in line with the guidelines of the World Bank. The Procurement Manual will include component descriptions, institutional arrangements, regulatory framework for procurement, approval systems, activities to be financed, procurement and selection methods, thresholds, prior review and post reviews arrangements and provisions, filing and data management and the procurement plan for the first 18 months for all project components. The Procurement Manual once developed will be updated from time to time by the PFM Reform Secretariat.

63. Assessment of the PFM Reform Secretariat capacity to implement procurement. A full time Procurement Officer has been assigned to the PFM Reform Secretariat, with relevant experience in GoL and Bank procurement.

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64. As per the Public Procurement Regulations of Lesotho (2007), procurement has been decentralized to procuring entities, and all procurement decisions will therefore be made at MoF level. Delays in obtaining procurement clearances are therefore not envisaged.

65. Procurement Supervision. Given the country context and the project risk indicated above, an annual Post Procurement Review will be conducted in addition to the semi-annual supervision missions by the World Bank. The annual Post Procurement Review will be carried out either by the World Bank or World Bank-appointed consultants. The frequency of procurement supervision missions will be once every six months and special procurement supervision for post procurement reviews will be carried out at least once every twelve months.

66. To enhance the transparency of the procurement process, the Recipient shall publish the award of Contracts procured under NCB procedures or selected under QCBS method, generally within two weeks of receiving the World Bank no-objection to the recommendation of award of Contract, in accordance with the Procurement and Consultant’s Guidelines. Additional procedures, as elaborated in the procurement manual, will govern the disclosure under other procurement and selection methods.

67. Procurement Plan. The Borrower has developed a draft Procurement Plan for project implementation. The Procurement Plan will be updated annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Goods, Works and Non-consulting Services

68. Prior review threshold. Table 9 outlines procurement decisions that are subject to prior review by the Bank (as stated in Appendix 1 to the Guidelines for Procurement) -

Table 9: Prior Review Threshold: Good, works and non-consulting services Procurement Method Prior Review Threshold

(US$) Comments

WORKS 1. ICB >$7,000,000 All 2. NCB >$200,000 - <$7,000,000 As per procurement plan 3.. Shopping (Small contracts) <$200,000 As per procurement plan 4. Direct Contracting N/A All GOODS AND NON CONSULTING SERVICES (excluding Consultants Services) 1. ICB >$1,000,000 All 2. NCB >$100,000 - <$1,000,000 As per procurement plan 3. Shopping <$100,000 As per procurement plan 4. Direct Contracting N/A All

69. Procurement packages subject to Bank prior and post review. Table 10 outlines the procurement packages for supply and installation contracts and non-consulting services that will be subject to Bank prior review and post review -

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Table 10: Procurement Packages - Supply and Installation Contracts and Non-Consulting Services Ref No.

Contract (Description)

Estimated Cost

(US$)

Procure-ment

Method

Review by Bank (Prior/ Post)

Expected Bid-

Opening Date

Comments

SUPPLY AND INSTALLATION CONTRACTS AND NON CONSULTING SERVICES SI-1 Improvement of the IMFIS

Wide-area Network connectivity

200,000 Shopping Post Feb 2014

SI-2 Improvement of servers and UPS at primary & backup IFMIS data centers

152,101 Shopping Post Feb 2014

SI-3 Extension of IFMIS WAN for connectivity of Ministry offices in Districts

1,540,745 NCB Prior Jun 2014

SI-4 Supply and installation of 900 IFMIS Network Computers

774,772 NCB Prior Jun 2014

SI-5 Licensing, installation, configuration, and implementation support for the upgrade of the IFMIS software

1,297,910 Direct Contracti

ng

Prior N/A Existing IFMIS

Supplier

Selection of Consultants

70. Prior review threshold. Table 11 outlines consultant selection decisions subject to prior review by the Bank (as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants) -

Table 11: Prior Review Threshold: Consultants Selection Method Prior Review

Threshold Comments

1. QCBS and QBS >, =$100,000 All 2. FBS, QBS, LCS and CQS <$100,000 As per procurement plan 3. Single Source (Firms) N/A All 4. Individual Consultants >, =$50,000 All 5. Individual Consultants <$50,000 As per procurement plan 6. Single Source (Individual Consultants) N/A All QCBS = Quality- and Cost-Based Selection (Section II of the Consultants’ Guidelines) LCS = Least Cost Selection (Para 3.6, of the Guidelines) CQS = Selection based on Consultants’ Qualifications (Para 3.7 of the Guidelines) FBS= Fixed Budget Selection (Para 3.5 of the Guidelines) QBS = Quality Based Selection (Para 3.2 of the Guidelines)

71. Short list comprising entirely of national consultants. Short list of consultants for services, estimated to cost less than US$ 100,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. All Terms of Reference, irrespective of the value of the consultancy assignment, are subject to prior review.

72. Consultant procurement packages. Table 12 outlines the procurement packages for consulting services that will be subject to Bank prior review and post review –

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Table 12: Procurement Packages - Consultancy Assignments Ref. No. Description of Assignment

Estimated Cost (US$)

Selection Method

Review by Bank Prior/ Post

Expected Proposals Submission Date

Comments

C-1 Activation of the IFMIS EFT interface with the CBL 100,000 CQS Post March 2014

C-2 Cleaning IFMIS databases & improving accounting controls 300,000 CQS Prior March 2014

C-3 PFM business process re-engineering 200,000 CQS Prior March 2014

C-4 Change management and training 572,735 QCBS Prior March 2014

C-5 Audit 50,000 LCS Post Jan 2015

D: RESULTS MONITORING & EVALUATION

73. Progress towards the PDO will be monitored through the PDO level and intermediate level results indicators in Annex 1 and will be conducted on a continuous basis under the leadership coordination of the PFM Reform Secretariat. The M&E function under the Secretariat and the designated M&E officer will be in charge of coordination for soliciting and deriving the primary data and information to report on project progress as outlined in Annex 1. The Annex provides the baselines, annual targets, frequency of data collections, data source and methodology, and responsible institutions for data collection for all indicators. The project’s results framework is, to a large extent, based on the PEFA indicators to measure progress against the PDO and with intermediate indicators to reflect performance at component levels. 74. The main data collection methods for PDO level indicators will be based on the PEFA PFM performance measurement methodology - (i) annual self-assessment of key indicators led by the PFM stakeholders and coordinated by the PFM Reform Secretariat; and (ii) biennial PEFA assessments by independent external assessors. These assessments, and especially the self-assessments, will inform the project progress monitoring and be integral to the IFMIS implementation and the accompanying capacity development initiatives.

75. Reviews of project implementation progress will be undertaken annually and used to identify and discuss issues and bottlenecks that may arise and impede achievement of targeted outcomes. The issues raised will be discussed by project management and Bank implementation support missions and resulting recommendations will become action points for implementation follow-ups and subsequent implementation support. The Government’s PFM Improvement & Reforms Steering Committee (IRSC) will receive and review strategic information on implementation progress from the IFMIS Component Leader (in respect of the project), and the PFM Reform Secretariat in respect of the entire PFM reforms program in the country, and provide strategic guidance to enable the project to achieve its development objectives.

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ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)

Operational Risk Assessment Framework (ORAF) Lesotho: LS-PFM Reform Support Project (P143197)

Stage: Board .

Project Stakeholder Risks Stakeholder Risk Rating Moderate

Risk Description: Ownership –Consensus building on the content, pace, and relevance of the reforms will be critical to not only minimizing the opposition to PFM Reform Action Plan (PFM RAP) but also essential in building trust and a strong coalition and advocacy on the importance of improving PFM systems to support government accountability and service delivery objectives. Without these, there is a likelihood of resistance from MDAs to the changes in processes, procedures and attitudes that are critical to a successful PFM reform implementation including the IFMIS. Donor relations Coordination–There are four key development partners actively supporting PFM reforms in Lesotho (the World Bank, the EU, the AfDB and the IMF). This level of interest poses the risk of uncoordinated or out-of-sequence policy advice, TA and support that could jeopardize the efficacy and sustained momentum of the reforms. This is

Risk Management: The IRSC is being reconstituted and strengthened by the Government to ensure greater inclusiveness and collaboration between participating MDAs and with development partners. In addition, a national workshop of key reform component leaders was hosted by the Government on November 11, with participating MDAs to discuss/brainstorm on the modalities for implementing the PFM Reform Action Plan. Amongst the outcomes of the workshop is clarity of the PFM Reform Action Plan objectives, scope and implementation arrangements/responsibilities.

Resp: Client Status: In Progress Stage: Implementation

Recurrent:

Due Date:

Frequency:

Quarterly

Risk Management: The Government through the PFM Reform Directorate has committed to a phased implementation of the activities under the PFM RAP. This will provide sufficient opportunities for detailed consultations and testing of new concepts. In addition, through component 3 of this operation - supporting an effective change management strategy - the PFM stakeholders across Government will be involved at every step of the project implementation. Resp: Client Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Resp: Client Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

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particularly so, given that (i) the World Bank's operation supports one aspect (i.e. component 5) of the PFM RAP; (ii) the activities under the other 7 components of the PFM RAP have direct impact on the progress and indeed outcome of the IFMIS.

Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Substantial

Risk Description: The implementation of the project will be dependent on various implementing entities outside the MoF (as project sponsor). Without a strong institutional arrangement together with technical support to the participating MDAs, as well as an agreed structure or roles and responsibilities between MoFDP units, there is a risk of unsuccessfully project implementation. This risk is accentuated by the level of weakness of the Improvement & Reform Steering Committee (IRSC) as it relates to a strong strategic leadership that is based on inter-ministerial collaboration. In addition, different capacities exist in the different implementing entities and there is as yet not a strong central PFM Program Coordination Unit established. The IRSC is also as yet not fully effective as regards the implementation of a new PFM Reform Action Plan. Procurement Capacity: (i) Lack of proficient skills /capacity and experience to undertake and manage normal procurement by the implementing entities

Risk Management: Dedicated programme staff in MoF for coordinating and monitoring the programme. Components of the programme include activities (capacity building, change management, professionalization) to improve the competence of relevant staff.

Resp: Client Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Risk Management: The PFM Reform Secretariat will complete the selection of a qualified and experienced Procurement Officer before the commencement of major procurements and consultant selections. The Government through the support from the Bank will engage in in-country training of PFM Reform Secretariat and IFMIS Core Team staff on World Bank Procurement and Consultant Selection Methods and Procedures. In addition, selected contracts will be subject to prior review Resp: Both Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Risk Management: The GoL has articulated a program implementation arrangement with component and sub-component leaders identified, and the associated roles/responsibilities clearly defined. Thereafter the project will provide technical and advisory support to the relevant implementation teams to ensure that the requisite skills are developed. For instance, the project aims to work with the Lesotho Center of Accounting Studies to strengthen the capacity and training capability of the Application Support team to deliver the necessary accounting and systems training to end users on a sustainable basis.

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(ii) Lack of familiarity with current trends and updates of World Bank procurement guidelines and procedures; (iii) Weak capacity of the end-users/ beneficiary agencies in drafting TORs and technical specification in a generic way and in accordance with World bank requirements; (iv) Lack of understanding of the role of end-users/ beneficiary agencies in the procurement process and project implementation resulting in delays in the implementation; Financial Management Capacity: Challenges in coordinating the activities of the various beneficiary agencies and spending units. Lack of effective monitoring and tracking of activities and expenditure.

Resp: Both Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Governance Rating Moderate

Risk Description: Poor governance / weak fiduciary environment

Risk Management:

A well-represented and effective PFM Reform Steering Committee (IRSC) supported by a well capacitated PFM Reform Secretariat, and Core IFMIS Implementation Team, will ensure smooth project implementation. The PFM Reform Secretariat will have dedicated financial and procurement staff, with a sound internal control framework and systems and effective internal audit arrangements.

Resp: Client Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Risk Management:

Bank procurement procedures to apply. Proper segregation of authorization, implementation and recording functions to be assured. Prior and post review of contracts.

Resp: Client Status: Not Yet Due

Stage: Implementation

Recurrent:

Due Date:

Frequency:

CONTINUOUS

Project Risks

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Design Rating Moderate

Risk Description: The project has been designed based on the ability of the Government to resolve key adaptive and architectural issues such as: (i) lack of month-end/year-end IFMIS closures; (ii) existence of separate databases at MDAs and sub-accountancies; (iii) bypassing of IFMIS commitment controls; (iv) lack of EFTs for payment processing. Addressing these issues will require specific policy commitment of the GoL including the transition to a centralized TSA; redeployment of sub-accountancies to district councils; and the use of a single general ledger for the Consolidated Fund The project aims at correcting a dysfunctional IFMIS environment, and cuts across process, data, technical and capacity issues

Risk Management: The authorities have signaled a commitment to adopting these policy measures. The project as designed will also facilitate the execution of these measures. Resp: Both Status: In Progress Stage: Both Recurrent: Due

Date: 03-Mar-2014

Frequency:

Risk Management: Sound diagnostics have been carried out for the problems being experienced. The project has therefore been designed to specifically mitigate these problems. In addition, the project has been designed to ensure a phased approach facilitated through appropriate technical assistance with sufficient attention to sustaining capacity/skills.

Resp: Both Status: In Progress Stage: Both Recurrent:

Due Date:

Frequency:

CONTINUOUS

Social and Environmental Rating Low

Risk Description: Risk Management: There will be only minor works in IFMIS computer network sites and these are not expected to entail major safeguard issues.

Resp: Status: Stage: Recurrent: Due

Date: Frequency

:

Program and Donor Rating Moderate

Risk Description: Risk Management: The overall GoL PFM Reform program will be supported by the WB, EU, AfDB, and IMF (with TA). As far as possible support for the overall program will be "split" between the donors, but this may be

Regular IRSC meetings supported by a strong central PFM Reform Coordination Unit, and regular formal joint assessments of progress. Resp: Both Status: Not Yet

Due Stage: Imple

mentation

Recurrent:

Due Date:

Frequency:

CONTINUOUS

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somewhat artificial and activities supported by one donor may well affect a component supported by another. The demand for the GoL leadership, coordination and monitoring will be high, and there is yet to be established a strong central PFM Reform coordination unit. Timing and funds flow methodologies will also be different, potentially putting additional strain on implementation.

Delivery Monitoring and Sustainability Rating Moderate

Risk Description: Risk Management: There is a significant risk that the M&E requirements will pose a challenge to the IAs given the level of technical capacity. There is also the risk that other donors supporting the PFM RAP will seek parallel M&E reporting modules to satisfy their reporting requirement – hence testing the capacity of the PFM Reform Secretariat. In addition, end-users are unlikely to feel the effects of the project until at least the medium term unless there is periodic reporting of outputs and their linkage to overall PFM and NDSP goals. Implementing agencies have demonstrated ownership and commitment to the PFM reform process – as demonstrated by the painstaking process of finalizing the PFM RAP. To promote sustainability of reform objectives, careful consideration will have to be given to ensure capacity and institutional memory is sustained. Contract management and procurement capacity poses a significant risk in the short

TA support will be provided to augment capacity and transfer knowledge and expertise to civil servants. The recurrent cost implications of the program beyond closing date will be minimized through using and strengthening the country's existing capacity and systems. Resp: Client Status: Not Yet

Due Stage: Imple

mentation

Recurrent:

Due Date:

Frequency:

CONTINUOUS

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term despite the experience with World Bank –financed operations. Significant attention will have to be given to working with authorities on project management, especially procurement and contract monitoring, in the initial stages of the project

Overall Risk Overall Implementation Risk: Moderate Risk Description:

GoL IFMIS environment. The GoL has had nearly 4.5 years of experience in running the system, and understands the problems well. Strengthening of project governance, management and implementation arrangements are underway.

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ANNEX 5: IMPLEMENTATION SUPPORT PLAN

LESOTHO: PFM Reform Support Project (P143197)

A: STRATEGY AND APPROACH FOR IMPLEMENTATION SUPPORT

1. Project implementation is the responsibility of the GoL. Nevertheless, an implementation support (IS) strategy has been developed, as part of project design, to enable the Bank and other participating development partners to play a crucial facilitation role in the GoL implementation of the project. On a semi-annual basis, the World Bank will conduct implementation review and support missions with terms of reference that will include the provision of guidance and technical advisory support to the various implementing units under the project across all components, sub-components and activities. In between the formal semi-annual implementation reviews, specialist support missions will also be conducted to provide additional hand-holding support to the MoFDP and the various implementing teams and respond to emerging challenges. Follow up on the status of implementation of agreed actions, geared to delivery on results, will be a key focus of all implementation support missions.

2. Given that project implementation risks would need to be managed in a timely, efficient, and effective manner, the Bank will review and give cognizance to the measures being implemented by the GoL towards mitigating the essential risks arising during implementation and provide the requisite hands-on technical and advisory support to the project implementing agencies during the life of the project.

3. In addition to the Bank’s semi-annual review missions in the field and the regular implementation support visits by the task leader and other specialist members of the task team, the following will serve as the basis of the arrangements and approach for supporting the implementation of the project: (i) a South Africa-based experienced Bank staff, who will provide continuous support and guidance to the project implementing agencies, strengthen the Bank’s oversight of compliance with the implementation covenants, serve as the coordination interface with the GoL counterparts on project related issues, and represent the Bank at coordination meetings between the donor partners as part of the donor PFM working group; (ii) regular technical meetings by audio and/or VC in between formal missions, between the GoL counterparts and the task team, to discuss emerging implementation risks and bottlenecks; (iii) regular one-to-one interactions between the in-country Senior Operations Officer (as member of the task team) and the implementing agencies to cater for ad hoc support requirements; (iv) synthesis of feedback on the outcome of meetings of the GoL PFM reform steering committee as well as the project implementation team; (iv) prior reviews of procurement actions falling within the threshold as well as recurring reviews of procurements subject to post-review; (v) reviews of M&E reports and milestones achieved; and (vi) interim financial and progress reports, and annual audited financial statements of the project. All these will be further strengthened through Bank’s ‘enhanced supervision’ of the project by a team of well qualified and experience professionals, including appropriately skilled consultants.

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4. The need to exercise reasonable flexibility in project implementation and by fine-tuning of the scope, pace, and substance of the reforms in response to changing circumstances will be agreed with the GoL in support of achieving sustainable outcomes. To this end, the Bank will, when necessary, enter into dialogue with the GoL on any emerging issues/risks that may have a bearing on the achievement of the project’s objectives. The goal will be to, as much as possible, better redirect the implementation actions towards achieving the project outcomes.

5. As part of the governance and coordination arrangement, the project will be implemented using the existing systems and institutional structures. However, recognizing the inherent implementation capacity challenges, the project will provide the requisite technical assistance and advice needed for facilitating the effective implementation and coordination of the project. To this end, the TA will support the IFMIS Component Leader in the preparation - prior to each formal implementation support mission - of detailed progress report on the project’s activities as well as an updated annual plan and budget, consistent with the project plan and costs. Lessons from the implementation of Financial Management Information Systems across the Bank point to more intensive supervision and client hand-holding during, at least, the first 24 months of project implementation. 6. Coordination amongst the development partners will be key to achieving results on the ground. Through the PFM Sector Working Group, the Bank will ensure, among others, (i) the harmonization and alignment of reform interventions to avoid duplications, (ii) sequencing of donor support (some of which may be parallel) within the overall framework as defined in the holistic PFM Reform Action Plan; and (iii) the sharing of information on all aspects of donor programs impacting PFM as a whole. 7. Sustaining high quality supervision throughout project life will be critical to assure delivery of outcomes (not merely outputs) within the project’s 3-year implementation period. The task team will be led by an experienced and seasoned professional in PFM reforms, and will include a mix of skills that is adequate to cater for a thorough supervision of this technical assistance project. The team will include economic policy and public sector specialists; IFMIS implementation specialists (technical and functional); M&E specialist; experienced public sector accounting, auditing, and reporting specialists; financial management and procurement specialists – all with experience in supporting PFM reform projects in environments similar to Lesotho. The AfDB, DFID, and EU technical staff will form part of the review missions as necessary.

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ANNEX 6: SUMMARY OF THE 2012 PEFA PFM PERFORMANCE ASSESSMENT

LESOTHO: PFM Reform Support Project (P143197)

EXECUTIVE SUMMARY18

A: CONTEXT OF THIS ASSESSMENT

1. Lesotho is a small and mountainous country entirely surrounded by its more developed neighbour South Africa. Its population is about 2 million, with national income per head of about US$1,000 a year, of which about 20 per cent comes from remittances from Lesotho citizens working in South Africa. Real GDP has been growing at about 3.5 per cent a year despite the current global recession. Growth over the last decade, apart from rising public consumption and investment, has depended on manufactured goods (mainly textiles) exported outside the Southern African Customs Union (SACU), on water royalty receipts from South Africa, and more recently on the development of diamond mining. 2. The incidence of poverty and unemployment is high (43 per cent of the population were living on less than US$ 1.25 a day in 2005), with much of the population still engaged in subsistence agriculture. Public expenditure, current and capital, accounts for about 50 per cent of GDP, with between a third and a half of government revenues coming from Lesotho’s share of aggregate SACU receipts. Lesotho is very adversely affected by HIV/AIDS, with 40 per cent of the population between the ages of 15 and 49 HIV-positive; as a result average life expectancy fell from 59 years in 1990 to 44 in 2005. According to the UNDP Human Development Report 2012 it has recovered to 48 years.

B: INTEGRATED ASSESSMENT OF PFM PERFORMANCE

A. Credibility of the Budget 3. Budget credibility is still inadequate overall and has not improved materially since the last assessment. It is satisfactory as measured by the overall variance in expenditure (PI-1), but not in terms of the capacity of individual Ministries to stick to the approved budget, as measured by PI-2. The variance arises mainly because of large variances on 9 capital expenditure lines. The overall composition variance was relatively high, exceeding 10% in all three years 2009/10 to 2011/12. Domestic revenue collections, excluding revenue from the Southern African Customs Union, (SACU) exceeded budget in all three years. Very serious doubts remain about the accuracy and reliability of the data used for the assessment as there were large differences between the aggregate expenditure and revenue figures given for the same period in different reports.

18 Public Expenditure and Financial Accountability (PEFA) Lesotho, ACE International Consultants, European Union, November 2012.

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4. The Treasury has no reliable information about the stock of arrears, as the Integrated Financial Management Information System (IFMIS) accounts/aged payables module shows negative figures for overdue payments. Moreover, some Ministries, Departments and Agencies (MDAs) have been circumventing the internal control system and engaging suppliers to provide goods and services without purchase orders registered in IFMIS. However there are no indications that this is happening now on a large scale: a recent audit conducted by the Internal Audit Department of the Ministry of Finance and Development Planning found arrears equivalent to only about one per cent of total annual budget expenditure, about half of which were registered in the system, with the remainder resulting from orders irregularly placed outside it. B. Comprehensiveness and Transparency 5. The revised Chart of Accounts introduced with the new IFMIS at the beginning of 2009-10 should eventually make possible consistent comparisons between budgets and out-turn broken down by function, sub-function, administrative unit and economic category. However, there have been delays in the production of IFMIS reports. Documentation submitted to Parliament with the Budget is consistent and comprehensive, and now includes material on the debt stock, although there is still no information on financial assets. Fiscal information presented with the Budget is now more readily available to the public. There may be relatively small amounts of expenditure by government units, particularly in the areas of health and education, which are financed through charges not passing through the Treasury. There remain significant gaps in the budget coverage of projects financed outside the Treasury by development partners. 6. Allocations for local government capital expenditure have been made in accordance with a transparent formula, but local government expenditure is not reported by functional categories. Little progress has been made since 2009 in instituting effective overall monitoring of public enterprises (PEs) and their fiscal risk as financial reporting by PEs is often late and unreliable. Provisions in the new PFMA Act, if implemented, would improve the situation. No financial targets have been set for PEs, and there is no central machinery to review the economic case for proposed investments and assess whether the returns will be sufficient to service and repay any borrowing required. Local government is too small to pose any significant fiscal risk to the central government. C. Policy-based budgeting 7. Lesotho’s budget process remains orderly and well understood, and some progress has been made in embedding the medium-term dimension into fiscal planning. Although the Budget Call Circular (BCC) is comprehensive and reflects ceilings approved by Cabinet, and the budget is approved consistently before year-end, Ministries, Departments and Agencies (MDAs) have too little time for their budget submissions. Most Ministries are now preparing Budget Framework Papers (BFPs) which project their current and capital expenditure over a period of three years, and take into account the on-going costs of newly-commissioned investments. However, uncertainties about future revenues from the Southern Africa Customs Union (SACU) add greatly to the difficulty of medium-term planning and may explain the large divergences between the following year’s expenditure as presented in a BFP produced in the late summer and

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the actual amounts included in the budget for that year presented in the following January. The execution of investment projects appears to diverge significantly from plans shown in each year’s budget. Medium term fiscal planning may need to accommodate different scenarios: a more rigorous prioritization of different investment projects according to their economic returns could help to adapt to different situations. Although the global recession has resulted in an increase in Lesotho’s public external debt, debt sustainability should not be a problem as long as prudent fiscal management is maintained in accordance with the undertakings given to the IMF in the context of the current Extended Credit Facility (ECF) programme. D. Predictability and Control in Budget Execution 8. The Lesotho Revenue Authority (LRA) has collected more revenue than budgeted in each of the years considered for this assessment (the three years 2009-12). LRA carries out extensive education activity to assist taxpayers to comply with the requirements of self-assessment for corporate and personal income taxes and VAT. Each taxpayer has a unique Taxpayer Identification Number (TIN) used for all taxes and also corporate business licenses. Tax clearance is required for the renewal of business and commercial vehicle licenses, and LRA is seeking the agreement of commercial banks not to open business bank accounts without tax clearance being presented. Heavy penalties can be imposed for under-declaration and late payment of tax. On the other hand practitioners say that the level of sophistication among both taxpayers and tax collectors is low, and that tax assessments imposed following inspections in many cases are based on a misunderstanding of the facts. These result in a significant volume of complaints and administrative appeals which are settled in a non-transparent way. LRA is said to have changed its approach on a number of issues without notice or explanation to taxpayers. A Tax Appeals Tribunal has been constituted, but has yet to hear any cases: a small number of cases have reached the High Court, where judgments have always been given in favor of LRA. The integrated revenue management system foreseen in the 2009 assessment has not yet been installed. The level of tax arrears is significant (about 8 percent of annual collections) and the amount has been increasing. 9. Although there is no systematic forecasting and monitoring of cash flows, spending authorities have had reasonable assurance that cash will be available to meet any commitments within available budgetary provision. The quarterly releases of funds have thus not operated as a constraint on the undertaking of commitments. Payroll controls are weak, and the situation has been made worse by the decentralization of responsibility for controls and reconciliations to the line Ministries. The Procurement Regulations (currently under review) are generally consistent with good international practice, but responsibility for procurement rests with each Ministry, and there is no systematic collection of information which would demonstrate their compliance. The IFMIS includes a commitment control which prevents payment without a purchase order having been introduced into the system. A reasonable set of internal financial controls (the 1973 Finance Regulations, shortly to be replaced by the new draft Treasury Regulations) is in place, but audit reports suggest that they are widely disregarded. Internal audit is improving its coverage and range of work, but needs substantial further development to match best international practice.

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E. Accounting, Recording, and Reporting 10. This was an area of particular concern in the 2009 assessment, and remains so, despite (or because of) the introduction of IFMIS. There have been serious difficulties with the performance of both the software and hardware elements of the new system, and the GoL has found it very difficult to train and retain the people needed in both MFDP and spending Departments to operate the new system successfully. There is widespread failure to undertake bank reconciliations and to clear suspense accounts and advances. Although IFMIS should make possible the flexible and timely generation of accurate in-year budget execution reports, problems remain in the operation of the system and its interfaces with other databases which cast doubt on the accuracy of the information produced. The most recent published annual financial statements (for 2007-08) were again heavily criticized by the Auditor General, and there is no reason to expect any improvement for 2008-09 for which the audit report has been awaiting tabling in Parliament by the Minister of Finance since March 2012. There is a three year backlog in the production of consolidated financial statements and no statements have been submitted for audit within 15 months of the end of the financial year for many years. No comprehensive information is collected on the resources received (in cash or kind) by service delivery units in any major sector. One good area is that public debt is efficiently managed and records are up-to-date, reliable and reconciled. F. External Scrutiny and Audit 11. The Office of the Auditor-General (OAG) undertakes financial, compliance and performance audits and aims to comply with international standards. But its resources are limited, and it is still treated as a government department, reporting to Parliament through the Ministry of Finance. The new audit law to strengthen the independence of the OAG which was foreshadowed in the 2009 assessment has still not been put before Parliament. The delay in the preparation of the government’s financial statements, and thus in the presentation to Parliament of the annual audit reports, deprives audit work of much of its force: findings and recommendations are outdated by the time they are published. The OAG’s practice of not publishing any results from current inspection activity until they can be mentioned in an annual audit report on the year in question enables MDAs to ignore their work in the knowledge that there is little risk of public pressure to take remedial action. The OAG has begun to undertake performance audits, but the main focus seems still to be on compliance failures rather than on assessing the impact on the efficiency and effectiveness of public services. Parliamentary scrutiny of the annual budget may be seen as adequate, given the limitations of the Westminster model which enables the executive to maintain tight control over the details of budget proposals. Some progress was made during the 2007-12 Parliament in strengthening the work of the Public Accounts Committee (PAC), which with the assistance of the OAG was becoming more effective in questioning Chief Accounting Officers (CAOs, i.e. Principal Secretaries of Ministries) about the findings in the OAG reports. But there is no evidence of the PAC reports having much impact on government practices.

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G. Donor Practices 12. The World Bank, EU and the African Development Bank (AfDB) are currently providing budgetary support to Lesotho, although there have been delays in payments, and EU assistance has been cut back because of the GoL failure to fully meet the conditions for full disbursement. Most donors provide information for inclusion in annual budgets, but reporting on disbursements has been incomplete, and actual capital expenditure often differs markedly from the plans set out in the budget. Use of national procedures remains limited. The World Bank, AfDB and Irish Aid are using the services of the OAG for the audit of projects, and government procurement procedures may be agreed on a case by case basis for particular projects. Other major donors – Millennium Challenge Corporation and EU – insist on their own procedures. H. Impact of strengths and weaknesses on budgetary outcomes Aggregate budget discipline 13. Lesotho has to contend with unpredictable fluctuations in its largest revenue stream, revenues from SACU. In the past, the impact of these fluctuations has been reduced by Lesotho’s ability to draw on a cushion of accumulated budget surpluses. In present circumstances aggregate financial discipline is effectively being enforced by the need to comply with the conditions of the IMF Extended Credit Facility (ECF) which is underpinning the country’s external position. Unreliable fiscal reporting, inadequate internal financial controls and weak cash management identified in this assessment, all pose risks to the maintenance of financial discipline, and may result in enforced adjustments with an adverse impact on resource allocation and service delivery. Further strengthening of medium-term fiscal planning and investment prioritization could help to moderate the adverse impact of enforced fiscal adjustments. Allocation of resources 14. A sufficient strategic overview of the allocation of resources is currently lacking in Lesotho. Progress has been made in medium-term fiscal planning, but it is largely based on incremental changes from the present situation. Budgeting remains focused on inputs and on the immediate fiscal year. The structure of the civil service – the government is by far the largest employer in the country – does not seem to have adapted sufficiently to the impact of information technology on administrative processes, with administrative controls (e.g. the arrangements for vehicle licensing) set up to preserve present patterns of employment rather than assist in the development of the economy and the provision of a good service to the citizen. Some over-arching decisions about resource allocation may need revisiting, for example: - is the much higher priority accorded to tertiary rather than secondary education described in the recent World Bank Public Expenditure Review fully justified? Given that the government absorbs half of GDP, and that the proportions of GDP devoted to public expenditure on health and education are unusually high, should not more be expected in terms of services delivered? Inadequate transparency in reporting on and auditing the use of public resources helps to perpetuate unsatisfactory practices.

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Efficient service delivery 15. A number of the PFM weaknesses identified in this assessment have a clear adverse impact on service delivery. Inadequate planning of services, insufficiently competitive procurement, inadequate provision of information about the resourcing of schools and health facilities, weak staff discipline and the absence of any effective public questioning of the efficiency with which the government discharges its functions can all stand in the way of efficient service delivery. Recent fiscal adjustments achieved by cutting back on current expenditure on goods and services while protecting expenditure on wages and salaries are likely to have had an adverse impact on service delivery, as are delays in the execution of particular investment projects, including those financed externally. On the other hand efficient service delivery is assisted by good predictability of recurrent funding for spending ministries once it has been approved. Progress since 2009 16. This assessment identifies a number of areas where significant improvements in PFM have been made since 2009. The passing of the Public Financial Management and Accountability Act 2011 was an important step forward, but it has yet to be adequately implemented. The installation of the new Integrated Financial Management Information System (IFMIS) should eventually make it possible to overcome the problems of accurate budget execution, accounting and reporting. But the way IFMIS was introduced, without piloting or adequate consultation with users, and without sufficient trained staff in MFDP and elsewhere in the government to operate and maintain the system satisfactorily, has given rise to many problems, and required financial controls and reconciliations of bank accounts and payrolls(for which responsibility was decentralized to MDAs when IFMIS was introduced) are not being adequately carried out. The promised new legislation on Customs and Audit has not been put before Parliament. Arrangements prepared in discussion with development partners to ensure that full information is collected at both budget and out-turn stages about externally funded projects implemented outside the Treasury have not been put into effect. Consolidated procurement information is not being collected; no arrangements are being put in place to ensure that the reporting requirements imposed on MDAs by the PFMA Act 2011 are complied with, and so on. There seems to be a lack of leadership from MFDP to ensure that effect is actually given to intentions. 17. Overall, progress since 2009 is rather disappointing. Table 2 shows the ratings in the 2009 and 2012 assessments for each Indicator and the extent to which they are comparable. Comparisons between one PEFA assessment and the next always have to contend with subjective elements resulting from different consultants being used, and there may also be differences in the availability of data (this assessment had particular difficulty in obtaining information from the Lesotho Revenue Authority (LRA) about aspects of the operation of the tax system). In terms of the ratings there have been clear improvements in PI-12 (development of medium-term fiscal planning), PI-17 (better monitoring and control over public debt) and PI-20 (introduction of control over commitments). Some of the Indicators (PI-2, PI-3, and PI-19) have been re-specified, so that no exact comparison with 2009 ratings is possible. In others there have been some apparent improvements in the ratings which are more a reflection of fuller evidence being available in 2012 than in 2009 (PI-8, PI-9(ii), and PI-16(ii)) than of underlying PFM

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improvements; conversely in respect of some of the Indicators where there are apparent deteriorations in performance (PI-11(i), PI-13, PI-14, and PI-18(ii)) it seems unlikely that underlying performance will have deteriorated. Only in the case of PI-10 is there a clear indication that performance is worse, as a result of the Minister of Finance delaying the publication of audit reports. Prospects for further PFM reforms 18. Since 2005 there have been on-going efforts supported by development partners to improve different aspects of PFM reform in Lesotho. Development partners have agreed a Performance Assessment Framework 2011-13 to measure progress in growth and macro-economic performance, improvements in public financial management and governance, and enhancements of human development and social protection, with the meeting of targets justifying the continued provision of budget support. Progress is reviewed quarterly. In addition there is a PFM Improvement Reform Steering Committee whose task it will be to determine the priorities for future PFM reform activities in the light of the findings of this assessment. An initial matrix was prepared to analyze what improvements could be made over the three years to 2014-15 which would justify higher ratings in a future PEFA assessment. In terms of actual achievements, PFM progress since 2009 is disappointing: it will be important that future plans command the wholehearted support of the government at every level, and that intensified efforts are made to achieve the intended benefits of initiatives which in many cases have already begun.

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Table 13:

Performance Indicators Scores PEFA 2009 2012 PFM Out-Turns Credibility of the Budget PI-1 Aggregate expenditure outturn compared to original approved budget A B PI-2 Composition of expenditure out-turn compared to original approved budget C C+ PI-3 Aggregate revenue out-turn compared to original approved budget A B PI-4 Stock and monitoring of expenditure payment arrears NR NR Key Cross-Cutting Issues: Comprehensive and Transparency PI-5 Classification of the budget evidence in 2009 B B PI-6 Comprehensiveness of information included in budget documentation B B PI-7 Extent of unreported government operations NR D+ PI-8 Transparency of Inter-Governmental Fiscal Relations NR B PI-9 Oversight of aggregate fiscal risk from other public sector entities D+ D+ PI-10 Public Access to key fiscal information C D Budget Cycle Policy Based Budgeting PI-11 Orderliness and participation in the annual budget process A B+ PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting C+ B Predictability & Control in Budget Execution PI-13 Transparency of taxpayer obligations and liabilities B D+ PI-14 Effectiveness of measures for taxpayer registration and tax assessment B B PI-15 Effectiveness in collection of tax payments NR D+ PI-16 Predictability in the availability of funds for commitment of expenditures D+ D+ PI-17 Recording and management of cash balances, debt and guarantees C B PI-18 Effectiveness of payroll controls D+ D PI-19 Competition, value for money and controls in procurement D D+ PI-20 Timeliness and regularity of accounts reconciliation D D+ PI-21 Effectiveness of internal audit D D+ Accounting, Recording and Reporting PI-22 Timeliness and regularity of accounts reconciliation D D PI-23 Availability of information on resources received by service delivery units D D PI-24 Quality and timeliness of in-year budget reports D+ D+ PI-25 Quality and timeliness of annual financial statements D D External Scrutiny and Audit PI-26 Scope and nature and follow-up of external audit D+ D+ PI-27 Legislative scrutiny of the annual budget law C+ C+ PI-28 Legislative scrutiny of external audit reports D+ D+ Donor Practices D-1 Predictability of Direct Budget Support NR D+ D-2 Financial information provided by donors for budgeting and reporting on

project and program aid C NR

D-3 Proportion of aid that is managed by use of national procedures D D