Madagascar - Governance and Institutional Development Project

Updated Project Information Document (PID) Report No: AB160 Project Name MADAGASCAR-Governance and Institutional Development Project Region Africa Regional Office Sector General public administration sector (100%) Theme Public expenditure, financial management and procurement (P); Other public sector governance (S) Project P074448 Borrower(s) REPUBLIC OF MADAGASCAR Implementing Agency(ies) OFFICE OF THE PRESIDENT Bureau National du Projet Address: Antananarivo/Madagascar Contact Person: Rajaonary Raoilison, Directeur Tel: (261) 202220911 Fax: (261) 202220912 Email. mpaigep@dts.mg Environment Category C (Not Required) Date PID Prepared July 17, 2003 Auth Appr/Negs Date July 10, 2003 Bank Approval Date November 11, 2003 1. Country and Sector Background Madagascar is one of the poorest countries in Africa with a per capita income of US$260 (in 2000), 70 percent of the population in poverty and half of the children malnourished. Poverty in Madagascar has many causes. Low agricultural productivity, a stagnant land market, lacking access to markets (roads, electricity), a still small (although rapidly growing) light labor-intensive manufacturing sector, and high illiteracy rates feature prominently. After years of development assistance the poverty rate in Madagascar still remains at the very high level of 69%. The public sector is crucial to reduce poverty: education and health services are needed for the poor to be able to take better advantage of economic possibilities, rural roads will help connect markets, basic services like water, sanitation, electricity will improve living conditions directly and can spur local economic development. Further, the public sector will have to play a role in the longer run to nit a social safety net for those who cannot make it on their own. Currently, only a fraction of vital and needed basic and social services reach the poor. A number of reasons are responsible for this. First, domestic revenues of the central and decentralized governments are limited; exploitation of several natural resources are far below potential, especially in the mining sector. Second, effective service delivery is weak; the Malagasy budget system requires urgent renovation as available credit lines - especially in the social sectors - are underutilized. A complicated expenditure chain with numerous controls coexists with only limited computerization. Third, decentralization has not yet contributed to more effective pro-poor service delivery in the county. Key elements of the decentralization strategy remain to be defined; local governments will need to be appropriately prepared and trained to assume service delivery functions. This situation was further aggravated by the political crisis of 2001/2002 which brought the country to a complete standstill. Since July 2002 the new Government has outlined its political, social and economic strategy which is consolidated in the recently finalized PRSP. The PRSP centers around three strategic objectives: (i) restoration of the rule of law and strengthening of good governance, (ii) economic growth, and (iii) human development and social protection. The project will assist Government in  2 PID operationalizing the first objective. In this context, the Government has identified the following elements that form the basis for the operational agenda: Public finance reforms: The public finance system in Madagascar faces four main challenges: First, budget and expenditure information is incomplete and unreliable. It does not provide the necessary basis for strategic decision making. Key reason is an outdated budget and expenditure management system that requires fundamental overhaul. Second, the budget preparation process is weak because of the fragmentation of preparation responsibility between the ministries implicated in the budget preparation process and the lack of reliable information about budget execution, both on the income and on the expenditure sides. Third, the internal and external control functions are nonfunctional and undersourced, regular audits are almost nonexistent, except on an adhoc basis. Fourth, the system of public procurement is flawed by corruption and numerous inefficiencies. Under the World Bank funded Public Management Capacity Building Project (PAIGEP I) the old Government begun to target some of these weaknesses. In particular, it simplified and modernized the budget and accounting framework, the "plan comptable des operations publiques" (PCOP). The PCOP forms the basis for more reliable information from the treasury. Analytical work has emphasized the need to further deepen and consolidate the reforms to ensure that the system of public finance will gradually be adjusted to international standards. In line with the recommendations of this analytical work the GoM has initiated a comprehensive reform process to improve the system of public finance: At the center of the reforms is the introduction of a computerized and integrated budget and expenditure management system encompassing all agencies involved in public financial management and at all levels of government. This system will rationalize the existing procedural and institutional set-up in view of increasing the operational efficiency. As a first step the Government has merged the finance and the budget ministries which had been recommended by various development partners for several years. Complementary reforms will focus on strengthening transparency and accountability by improving internal and external controls. In addition, the public procurement system will be adjusted in line with the recommendations of the CPAR. Fight against corruption: The Transparency International Corruption Perception Index of 2002 (Madagascar was rated 98th out of 102 country) confirmed the high level of corruption at all levels of the society. For the GoM the corruption is one of main sources for the lack of progress in the socioeconomic development of the country; it has therefore decided to make the fight against corruption a cornerstone of its political agenda. Main objectives are to improve transparency and accountability of Government operations and to raise awareness about the implications of corruption. The GoM has established an Anti-Corruption Commission (Conseil Superieure de Lutte contre la Corruption) which is placed under the authority of the President. The Commission will develop and coordinate the Government's program; it is also tasked to set up an independent Anti-Corruption Agency which will have investigative authority. In addition, the Government has passed a decree which requires public and elected officials to regularly declare all their assets and those of their close relatives, regardless of where these assets are held. In response to the significant overspending of the President's special fund under the old regime the new Government has mandated the Auditor General to conduct regular, semi-annual audits of all special funds. In an attempt to reduce discretionary powers the Government is presently reviewing the approval processes, in particular in areas that provide services to the population or to the business community. Legal and judicial reform: In the area of legal and judicial reforms the main objective of the Government is to restore the credibility of the judiciary which has been seriously undermined by rampant corruption and inefficiencies. Ultimate  3 PID goal is the establishment of a credible and effective legal/judicial framework that provides equal access to all layers of society and that fosters good governance, private sector development, gender equity and compliance with international law, thereby contributing to the establishment of the rule of law. The Government has identified five broad priority area which will form the basis of a reform strategy which is yet to be developed: (i) fight against corruption, (ii) expedition of proceedings, (iii) reform of business laws, (iv) rehabilitation of court and prison infrastructure, and (v) humanization of detention facilities. The reforms intend to further deepen the reforms initiated under PAIGEP I and to consolidate the achievements, in particular in the areas of training, capacity building and codification of texts and regulations. The needs of the private sector is a major consideration in the formulation of a legal and judicial reform strategy. The immediate focus of the Government is the development of an operational strategy validated by all key stakeholders. As a first step in the fight against corruption the Government also intends to strengthen internal control of the judiciary. It has placed under investigation a number of magistrates because of corruption charges. Work has also begun to expedite civil and commercial law proceedings. Coordination, monitoring & evaluation: The Government is working on building an efficient m&e system for PRSP monitoring with support of by various donors, especially UNDP. To date, however, there does not appear to be a coherent strategy in place where policy planning, service delivery, and management of public investments are matched with policy analysis, evaluation, data collection, reporting and dissemination. In addition, (policy) coordination is weak and inefficient. Past efforts have focused on data collection activities with little emphasis on the use of the information collected for policy making. Thus much remains to be done to reach minimum standards for an efficient m&e framework which includes improved coordination of government activities. Such a framework is an important prerequisite for PRSP implementation to (a) orient policies and programs towards achieving objectives, while efficiently allocating and managing financial and human resources, and (b) provide transparency and accountability, for civil society for whom services are rendered. The Government recognizes the need for such a framework. As a first step it has installed in all ministries project coordinators whose main function is to monitor and evaluate implementation and consistency with overall policy objectives. It is envisaged to establish at the level of the Presidency a policy coordination, monitoring & evaluation infrastructure to improve strategic decision making and to ensure that key Government strategies are adequately implemented. Training and capacity building It is the Government's view that the training and capacity building needs in the context of the implementation of its reform program are substantial. The reform program will require significant investments in institutional and human resource development. The institutions that are at the center of the reform process will need assistance to manage and implement the complex change processes triggered by the various reforms. Comprehensive awareness creation, training and capacity building will be required to ensure the sustainability of the reforms. The focus of the Govermment is therefore to strengthen the ability of key institutions that are tasked to effectively manage institutional change and governance reforms, in particular the Ministries of Budget & Finance, and of Justice. The Government also believes that without efficient local training institutions its ambitious reform program cannot be implemented and sustained. At the present stage the capacity of local training institutions to deliver professional training in particular in the areas of public finance management, general administration, monitoring & evaluation, legal and judicial reforms is limited. To reduce Madagascar's dependency on costly overseas training the Government has begun to upgrade some of the key institutions and to enhance their capacity. It has made available to the National School for Magistrates and Clerks of the Court (Ecole Nationale de la Magistrature et des Greffes, ENMG) new facilities which would enable the school to significantly enhance its training program. Similar plans exists for other institutions such as the National School of  4 PID Administration (Ecole Nationale d'Administration de Madagascar, ENAM) and the National Center for Administrative Training (Centre National de Formation Administrative, CNFA). In line with these attempts to improve quality and quantity of local training the Government has also requested to integrate Madagascar into the Global Development Learning Network (GDLN) initiated by the World Bank. 2. Objectives The main objectives of the project are to assist the Government of Madagascar (GoM) in implementing the poverty reduction strategy which is based on the Poverty Reduction Strategy Paper (PRSP) by * Rationalizing and modernizing budget and public expenditure management, * Improving accountability and transparency of Government operations, * Refining Government strategy in the area of judicial reform, and by * Strengthening the capacity of public institutions to deal with complex change processes. 3. Rationale for Bank's Involvement The comprehensive World Bank experience with public finance reforms will be critical for the design and implementation of the Madagascar reforms. In this context, the World Bank is expected to make available for Government consideration comparative experience in particular with regard to the integrated financial management system but also in the area of decentralization, legal and judicial reforms. 4. Description The project which would be implemented over a period of five years consists of two components: Component 1 - Improvement of transparency and economic governance This component would support a comprehensive reform of the public finance system in Madagascar, mainly at the central government level. It would build on previous reforms already completed or initiated and on a pilot financed under PAIGEP I. The component would include four sub-components: (i) Integrated publicfinancial management system. The budget of the central government would be prepared and managed on the basis of a comprehensive computerized system to which all agencies involved in budget and expenditure management (Finance and Budget, line ministries, central and de-concentrated offices of central government) would be connected. The system would encompass the whole national budget: wages, non-salary operating costs, investment, debt service, income mobilization (customs, taxes). This would include the roll-out of the integrated system developed and tested in the province of Toamasina under PAIGEP I to the other five provinces. (ii) Internal and external audit and control functions. The GoM has prepared a proposal to comprehensively reform the internal and external audit functions in view of strengthening capacity and putting in place an adequate framework. This work has been complemented and further refined by a Country Financial Accountability Assessment (CFAA) which will be completed in early FY04. The project will assist the GoM in implementing the recommendations to strengthen internal and external controls. It will particularly focus on adjusting the existing institutional and procedural framework to international standards. In this context, the project will support the establishment of an independent internal audit function in the Ministry of Finance and Budget ('Inspection Generale des Finances'), the strengthening of other control functions ('Brigade du Tresor', 'Inspection Generale de l'Etat', 'Controle des Depenses Engages', Conseil de Discipline Financiere et Budgetaire') and the transformation of the 'Chambre des Comptes' into a 'Cour des Comptes' (Auditor General). (iii) Procurement reform. Based on the findings of a Country Procurement Assessment Review (CPAR) which is expected to be completed in early FY04, the project will assist the GoM in adjusting the public procurement system to international standards. This will include a comprehensive reform of the existing regulatory and institutional framework as well as significant capacity building activities to ensure compliance with the new rules and regulations. (iv) Coordination,  5 PID monitoring & evaluation. This sub-component will assist the GoM in strengthening monitoring and evaluation, in particular in view of the implementation of the PRSP. It will support the development of adequate mechanisms to coordinate and track the implementation of government policies, in particular at the level of the Presidency. This will include capacity building activities for Government in the use of informnation for decision making, management, public investment oversight, policy analysis, evaluation and reorientation of policies and programs within the context of the PRSP. Component 2 - Capacity building and strengthening of local training institutions This component would focus on institutional development and capacity building activities in selected government institutions. Capacity building in the Ministry of Economic Affairs, Finance and Budget aims at complementing the significant changes triggered by the reforms under component 1. To continue the reforms initiated under PAIGEP I the Ministry of Justice will receive some support to improve its operational efficiency to implement key reforms identified by the government (expedition of civil and commercial proceedings, strengthening of internal control to combat corruption). To ensure that capacity building activities can be adequately implemented the project also aims at strengthening selected local institutions that would deliver professional training and capacity building in particular in administrative and financial management as well as procurement. Project support will focus on the Ecole Nationale de l'Administration de Madagascar (ENAM) and the National Center for Administrative Training (Centre National de Formation Administrative, CNFA). In addition, the project will continue to provide assistance to the institution that is responsible for the training of justices and court personnel (Ecole Nationale de la Magistrature et des Greffes' - ENMG). The ENMG received support under PAIGEP I. The project would further strengthen the institutional capacity of ENMG, and provide it with the resources that it requires to improve its training facilities, enhance its training curriculum and deliver high quality training. In line with the government's strategy to strengthen the capacity for the provision of in-country training support the project will include the establishment of a Distance Learning Center in Madagascar as part of the Global Development Learning Network. 5. Financing Source (Total (US$m)) BORROWER ($28.00) IDA ($30.00) Total Project Cost: $58.00 6. Implementation The project will be implemented under the authority of the Office of the President. 7. Sustainability Critical factors for the sustainability of project benefits are: * Degree of government's commitment during the implementation of the project Despite the high risk to implement such complex reform program continuous government's commitment is expected because of the broad consensus about the need to comprehensively reform the existing system of public finance and to significantly strengthen the accountability framework. * Capacity and incentives to institutionalize the project The project will put a heavy burden on the administrative capacity of the government machinery to effectively deal with the significant changes triggered by the introduction of an entirely different public expenditure management system. The targeted institutions will need to dedicate a substantial amount of their (rather limited) administrative capacities to integrate the new system into the existing institutional structures and procedures. To address these challenges a significant amount of training  6 PID and capacity building has been built into the project to ensure that the changes introduced by the reforms can be adequately dealt with. 8. Lessons learned from past operations in the country/sector The proposed project design reflects previous implementation experience: The main emphasis of the project are comprehensive public finance reforms; the operational agenda has been extensively discussed with the various stakeholders and agreed upon with Government. For the introduction of the integrated financial management system the Project Implementation Plan (PIP) foresees a carefully sequenced and prioritized roll-out. The new system will be designed and implemented on a 'turn-key' basis by an experienced international contractor. This contractor will be subjected to regular quality control and independent audits. This approach will mitigate implementation risks and management problems which typically occur in a large-scale IT-project. To address capacity building constraints and to overcome potential resistance significant training and awareness creation activities have been built into the project. These activities will be complemented by regular workshops to discuss implementation problems and concerns. 9. Environment Aspects (including any public consultation) Issues n/a 10. List of factual technical documents: n/a 11. Contact Point: Task Manager Guenter Heidenhof The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458 5591 Fax: 202-614 1191 12. For information on other project related documents contact. The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web http:/l www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.