Zambia - Second Technical Assistance Project

Document of The World Bank FOR OMCIAL USE ONLY Rpst No. P-4167-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.3 MILLION TO THE REPIJBLIC OF ZAMBIA FOR A SECOND TECHNTCAL ASSISTANCE PROJECT March 3, 1986 Thi docuent hs a sticded disbibud. xad my e used by recipients ony in the perfounnice of dir offkid dutes lb outb may not oderwise be disdosed widho Wodd Bank authorizriom.  CURRENCY EQUIVALENTS Currency Unit Zambian Kwacha (K) USS 1.00 K 6.40 K 1.00 USS 0.16 (The US Dollar/Zambian Kwacha exchange rate shuon above is the rate that prevailed at the end of January 1986.) ABBREVIATIONS BOZ - Bank of Zambia DPU - Data Processing Unit EEC - European Economic Community IP - Investment Policy, Programming and Project Preparation Department MOF - Ministry of Finance MTFP - Medium Term Financial Plan NAMBOARD National Agricultural Harketing Board NCDP - National Commission for Development Planning NIPA - National Institute for Public Administration UNDP - United Nations Development Programme ZICA - Zambian Institute of Certified Accountants ZIMCO - Zambia Industrial and Mining Corporation, Ltd.  FOR OMCIAL USE ONLY ZAMBIA SECOND TECHNICAL ASSISTANCE PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Zambia Amount: SDR 7.3 million (US$ 8.0 million equivalent) Terms: Standard Project The project would finance assistance to Description: improve the capacity of the Government to carry out macro-economic Analysis; implement improvements in the planning and budgeting systems to make resource allocation more responsive to Government policies and objectives. and improve management and accounting skills and the availability, speed and accuracy of essential management information. Benefits: At the end of the project period, Government should have improved macro-economic analysis capability resulting in a more effective planning process which, in turn, will guide the budget process. Government should also have improved control over the budgetary process, from resource constraint identification to monitoring of budget execution. The introduction of a computerized Financial Management System will help to produce timely information for policy formulation, aid coordination, and better control of available financial resources. The project's training activities will result in a pool of competent and better motivated staff at all levels from accounting technicians to macro-economic planners to senior management officials in the key economic institutions. Risks: The major risks associated with the proposed project are (1) sustainability of institutional benefits anticipated in view of high turnover rates in the civil service; (2) sustainability of commitment adn accountability on the part of line managers and operational staff towards full implementation of the financial management system. The Government is currently addressing the issue of salaries for technical and professional staff with the goal of reducing the drain of qualified and experienced civil servants to the parastatal and private sectors. With regard to the financial management system, the phased design of a proposed comprehensive and extensive training program is expected to improve morale and accountability of agencies providing primary data. This document hk a rtricted distibuton and may be used by recipients only in the performance of their ofacial duties. Its contents may not otherwie be disclosed without World Fhank suthonntion.  Estimated Prolect Costs PirojectCosts: (USS millions) Local Foreign Total Long Term Experts 1.5 1.5 Consultants 0.4 1.9 2.3 Training 0.3 2.3 2.6 Equipment, Supplies, Maintenance, Office Space 0.2 0.6 0.8 Contingencies 0.7 1.5 2.2 Total1 1.6 7.8 9.4 Financing (in US$ millions) IDA 1.1 6.9 8.0 Government of Ireland 0.1 0.9 1.0 Government of Zambia 0.4 - 0.4 Total 1.6 7.8 9.4 Estimated Disbursements: IDA Fiscal Year 1986 1987 1988 1989 1990 1991 1992 (US$ millions equivalent) Annual: 0.4 1.6 2.0 1.7 1.2 0.9 0.2 Cumulative: 0.4 2.0 4.0 5.7 6.9 7.8 8.0 Rate of Return: Not applicable. Staff Appraisal Report: No separate Staff Appraisal Report has been prepared for this project. lTaxes included in project costs are negligible, as all items would be exempt from import duties and local taxes.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ZAMBIA FOR A SECOND TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Zambia of SDR 7.3 million (approximately US$8.0 million equivalent) on standard terms to help finance a Second Technical Assistance Project. Cofinancing is being provided by the Government of Ireland. PART I - THE ECONOMY 2. A Country Economic Memorandum on Zambia (Report No. 5000-ZA) was distributed to the Executive Directors on April 24, 1984. This part is based on that report's findings and on subsequent information received from the Zambian authorities. Country data sheets are attached as Annex I. 3. Zambia's economy is heavily dependent on external trade and on government activity. Imports and exports range between 30 and 40 percent of GDP. Government expenditures amount to about 35 percent of GDP, and the Government owns a majority share of mining and most manufacturiug enterprises. Copper mining provides over 90 percent of faoeign exchange earnings and 15 percent of gross value added. Mueh economic activity is dependent on expatriate technical, managerial, and administrative skills. Current Economic Situation 4. Zambia is currently in an acute stage of economic and financial crisis. Production has declined steadily for four consecutive years in most sectors due to reductions in import volumes. Due in part to continued declines in the copper price, scheduled external debt service obligations amount to over 70 percent of export earnings. Large arrears have been accumulated on debt servicing and commercial payments to members of the Paris Club and the IMF. (However, all arrears to the IMF were paid in early January 1986). In addition, disbursements of external loans have fallen sharply due to reductions in capital expenditure by both the Government and many public enterprises. As a result, a multi-faceted foreign exchange constraint now grips the country and threatens to override the positive effects of the Government's economic recovery program initiated in 1983. To avoid this, a major coordinated effort of debt restructuring and renewed financial flows is, required for the third time in the last four years -- the previous reschedulings were in 1983 and 1984.  - 2 - 5. Zambia's economic and financial problems were initiated by a sharp decline in the copper price in 1975. Zambia's terms of trade have deteriorated steadily since then, and by 1984, were 70 percent below the average for the early 1970s. Real GDP has been in a general downward trend since 1975, declining on an average by about 1.5 percent per year. With population growing by 3.1 percent per annum, real GDP per capita is 25 percent lower than in 1974. GNP per capita was estimated at US$580 in 1983, using the World Bank Atlas methodology, but is now much lower as a result of major devaluations of the Kwacha in 1984 and after the introduction of the foreign exchange auctionings in October 1985. 6. The balance of payments has been in chronic disequilibrium since 1975, with current account deficits climbing to an average of 19 percent of GDP in 1980-82. Nevertheless, the volume of imports declined steadily and is now 50 percent below its level in 1980 and 75 percent below its level in 1974. This has resulted in an economy-wide problem of severe under- utilization of capacity and, especially in the mining sector, a large backlog of maintenance and rehabilitation expenditure that has contributed directly to a declining trend in copper production and exports. In 1985, copper exports fell to their lowest level (480,000 tonnes) since Zambia's independence. The current level of imports is now inadequate to sustain copper production and to provide a critical minimum for the rest of the economy to function efficiently. The large current account deficits have also led directly to Zambia's high level of external indebtedness. At the end of 1984, Zambia's total external liabilities stood at US$4.4 billion, including drawings from the DMF (US$740 million) and US$500 million in overdue commercial payments. By comparison, exports of goods and services amounted to somewhat over US$900 million. 7. The decline in copper prices also severely affected Zambia's fiscal and monetary positions. In the past, mineral taxes provided a large share of government revenue, but they have been negligible since 1976. A new mineral export tax was introduced in 1983, however, which now contributes about 10 percent of Government's revenue. Deficit financing absorbed a large share of net domestic credit and contributed to a sharp rise in consumer prices, averaging 20 percent per annum during 1976-78 and 12 percent per annum in 1979-82. Price increases have accelerated in 1983 and 1984 to about 20 percent per annum, reflecting the decontrol of prices in December 1982 and the devaluations of the Kwacha during the past two years. Currently, the inflation is running at an annual rate of about 75 percent while the economy has been adjusting to the sharp increase in the dollar parity of the Kwacha from 2.2 prior to the introduction of the foreign exchange auctioning to 5.7 at present. S. There is no doubt that external factors have been an important cause of Zambia's present economic difficulties. Apart from low copper prices, severe droughts over three consecutive years have necessitated substantial food imports. Nevertheless, inappropriate policies and shortcomings in economic management have exacerbated the economic difficulties. The main deficiencies in economic policies were that: (i) pricing and subsidy policies favored the urban consumer at the expense of the agricultural producer; also, controlled industrial prices led to low profitability in the manufacturing sector; (ii) tax incentives and low  - 3 - interest rates led to a pattern of capital intensive investment; (iii) exchange rate and tariff policies encouraged the use of artificially cheap imported raw materials and other inputs As a result, a highly capital and import-intensive productive structure was created that proved to be very vulnerable to prolonged declines in the availability of foreign exchange. Strategy for Economic Restructuring 9. Economically exploitable ore reserves are only sufficient to maintain present levels of copper production for another 15 years or so, after which production can be expected to decline sharply. In the absence of new sources of income, employment and foreign exchange, Zambia may expect a drastic fall in living standards and social well-being by the turn of the century. However, Zambia has the potential to develop alternative sources of income, employment and exports. The greatest potential is in agriculture, where there are opportunities for import substitution (cotton, oilseeds, livestock, grains, forestry products and fish) and for exports (beef, cotton, coffee, tobacco, groundnuts, and sugar). Once a good start is made with agricultural development, possibilities will be created for agro-based industries- 10. For any long-term growth strategy to succeed, however, it is of the utmost importance that 'inancial balance be restored in the economy. As the main provider of foreign exchange, the copper industry has a major role to play. For this reason, in 1984, the Bank approved an Export Rehabilitation and Diversification Project which aims to increase the efficiency of the mining industry and make it competitive again by international standards. This project was accompanied by an agreement on changes that would be needed in macro-economic and sector policies in order to restructure and diversify the rest of the economy. 11. The Government, with Bank and Fund assistance, has developed a wide-ranging package of economic restructuring policies that may be summarized as follows: - Providing a system of incentives to producers and exporters of agricultural and industrial products in which production is responsive to market forces; -- Ensuring the competitiveness of exports through an active exchange rate policy; -- Using tariffs and interest rate policies to reverse past trends of import dependence and capital intensity; -- Liberalizing administrative restrictions on foreign trade and the licensing of production, in order to improve the allocation of resources and to encourage investment in productive activities; -- Reducing the Government's deficit and recourse to domestic bank borrowing by reducing expenditure on personnel costs, subsidies and other non-development related activities;  -- Improving planning and budgetary procedures to shift resources to productive uses and economic investments; -- Allowing greater competition in the procurement and selling of food crops. The National Agricultural Marketing Board (NAMBOARD), the Government's agricultural marketing agency, will move towards the role of buyer and seller of last resort, using a system of floor and ceiling prices for agricultural produce and inputs, respectively; -- Strengthening the technical and managerial capacity of Zambia Industrial and Mining Corporation (ZIMCO), which is the holding company of most state-controlled enterprises; -- Restructuring the energy sector to bring about lesser dependence on imported oil. 12. In the past two years, the Government has made significant progress in translating the above policies into tangible action. Stand-by arrangements were agreed with the IMF in 1983 and 1984. Under these programs, the Kwacha was linked to a basket of currencies and was depreciated in a gradual manner by more than 60 percent (in foreign exchange terms) through October 1985 when the foreign exchange auctioning was introduced (paragraph 15). Because the Government has been successful in holding wage increases to considerably less than rises in the cost of living, it has maintained the benefits of devaluation in real terms, which has improved the competitiveness of exports. Debt rescheduling with members of the Paris Club, commercial banks and non-OECD governments was also obtained. 13. In terms of improving conditions for longer-term growth, the most significant of the above financial measures was no doubt the exchange rate adjustments. But other measures with significant long-term impact have been introduced as well. In December 1982, the Government abolished the control of all wholesale and retail prices except for three essential commodities: wheat flour, maize flour and candles. Most recently, the prices of wheat flour and bread were also decontrolled. Over the last three years, producer prices for most agricultural crops have been increased considerably in real terms. The Government has also improved the incentives affecting foreign trade by introducing a foreign exchange retention scheme and concessional tax rates for non-traditional exports, and by imposing a minimum tariff on many non-dutiable imports which should reduce the high rates of effective protection afforded to import-intensive industries. 14. The Government's efforta over the past two years represent a major reformulation of economic policies and incentives. This progress is currently in danger of being set back, however, due to insufficient foreign exchange to maintain production (and exports) and to honor external debt obligations. On one hand, the Government wishes to improve the supply of essential consumer goods and thus show some benefits from the considerable sacrifices its policies have required of tne population. In particular, a rapid increase in the consumer price of maize (resulting from higher  -5- producer prices, drought induced imports and lower subsidies) has heightened the political sensitivity of further reforms that result in higher prices for other goods and services. On the other hand, the Government must allocate considerable foreign exchange to debt service that cannot be rescheduled. 15. In facing rhis dilemma, the Government has adopted a foreign exchange auction system in recognition of the need for greater efficiency in the allocation of these resources. This shoul'd also help mobilize additional foreign exchange into the official market from unrecorded exports and from official development agencies that would be willing to support such a significant policy change with quickly disbursing assistance. However, this strategy risks uprooting a hard-won political concensus that the economic reform program must continue. Against the hope that additional foreign exchange resources will materialize, the Government's decision to adopt an auction system is being taken with the clear expectation that higher prices will inevitably follow further depreciation of the Kwacha. Indeed, petroleum prices doubled following the first auction where the rate jumped from K2.2 to K5.0 per US dollar. It is therefore essential that additional foreign exchange resources be aade available for the new system to work and for an increase in production to occur, in order to expand the supply of basic consumer goods and minimize upward pressure on prices. Along with the new system, the Government has introduced a wide range of supporting measures, including decontrol of interest rates, conversion of the import licensing system to one of import registration, and further measures to reduce government expenditure and borrowing from the banking system. Creditworthiness 16. Scheduled service on public and publicly guaranteed (PPG) external debt will remain over US$400 million per annum for the next three years, or about 40 percent of export earnings at today's copper prices. Of this amount, about US$65 million per annum is due to the World Bank Group, including the IFC. (The Bank currently holds US$430 million, or 15 percent of Zambia's US$2.8 billion PPG debt disbursed and outstanding). In addition, about US$200 million per annum in payments is due to the IMF and another US$50-70 million per annum on Zambia's pipeline of commercial payment arrears and short-term borrowings. In total, then, scheduled debt service will amount to over US$700 million per annum x-or the next three years, and it will thus be necessary for the Government to continue its financial stabilization policies in cooperation with the IMF and to seek debt relief through further rescheduling. Even with maximum debt relief, however, Zambia will continue to owe over US$400 million per annum in debt service that cannot be rescheduled. The Government should, therefore, avoid as much as possible borrowing on commercial terms, and additional borrowing should carry sufficiently long grace periods and maturities. 17. In the longer term, the restoration of Zambia's creditworthiness depends on the vigor with which the Government continues to pursue its economic restructuring policies. The Government is well underway in adjusting its economic policies and is fully committed to take further steps towards economic reform and the restructuring of Zambia's productive  - 6- industries. Assuming successful economic policies, careful financial management and adequate external assistance, Zambia could achieve a reasonable measure of export growth and diversification in 10 to 12 years and reduce its overall debt service ratio to 30 percent of exports. PART II - BANK GROUP OPERATIONS 18. Since 1956, the Bank Group has made 28 loans and 16 credits to Zambia, totalling about US$803 million (net of cancellations). Two additional Bank loans were made to Zambia and Zimbabwe jointly to finance shared power facilities on the Zambezi River. Fourteen loans and seven credits have financed energy, transportation, communications and rural water supply projects. Four loans and one credit for education have helped expand Zambia's secondary and higher education systems, teacher training, and commercial, agricultural and technical education systems. Two program loans have helped Zambia maintain its development program in periods of severe economic dislocation. In agriculture, forestry and fisheries, six loans and six credits have been for industrial forest plantations and wood processing, livestock, commercial crops, integrated family farming, coffee production and smallholder dairy and fisheries development. Agricultural projects in the Eastern and Southern Provinces are assisting smallholder farmers and an Agricultural Rehabilitation Project is providing inputs to the sector in support of policy reforms. The Industrial Reorientation Project is supporting policy and institutional reforms designed to increase the efficiency and productivity of industrial firms and to reorient the industrial sector towards greater use of domestic inputs and export markets. Other loans have assisted Zambia's urban development program, copper mining and, through the Development Bank of Zambia, its manufacturing, agricultural and industrial sectors. The first technical assistance credit is helping the Government improve its planning and project preparation. 19 The International Finance Corporation (IFC) has invested about US$85 million in eleven projects in Zambia since 1972. Two investments were in shoe manufacturing, two in a packaging materials plant, two in textiles and one each in the Development Bank of Zambia, cobalt production, copper production, tou.ism and in food and food processing. 20. The implementation of Bank-assisted projects in Zambia has deteriorated significantly in recent years, and serious delays have been experienced in the executior. of a number of these projects. The- are several reasons for this, the main one being the lack of budgetary resources with which to finance local counterpart expenditures and to prefinance local expenditures which are subsequently to be reimbursed by the Bank loan. Most seriously affected have been the Bankts agricultural projects for which funds, although budgeted, have not been released to the executing agencies for several months. Other reasons for the lagging implementation of projects are ineffective project management and inadequate inter-agency coordination. The Bank-assisted agricultural projects, which require careful management and effective coordination due  -7- to their complex design, have suffered from these problems, as has the hird Highway Project. 21. The deterioration of project implementation has, as expected, substantially reduced the rate of disbursements on Bank Group loans and credits. During the first four years of the period FY77-81, the disburse- ment rate on loans and credits to Zambia averaged slightly over 25 percent per annum, higher than the Bankwide average of 21.2 percent, or the 21.5 percent average for the Eastern Africa Region, and well above the 22.2 percent fo- Tanzania, 23.4 percent for Senegal and 20.2 percent for Bolivia. In FY81, however, the rate dropped to just over 16 percent, compared with 20.7 percent Bankwide, 16.5 percent for Eastern Africa, 23.6 percent for Tanzania, 20.8 percent for Senegal and 21.2 percent for Bolivia. The rate has risen since FY81, reaching 20.1 percent in FY83, which was slightly below the average for the Eastern Africa Region (20.7 percent) and for the Bank overall (20.8 percent). To alleviate the problem, provision is being made for technical assistance in projects to strengthen implementing agencies and increased use of the Resident Mission in monitoring project execution. Revolving funds are being established under new and ongoing projects which should ease the Government's financial burden and accelerate disbursements. The Bank or IDA makes advance deposits into these funds to eliminate the need for prefinancing by the Government of local expenditures financed by the Bank/IDA. In addition, estimates of counterpart funds required and their timing are being prepared by Bank/IDA staff well in advance to allow implementing agencies as much lead time as possible to plan for these expenditures. As of December 1983, IBRD loans disbursed and outstanding were about 12 percent of Zambia's total medium and ang-term debt disbursed and outstanding. 22. The Bank Group's strategy in Zambia is to support the country's efforts to diversify and increase economic efficiency. Raising the efficiency of the mining industry through the Export Rehabilitation and Diversification loan so that the industry may contribute resources to diversification programs was the first step in carrying out this strategy. Subsequent operations, such as the Agricultural Rehabilitation Project and the Industrial Reorientation Project, focus on improving sector policies in agriculture and industry, which are, respectively, the sectors with the best potential for production and export growth and for employment creation. The Group's strategy also gives priority to reducing consumption of imported petroleum, substituting indigenous energy resources and raising the efficiency of energy and transportation services. Emphasis will be given to rehabilitation and maintenance, rather than expansion, of infrastructure and Bank Group assistance is expected to include a significant proportion of quick-disbursing resources. Support in addressing the longer-term development constraints, e.g., improving economic management, education, population, health, etc., is also part of the strategy. Policy and institutional reform programs in each of the sectors, as well as on the macroeconomic level, are being agreed with the Government.  PART III - THE NEED FOR TECHNICAL ASSISTANCE 23. The Government of Zambia has completed the first phase of an adjustment process designed to establish a policy environment conducive to economic growth and diversification. Significant policy changes have been introduced and supporting measures are in place. The next phase of the adjustment process, covering a five to ten year period, will involve the actual restructuring of production and will require improved sector policies, psrticularly in agriculture and industry. A crucial element for further reforms will be the Governments capacity to sustain the macro-policy environment initiated in the first phase through subsequent stages of the adjustment process. The capability and effectiveness of the key economic ministries to guide and monitor this process will, therefore, be a determining factor for its success. 24. The economic crisis and the necessity to redefine economic policies to meet that crisis has, however, put a severe strain on the capabilities of these key institutions. The Ministry of Finance (MOF) and the National Commission for Development Planning (NCDP), which are responsible for overall economic management and development planning, respectively, do not have the analytical capabilities or the administrative machinery to cope with the demands of the economic recovery program. An efficient mechanism for initiating, executing and monitoring longer-term financial and economic recovery programs needs to be established, and the capability for analysis and formulation of economic policy needs to be developed. 25. Recognizing that existing weaknesses in both the areas of financial and economic management are serious obstacles to sustained programs of reform and further limit the country's ability to respond to continuously changing economic conditions, the Government of Zambia has, since early 1984, taken steps to improve coordination among the major economic ministries, to define responsibilities for decision making and to improve the planning and budgeting process. Specifically, the following changes have been introduced: i) implementation of an improved budget system consolidating recurrent and capital budgets; ii) establishment of a medium-term macro-economic and financial plan to provide Government with estimates of the funds likely to be available for expenditure over a three-year period, and setting public finance in the context of GDP growth, balance of payments, and debt flows; iii) revised annual planning process designed to: a) be used as a guide to the development of the budget, b) be more comprehensive, and c) focus on the consequences of proposed programs and policies rather than on pure description; iv) the bringing together of the MOF and the NCDP under a single minister -- Finance (a simplified organization chart of the Minio'try of Finance and Planning reflecting recent changes appears in Annex IV). In the short time since this change was announced, the Government has moved to rationalize the functions  -9 - of the two agencies and to improve coordination between the planning and budgeting functions. 26. The reforms described above have been implemented with considerable assistance and advice from World Bank staff and reflect a mutual understanding of the areas where assistance is most needed and likely to have the greatest impact. Their implementation represents a first phase in a longer term process of institutional strengthening, the next phase of which will be supported by the proposed project. 27. The second phase will address needed improvements in the areas of macro-economic planning, financial management and development administration which require a somewhat longer time frame to achieve. Macro-economic Analysis 28. At present, responsibility for macro-economic analysis and policy advice is shared between three different entities: i) The Economic Unit in the Budget Office (Finance) is responsible for macro issues related to fiscal policy, balance of payments and revenue estimation. It is also responsible for the medium-term financial plan. ii) The Research Department of the Bank of Zambia (BOZ) is responsible for monetary and credit policy and balance of payments issues; the National Debt Office in BOZ maintains records of external borrowing. Procedures for coordination with the MDF exist, though contacts at the working level are limited. iii) The Investment Policy, Programming and Project Preparation Department (IP), NCDP has responsibility for macro-economic analysis,projections and forward planning. 29. The Government has taken the decision to concentrate the major responsibility for macro-economic analysis in one organization, the IP Department in the NCDP.2 In terms of organization and staffing, however, IP is not ideally structured to carry out these functions and its capacity to provide advice and guidance on economic reform is weak. Responsibility for macro-economic analysis and projections falls to a small macro-economic unit in IP. Positions of the Under-Secretary (Department Read) and Deputy Under-Secretary were vacant over long periods and the macro-economic unit as a whole understaffed. The emphasis of IP work programs has been more on project preparation than on concept and analysis. 30. The Government intends to restructure and strengthen IP to develop it into an effective advisory body to the Ministry of Finance and Planning with the capacity to analyze the impact on the Zambian economy of internal economic policy decisions and exogenous factors, to analyze the 2The role of the Research Department of the Bank of Zambia will remain unchanged  - 10 - implications of alternative macro-economic scenarios. and to advise on desirable structural changes in the economy. 31. As a first step, previously vacant senior positions in IP have been filled and the Government proposes to further strengthen its economic staff by transferring economists from the Budget Office to carry out the expanded work program. The proposed project will finance advisory services to TP to reinforce the Government's efforts and to train national staff in carrying out required analyses and in preparing background and policy papers. Financial Management System 32. Lack of appropriate and timely data for effective management and decision making is generally recognized as a major obstacle to economic reform. Indeed, it is premature to think of elaborate reform mechanisms in the absence of accurate basic accounts. The deficiency of meaningful information for planning and control affects all aspects of the work of the MOF and is a major contributor to its present weakness. It affects the quality of preparation of briefing documents and policy papers. Information on project progress in both financial and physical terms is not available to help determine budget priorities or to ensure rational release of domestic funds. The MOF often has no direct knowledge of the amount of foreign funding available to and actually released to executing ministries. Information on external trade is as much as two years out of date. Labor-intensive and time-consuming accounting systems and practices occupy the time of budget analysts which could be better devoted to the compilation of annual and medium-term programs and budgets, monitoring financial performance and adjusting budgets in light of policy changes, resource availability and performance variances. 33. The General Government Accounts system has been automated in a piecemeal fashion, resulting in delayed production of reports, duplication, incomplete and inaccurate information, and lack of accountability for effective operations. Information needed for forecasting of cash flows, project evaluation and planning, and to obtain donor financing of development projects is too little and too late. Delays in receipt of information on tax and customs revenue lead to a high degree of uncertainty on the amount of money likely to be available and is one cause of an unnecessarily low level of releases to the spending ministries. Lack of information on actual project expenditures often results in ad hoc decisions on the part of the Budget Office causing delays in project implementation and the inability to fully utilize foreign funding. Information on income tax revenues, external debt and capital project expenditures is not automated and must be compiled manually. 34. At present all data (capital and recurrent accounts, expenditure reports, national accounts data from the Central Statistics Office, payrolls, customs and excise data, population census) is processed in the Data Processing Unit (DPU) of the Ministry of Finance. DPU has a staff of approximately 25 trained analysts/programmers, as well as a number of operations and data entry staff. lIo data base management system exists and requests for new or more detailed reports cannot readily be accommodated,  - 11 - as the major part of staff time is spent in maintaining the current computer systems. The delayed receipt of transaction data, a high incidence of errors transactions and processing delays at the DPU, result in a government-wide perception of DPU as a bottleneck. The morale of the staff is low resulting in a high turnover rate which further exacerbates an already difficult situation. 35. The problem, then, is not lack of data but the inability of the present system to capture what is available, process it efficiently, and make it available to decision makers in a timely and usable manner. Major improvements in the financial management and information systems are achievable with existing staff resources and the existing IBM 4341, though the former will require additional training and the latter upgrading. The proposed project will finance the introduction of an efficient financial management system and the related training program. Budget Process 36. The weaknesses of the budget process were described in a 1983 World Bank report and included: Mi) Cabinet did not make its input into the budget cycle early enough to plan and direct overall budget priorities; (ii) Annual Plan did not guide the preparation of the budget; (iii) Ministries had to prepare detailed budget submissions without knowledge of likely amount of resources available to them; (iv) Responsibility for recurrent and capital budgets is separated, preventing substantive analysis of the linkages between the two. 37. The Government has since taken significant steps to implement the recommendations of the report in order to address these problems. Specifically, the recurrent and capital budgets have been merged, a new budget format has been adopted and budget guidelines are issued in advance. A financial planning model is being utilized, ministries have been given more flexibility in allocating funds to different programs and a new forward-looking annual development plan is being introduced which will guide budget decisions. 38. Still to be accomplished, however, are revisions in the budget heads along functional lines (programs of expenditures), and developing mechanisms for assessing performance and adequacy of expenditure levels. In addition, although a medium-term financial plan (MTFP) has been developed and is being utilized by MOF as is the new Annual Plan procedure, neither is completely institutionalized. Economic conditions change continuously, and the MTFP should be rolled forward each year to make it more dynamic. The Annual Planning exercise which has just been introduced will require an experience of several years, during which some assistance  - 12 - wlli be required to train staff in the operating ministries on the procedures and to advise on working assumptions and scenarios for the macro-economic and financial analyses, before it is fully effective. The proposed project will finance assistance to the Budget Office to improve its capacity for budget analysis and revenue forecasting. Integration of Aid and the Budget 39. The lack of clearly defined areas of responsibility and poor coordination is particularly evident in the fragmentation of responsibility for various sources of finance. The MDF does not have an overview of all financial resources accruing to the Government nor of debt and debt repayment. The Loans and Investment Division of MOF is in charge of receiving or extending loans; the Economic and Technical Cooperation Department of NCDP is generally responsible for grants and technical assis- tance; proceeds from commodity aid are sometimes retained by the receiving ministry and MOF has little control over these funds. Lack of reliable information on amounts of aid expected results in a significant underesti- mation of these resources in the preparation of the budget. 40. Similar problems are encountered with debt management. At pre3ent, there are two government institutions that are responsible for some aspects of debt management: MOF and BOZ. Neither institution, individually, has complete information on foreign debt and no records are yet maintained on public enterprise debt. Although MOF is the direct source of information on government debt, its capacity to monitor and maintain the data remain weak. Excessive delays in producing debt data are encountered, inconsistencies in the statistics are persistent, and payments o0 debt service are often delayed, resulting in penalty interest charges and, in some instances, overpayments. Almost no analysis to aid debt management is done at present and the Government has no foreign borrowing strategy. As a result, indebtedness is incurred without sufficiently exploring the implications of the external debt profile. 41. The Government has announced its decision to bring together into a single division reporting to the Permanent Secretary, Finance, responsibility for all technical and financial assistance as well as internal and external borrowing. Staff from NCDP responsible for grants and technical assistance have been transferred to the Loans and Investment Division of MOF. This expanded division will have responsibility for loans, grants, commodity aid, aid coordination, and for establishing a comprehensive debt management system. These changes represent a major step in the direction of more efficient administration and improved control and coordination of resources. 42. Assistance to the Loans and Investment Division will be provided from the special program of technical assistance to IDA-only countries which will provide the services of a debt management specialist. The advisor would be assigned to the head of the Loans and Investment Division. In order to ensure that debt data is incorporated into the computerized system, the Advisor will work closely with the consultants selected under this project to design the Financial Management System.  - 13 - 43. The expanded Loans and Investment Division will also have responsibility for aid coordination and will serve as the Secretariat to the Joint Monitoring Committee (comprising local representatives of donors and the Zambian Government) which has been established to monitor and coordinate all types of aid. The Government has requested the United Nations Development Program (UNDP) to provide assistance to the Secretariat to carry out its aid coordination functions. The UNDP project is currently under preparation and should start implementation in early 1986. The Financial Management System to be developed under the prooosed project will also provide data on project expenditures and progress to the aid coordination unit. Accounting and Accountancy Training 44. The largest single discipline in HOF is that of accounting officers. For the most part, however, these officers do not possess qualifications recognized by professional accountancy bodies, and the Government remains highly dependent upon expatriate professionals. Much of the professional accountants' time is spent in reviewing and correcting the routine work of poorly trained and poorly motivated accounting clerks and technicians. The quality of education and training of accountants in Zambia ranges from excellent to substandard. There is no cohesion or direction to the various institutions which provide training and a lack of direction for the profession. 45. In 1982, the Accountants Act established a professional institute, the Zambia Institute of Certified Accountants (ZICA), responsible for establishing and maintaining standards of conduct, examining, admitting and maintaining a registry of accountants and accounting technicians in the country, and assisting in their education and training. ZICA, with assistance, can become the focal point of professional development in the country by setting examination standards and thereby assisting the training institutions to improve their own curricula and teaching staffs. 46. Improvements in the efficiency of accounting 3nd auditing in Zambia and raising the education standards of the profession will require a comparatively long-term infusion of technical and financial assistance. A number of donors are active in providing accounting assistance to Zambian institutions (the European Economic Community (EEC), and the Overseas Development Administration, U.K.). Much of this assistance is in the form of expatriate accountants teaching at Zambian training institutions. The EEC, however, is financing a feasibility study on the organization and development of the accounting profession in Zambia. Assistance under the proposed project will focus on the training required as a follow-up to the EEC study and on raising accountancy standards through support to ZICA. Management, Supervision and Administration 47. A major problem faced by MOF (and by all other ministries in Zambia) is the extreme burden of work placed on the top echelon. Consequently, ministers and permanent secretaries spend too much time on routine matters and not enough on policy formulation and program development.  - 14 - 48. The quality of preparation of background papers required by policy makers and senior officials is often weak. Advice concerning important items on the Cabinet agenda is sometimes lacking or prepared only at the last moment. Staff do not always receive adequate briefings and lack the background knowledge required to take initiative in preparing policy briefs. There is a certain lack of discipline, even as far as routine work is concerned, such as maintaining files and notes of meetings, which leads to unnecessary duplication of work. Those not present at a particular meeting or discussion, but involved in the follow-up to it, are handicapped. Also controversies may, and do, arise about what has been decided. It is difficult for new staff (and staff changes are frequent) to acquire the background information needed to do their work. 49. There is a noticeable lack of motivation, particularly among staff who do not see their work as worthwhile, those with unclear terms of reference, and those receiving little guidance or supervision. Many staff are unclear about the work required of them, and often do not know who is supposed to supervise their work. Communication between the top and working level staff, essential for adequate preparation and for motivating staff, is extremely limited. Regular meetings with working level staff to discuss policy issues and work programs are rarely held. 50. Overall, there is a lack of awareness of basic management practices, no orientation of new staff or briefing of existing staff, and few established routines for day-to-day work. An attempt to tackle these problems within one single ministry when the symptoms reflect a government wide managerial climate, would have only a limited impact, even within the target ministry. In addition, cross-ministerial transfers are so common, particularly at the management levels, that institutionalizing reforms would require an on-going re-education -ffort with very limited results within the proposed project period. The most effective entry point therefore is the central agency responsible for the civil service as a whole (including manpower development and training) -- the Cabinet Office. The proposed project will finance the design and implementation of a management awareness and training program for all supervisory levels through the existing training agencies reporting to the Cabinet Office. PART IV - THE PROJECT 51. The proposed project would be the second Bank Group-supported technical assistance project in Zambia. The first project, approved in 1978, was designed to strengthen the Government's project preparation and implementation capability. It provides: long-term expert services to improve the effectiveness of the Project Preparation Unit (PPU) in the National Commission for Development Planni.g (NCDP); short-term consultancy services for project preparation and implementation and training of local counterpart staff. Project implementation suffered serious delay in the early stages due mainly to lack of commitment by NCDP. Implementation has improved substantially following a change in NCDP's leadership. Since then, the project has been re-focussed somewhat to support the Government's economic restructuring and diversification efforts. Identification of  - 15 - sub-projects accelerated following the appointment of a project coordinator in PPU and counterpart staff training also gained momentum. As a result, project funds were substantially committed by the end of 1985, and the credit is scheduled to close in June 1986, two years behind schedule. Although the project's institution-building objectives may not have been fully achieved, nevertheless, it has provided the Government with much-needed consultancy services to carry out specific tasks, including project preparation work, some of which are supportive of activities included in the proposed project. The lessons of the ongoing project have been used in designipg the proposed project. 52. In 1984, the Minister of Finance requested further assistance to improve development administration in the key economic ministries. The project was identified in June 1984 and, in part, follows up assistance provided in planning and budgeting carried out as part of the Bank 's Economic and Sector Work Program. Appraisal was started in April 1985 and was completed in September 1985. Negotiations were held in Lusaka from January 28 to January 31, 1985. The Zambian delegation was led by Mr. Fred Siame, Senior Under Secretary, Ministry of Finance. A Credit and Project Summary is provided at the beginning of this report. Supplementary project data are contained in Annex III. Project Objectives 53. The proposed project will address two major weaknesses in development administration in Zambia: a) inadequate capacity to carry out macro-economic analysis, and b) the lack of timely and accurate financial information required for analysis and the efficient management of the economy. Related to these two main aid objectives, the project will also strengthen the processes of budget preparation and revenue estimation and improve coordination between planning and budgeting. Project Description 54. Specifically, the project, cofinanced with the Government of Ireland on a parallel basis, would provide the following: (i) Macro-economic Analysis: Macro-economist (48 m/m) and 36 m/m of short-term consultants assigned to IP; (ii) Financial Management System: Consultant services for the design and implementation of a five-phase computerized system over a four-year period; computer software, data entry units and terminals for the DPU, and microcomputers; (iii) Budget and Revenue: a budget specialist (36 m/m) assigned to the Budget Office; a Revenue adviser (24 m/m) assigned to the Revenue Section of the Budget Office (MOF); (iv) Training: a) a training program including seminars, workshops, coaching and fellowships in support of activities i) through iii) above;  - 16 - b) management training to assist in improving administrative, managerial and supervisory practices in the Zambian Government; c) curriculum reform and accountancy training for government Accountants and State Auditors; d) on-the-job training of legal draftsmen in the Ministry of Legal Affairs; and e) funds to be provided under the training component for text books and audio-visual equipment. (v) Follow-up to Technical Assistance I. Extension of the services of the Economic Adviser to the Minister of Fitance (24 m/m) and Financial Director, ZIMCO (24 m/m) currently financed under TA I. Detailed Features A. Macro-economic Analysis 55. The macro-economist would be assigned to the Under Secretary of IP which is responsible for macro-economic analysis. He will report to the Permanent Secretary, Planning. The macro-economist will advise on all aspects of economic plAnning and development, preparation of a comprehenslve economic plan and the preparation of annual development plans (in coordination with the Budget Office and the sector ministries). He will organize the work program for the Annual Planning exercise and ensure that the Plan contains a macro-economic and financial framework and a series of sector-specific analyses with material necessary to indicate how these resources should be allocated among sectors. He will assist IP in carrying out special tasks and studies of major concern to policy makers; e.g., recurrent expenditure implications of investment, relationship between imports and manufacturing output, cost of government subsidies, assessment of the incentive framework, etc. 56. The macro-economist would assist the Permanent Secretary, NCDP, to develop an effective advisory body to the Ministry. The macro-economist will formulate proposals for policy-oriented research and take responsibility for organizing work groups (including short term consultants, as necessary) to carry out such studies. In addition, he would assist in developing proper supervisory processes within IP and coordination procedures with other offices and ministries. 57. In addition to the post of macro-economist, the proposeri project will finance approximately 36 man-months of short-term consultants to assist in carrying out special tasks and studies, including assistance for three to four months each year in drafting the annual plan with particular emphasis on the sector chapters. The primary function of the short-term consultants will be to train national staff on-the-job to carry out required analyses, to improve the economic model, and to coach staff in the preparation of badkground papers for policy makers. The consultants would also be expected to present in-country seminars for staff of IP as well as other departments in NCDP.  - 17 - 58. The development of the macro-economic analysis function and the establishment of an effective advisory body within the Government are long-term undertakings. The proposed project will initiate the process and develop sufficient capacity within NCDP to reduce, but not eliminate, its reliance upon external consultants for policy advice. The project will establish the practice of using external specialists on a short-term basis to supplement the regular work program. Specialized, short-term assistance of this type will continue to be needed after project completion. B. Financial Hanagement Systems 59. The project will finance the services of a consulting firm to introduce a financial management system designed to facilitate the following: a) review of financial performance in relation to expected targets and medium term programs; b) improved Dudget preparation process and institution of performan:e measurement mechanisms in order to effect budget and program revisions and re-allocations of financial resources; c) effective revenue/expenditure management, planning, control, and forecasting; d) generation of financial data for use by management in making policy decisions and monitoring of technical and routine operations; e) administration of capital projects; and f) management of external debt. 60. A phased implementation strategy has been design..d with stringent performance assessments, monitoring of progress, and quantifiable benefits at each defined project milestone. Training programs are an integral part of each stage to ensure that new and revised systems are effectively implemented by Zambian personnel and are sustainable over the long run without further need for external assistance. Phase I: Streamlining Data Flow 61. This exercise is designed to improve the manual data flow to the DPU for processing. It will streamline forms and coding structures to eliminate existing duplication in transcription and thereby reduce opportunities for errors, define supervisory and administrative requirements and institute schedules, accountability, and deadlines. Timely collection of financial data from operating ministries, parastatals, etc. will be realized. A manual of the policies, procedures and responsibilities for reporting will be prepared. Phase I will improve the accuracy and timeliness of the informati'on currently received and processed by MDF, introduce reports for effective planning and control, and lay the ground work for subsequent enhiancements. Duration: 9 months.  - 18 - Phase II: Training 62. The objective of this program is to ensure that the new or revised systems are effectively implemented by government personnel. It will encompass staff within MDF as well as other organizational units which provide data to HOF. Design of the tzaining program will be concurrent with Phase I and cover the entire project period. It will include a set of courses for key staff in the routine operation of the data management system, general introduction and awareness courses for all staff either using the system or the system's output, special courses to upgrade management skills and practices; specialized training for selected staff in Database Management Systems and Structured Systems Design, and a limited number of fellowships abroad. Duration: 4 years. Phase III: Requirements Definition and Development Strategy 63. Upon the successful completion of Phase I and related training, further improvements will depend upon the development of an integrated Financial Management System which would further increase the accuracy and timeliness with which financial data is recorded and processed and generate comprehensive reports for financial control, programming and budgeting policy formulation, and resource allocation. The enhanced system would also integrate information on capital project management, external debt, external trade, and income tax revenues which are not currently automated. The objectives of developing the system further are, therefore, to enable the production of reports and mechanisms to facilitate the programming of financial resources, means of forecasting committed expenditures (both capital and recurrent) in light of policy changes or resource availabilities, to assist the annual planning exercise by improving the basis for allocating available financial resources between program areas, to improve management of budget execution, and to improve the financial and management auditing functions. Phase III of the program will investigate the information needs for effective management, specify the appropriate reports and mechanisms, and recommend either an enhancement or redesign of the financial applications, prepara detailed cost estimates, and propose an implementation strategy. Duration: 6 months. Phase IV: Implementation and Integration 64. Based on the agreed development strategy, the integrated financial management system will be designed, programmed, tested and implemented by the consultants together with selected counterpart staff of DPU. The full integration of the local staff into this development phase is crucial both in terms of long-term system maintenance and transfer of skills. Thus Phase IV must be considered also as a major training exercise, in addition to the more formal courses and workshops budgeted in the Training Phase. Hardware and software acquisition will be limited to additional data entry machines and terminals, plus the purchase and installation of appropriate software. Duration: 27 months. Phase V: Introduction of Microcomputers in Sectoral Ministries 65. This is the last phase of the program and will be undertaken only if the previous four phases are deemed successful. In this phase microcomputers will be introduced into the accounting divisions in sector  - 19 - ministries and the Customs and Excise Department. The automation will facilitate timely closings, accurate sectoral bookkeeping, improved local control over expenditures and releases, and expedite the transmission of edited and accurate financial transactions to MOF. The DPU will aggregate and process the data received and forward reports to appropriate management in MOF and the sector ministries. Duration: 15 months. 66. The focus of the proposed Financial Management System will be on the information requirements of the Ministry of Finance including inputs from the sectoral ministries. In addition to the MOF component, however, the proposed project will assist the Bank of Zambia thrortgh the provision of short-term consultants (9-12 m/m) and training to implement its on-going computerization program. Particular attention will be given to information sharing and coordination of data requirements between the MOF and the Bank of Zambia. C. Budget and Revenue 67. The Budget Analyst would be responsible to the Director of the Budget. He would assist the Chief Budget Analyst to develop the capacity of the Budget Office to undertake detailed assessments of program performance and to introduce more effective methods of budget analysis. He will be responsible for on-the-job training of Budget Office staff in analytical procedures and in adequate commitment reporting. The Budget Analrst will also assist in introducing budget reform procedures which have been agreed but not yet implemented and ensure that improvements already made in the planning and budgeting system are fully incorporated into the operational systems of the Budget Office. 68. The Revenue Advioer would also be assigned to the Budget Office. He would assist the Chief kevenue Inspector in preparing detailed revenue projections and to train staff in the Revenue Division to prepare such projections as a part of the routine operations of the Budget Office. The Revenue Adviser would also advise and assist government in implementing acceptable tax reform measures and other means of revenue generation. 69. The Budget Analyst and the Revenue Adviser would collaborate with the DPU and the consultants selected to design and implement the financial management system to ensure that the data needs of the Budget Office are adequately covered in the new system. D. Training 70 Training programs have been described as an integral part of components A, B, C and D above. In addition, the project will finance fellowships (260 m/m) in economics and development planning, budgeting and financial analysis for staff of IP, Budget Office, Loans and Investment Division, and the Data Processing Unit (MOF). Details of the fellowship program are provided in Annex V). 71. Accounting and Auditing. The first step in imp-oving accountancy training in Zambia is to raise the standards of the training for accountants and accounting technicians. The proposed project will finance Accountants and accountancy training as follows:  - 20 - a) ZICA (24 m/m) to draft standards and principles for professional conduct and practice and to review the supply of facilities and adequacy of curriculum for training of accountants and to recommend improvement. b) Accounting curriculum reform (24 m/m) National Institute for Public Administration (NIPA). NIPA is responsible for training of accountants in MOF and the Auditor General's Office. Two accountants will be provided to improve the accounting curriculum, one reporting to the Chief Accountant in MDF and one reporting to the Auditor General to ensure that the accountancy courses provided by NIPA meet the needs of the receiving institutions. The accountants will also conduct seminars for the teaching staff at NIPA to ensure that they are prepared to conduct all courses included under the revised curriculum. Funds for textbooks and teaching materials are also included under this component. c) Local refresher training of government accountants (25 m/m of consultant/trainer input. 72. Management, Supervision and Administration. The management training program will be implemented with the assistance of management training specialists (36 r/m) financed under a parallel agreement with the Irish Government. They will be assigned to the Office of the Secretary to the Cabinet and will be supported by trainers in specialized fields (25 m/m) and by Zambian specialists from the Directorate of Manpower Development and Training, the National Institute of Public Administration, and the Management Services Board. The management training team will prepare, during the first three mDnths, a detailed training program for middle- and upper-level officers with supervisory responsibility covering principles of organization and management policy formulation and implementation, effective supervision techniques, problem solving and on-the-job coaching. The training seminar will begin with the supergrades and be in the form of seminars where participants will diagnose the problems, identify solutions and indicate their role in implementing these solutions. Seminars will then be presented to successively lower managerial levels. In addition, the advisers will prepare courses in effecti-e writing for working level officers and an orientation and induction program for all in-coming staff. The management training team will prepare course material specifically designed for the Zambian Goverment with appropriate case studies developed from local material. A schedule of courses ranging from two to seven days, with refresher courses as required, will be prepared covering a five year implementation period. All courses will be presented under the auspices of local training institutions, employing and training counterparts from these institutions and increasing the capacity of the Zambian staff to continue the management training program after the project is completed. 73. Funds will also be available under this component for books and audiovisual equipment and ten short-term fellowships or internship programs in functionally comparable organizations.  - 21 - 74. Legal Training. The shortage of legislative draftsmen in the Ministry of Legal Affairs creates a serious bottleneck in the promulgation and implementation of new laws in Zambia. The lack of fully trained and experienced draftsmen is, in addition, a major constraint on the effectiveness of the Ministry of Finance in implementing policies and programs (including debt rescheduling) which require the drafting of legislation. The proposed project will provide on-the-job training in legislative drafting (36 m/m) as well as overseas seminars for qualified lawyers in the drafting department. Funds for books for the library of the Attorney General as Puell as office equipment are included under this component. Follow-Up to Technical Assistance I 75. The proposed project will continue financing the services of two long-term advisers, financed under the first Technical Assistance Project, the Financial Director, ZIMCO (24 m/m) and the Economic Adviser to the Minister of Finance (24 m/m). While, in the main, the proposed project addresses the longer-term issue of strengthening the national capacity to guide and monitor the economy, there remains an immediate need for policy advice and management skills to assist Zambia through its present period of crisis. In this regard, there is a continued need for the services of both the Economic Adviser who is currently advising the Minister on matters of budget and foreign exchange policy and liaison with the BOZ, as well as the Financial Director of the Zambia Industrial and Mining Corporation (ZIMCO) who is responsible, inter alia, for introducing sound economic appraisal practices into investment decisions in the mining and industrial sector. Project Implementation 76. MOF will have overall responsibility for project implementation. A National Project Administrator will be assigned to the project and with qualifications and experience acceptable to the Association. The assignment of the administrator will be a condition of Credit effectiveness. The Project Administrator will report to the Permanent Secretary of MOF and have responsibility for coordinating the execution of the project and liaison with the Association and the government offices and agencies involved. The National Project Administrator will be responsible for ensuring that all actions relevant to the project are carried out on a timely basis and for clearing all documents (short lists, curriculum vitae of experts, letters of invitation, contracts, bidding documents) with the Association. He will ensure that timely arrangements are made with educational institutions for all fellowships included in the project's training program and arrange interviews for candidates for expert posts. He will ensure that withdrawal applications and supporting documents are submitted as required. In order to facilitate the monitoring of project implementation, the Project Administrator will prepare six-mnthly progress reports covering all project components, status of project commitments, evaluation of consultants' performance and recommendations with regard to desirable modifications in the work program. Such reports will be submitted to the Association and provide the basis of discussions and field review between the Bank and the Government. Not later than six months  - 22 - after the credit closing date, the Project Administrator with the assistance of other agencies involved would provide the Association with a report evaluating the execution, initial operations, costs and benefits of the project and the performance of the Government and Association including the lessons learned. 77. With regard to the Financial Management System, prior to the first phase of the sub-project, and the selection of a consulting firm to carry out the assignment, a Monitoring Committee will be established within the Government to exercise control over project design and implementation. The establishment of the Monitoring Committee will be a condition of Credit effectiveness. The Committee will review project progress on a monthly basis, approve recommended procedural/structural changes, agree on training programs, and approve recommended software and hardware strategies. The Committee would also monitor the quality and effectiveness of the outputs at each checkpoint as specified in the Plan of Action during the project cycle and approve the start of work for the next phase only after being fully satisfied with the project's progress. The Committee will consist of the following: Data Processing Manager, Director of Budget, Head of the Accounting Division of the MOF, Director of IP Department (NCDP), Bank of Zambia, Finance Director, ZIMCO, Controller of Audit, and Controller of Customs and Excise, Commissioner of Taxes and representatives from at least three operational ministries. 78. Terms of reference for short-term consultants to assist IP staff in carrying out special tasks and studies will be prepared by the Macro-Economic Adviser in consultation with the Permanent Secretary of NCDP. All proposed terms of reference would be subject to the Association's agreement. 79. The selection of candidates for the fellowship program would be the joint responsibility of the Permanent Secretary, MOF and the Permanent Secretary of NCDP. A program of fellowships has been agreed with the Association (see Annex V). The Government will submit to the Association for approval, on an annual basis, the names and CVs of the proposed fellows before the start of the academic year. Project Costs 80. Cost of computer hardware and software has been estimated at US$450,000 including terminals, software and macro-computers for the Financial Management System. Price contingency estimates assume increases in local currency costs of 40 percent in 1986, 20 percent in 1987 and 10 percent thereafter; and, in foreign exchange costs, f 8 percent per annum. Physical contingencies of 5.0 percent for equipment have been added.  - 23 - Project Costs (by Component) (in US $ '000) Local Foreign Total) NCDP - Macro-economic Analysis 840 840 Financial Management System 410 1,500 1,910 Budget and Revenue (MOF) 600 600 Training Management Training 160 750 910 Accountancy Training 90 630 720 Legal Training 40 400 440 Fellowships and Study Tours 500 500 TA I, follow-up - 440 440 Equipment (including maintenance) 160 600 760 Base Costs -77 6,310 7,170 Contingencies, physical (5% on equipment) 10 30 40 Contingencies, price (31%) 730 1,510 2,240 TOTAL 1,600 7,850 9,450 Project Costs and Financing (by Category) (in US $ '000) Government IDA Co-Financing Total Long-term experts 1,520 1,520 Short-term Consultan.s 110 2,140 2,250 Training 80 1,650 860 2,590 Equipment (incl. maintenance) 50 760 810 Contingencies 210 1,930 140 2,280 TOTAL 450 8000 1000 9,450 Procurement, Disbursement and Accounting 81. It is expected that the Government would recruit directly under individual contracts the long-term experts to be funded under the project. Two of the experts are already 'n post. The Association will provide assistance, as required, in identifying qualified and experienced candidates for the remaining three positions financed under the project. The qualifications, experience and terms and conditions of employment of all experts and consultants would be satisfactory to the Association and in accordance with Bank Group guidelines for use of consultants. Consultants for the management training component are to be financed by the Government of Ireland on a parallel basis. The Irish Institute of Public Administra- tion which has provided assistance to Zambia in the past in the area of management training are expected to undertake this component.  - 24 - 82. For the design and implementation of the Financial Management System, the Government will engage a consulting firm with representation in Lusaka and with qualifications and experience acceptable to the Association. The short-list of firms as well as the letter of invitation will be cleared with IDA before inviting proposals. Contracts for equipment (including computers and related items) costing less than US$ 50,00 per contract would be awarded following one of the following procedures: (a) local competitive bidding (LCB); (b) international or local shopping or; (c) direct contracting in accordance with Bank Group guidelines for procurement. Contracts costing more than US$ 50,000 each, if any, would be procured by International Competitive Bidding (ICB). Estimated cost for procurement under these procedures is US$ 1.0 million including contingencies. The Project Administrator would submit to the Association for prior review, the tender documents indicating the method of procurement proposed. Items would be grouped to the extent practical to encourage competitive bidding. Mini-computers, to be purchased in Phase V of the Financial Management System implementation program, must be compatible with the main-frame computer currently used in the DPU. 83. In order to expedite disbursement and give the Government improved control over the timing of payments due under the credit, the Government will establish a Special Account in the Bank of Zambia under terms and conditions satisfactory to the Association, into which the Association would, upon credit effectiveness and receipt of withdrawal application, make an advance deposit of UIS$200,000. The Association would periodically replenish this account upon receipt and approval of withdrawal applications together with satisfactory evidence that the expenditures paid out of the Special Account were eligible for financing out of this project. 84. The Association would disburse against 100 percent of foreign expenditures and 60 percent of local expenditures for experts and consultant services, training, equipment and supplies. All disbursements would be fully documented except those for training and study tours and payments against contracts of less than US$20,000 equivalent which would be made against statements of expenditure, documentation for which would not be submitted for review, but would be available for IDA representatives during project supervision. The disbursement profile for Bank Group financed projects in Zambia is not appropriate for comparison and the seven year disbursement period is deemed reasonable. 85. Auditing would be required on a yearly basis for expenditures related to the project with particular attention to expenditures reimbursed against statements of expenditure. Auditing would be performed by an independent auditor acceptable to the Association within six months after the end of each fiscal year of the borrower. Project Implementation Schedule 86. The proposed credit is expected to become efEective in April 1986. Long term advisers would be identified prior to project effectiveness with the intention of posting them within the first six months. Proposals for the establishment of the Financial Management System  - 25 - will be requested prior to project effectiveness and work in the field should commence within three months of the effectiveness date. The fellowship program would start in September 1986. The project is expected to be completed by June 1992. The closing date is December 31, 1992. Benefits and Risks 87. At the end of the project period, Government should have improved macro-economic analysis capability resulting in a more effective planning process which, in turn, will guide the budget process. Government should also have improved control over the budgetary process, from resource constraint identification to monitoring of budget execution. The introduction of a computerized Financial Management System will help to produce timely information for policy formulation, aid coordination, and better control of available financial resources. The project's training activities will result in a pool of competent and better motivated staff at all levels from accounting technicians to macro-economic planners to senior management officials in the key economic institutions. 88. The major risks associated with the proposed project are (1) sustainability of institutional benefits anticipated in view of high turnover rates in the civil service; (2) sustainability of commitment adn accountability on the part of line managers and operational staff towards full implementation of the financial management system. The Government is currently addressing the issue of salaries for technical and professional staff with the goal of reducing the drain of qualified and experienced civil servants to the parastatal and private sectors. With regard to the financial management system, the phased design of a proposed comprehensive and extensive tcaining program is expected to improve morale and accountability of agencies providing primary data. PART VI - RECOMMENDATION 89. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that it be approved , the Executive Directors. A. W. Clausen President Washington, D.C. March 3, 1986  - 26 - ANE I L-Pa 1 of 6 u ~~~~~- 3021 IU5e* gal 0113 on COW~~(60 uu00u LSUTAZ3 AL le oerr r rxmums UK 1 obe. e3r A. OF0e 13M11* 1 L,0 r4~~~~~~~~~~uuaub