Ghana - Public Financial Management Technical Assistance Project

Document of The World Bank Report No. T-6977-GH TECHNICAL ANNEX REPUBLIC OF GHANA PUBLIC FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT OCTOBER 10, 1996 Macroeconomics Group 4 West Central Africa Department Africa Region  CURRENCY EQUIVALENTS US$1 = 1680 Cedis (September, 1996) FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS ADMU Aid and Debt Management Unit AMIS Aid Management Information System ASYCUDA Automated System for Customs Database BoG Bank of Ghana BPEMS Budget and Public Expenditure Management System CEPS Customs, Excise, and Preventive Services CIDA Canadian International Development Agency CAGD Controller & Accountant General's Department CPAR Countrv Procurement Assessment Report CS-DRMS Commonwealth Secretariat's Debt Recording and Management System EMS Economic Management Support Project ERP Economic Recovery Program EU European Union FAD Financial Administration Decree FAR Financial Administration Regulations FIMTAP Public Financial Management Technical Assistance Project FINSAC Financial Sector Adjustment Credit GDP Gross Domestic Product GoG Govemment of Ghana ICB Intemational Competitive Bidding IPPD Integrated Personnel and Payroll Database IRS Internal Revenue Service LIB Limited International Bidding MDA Ministries, Departments, and Agencies MTEF Medium-Term Expenditure Framework NaTCAP National Technical Cooperation and Assessment Program NCB National Competitive Bidding NDPC National Development Planning Commission NRS National Revenue Secretariat ODA Overseas Development Administration PER Public Expenditure Review PFP Policy Framework Paper PSAC Private Sector Adjustment Credit PUFMARP Public Financial Management Reform Program SAIS Structural Adjustment Institutional Support Project VAT Value-Added Tax  REPUBLIC OF GHANA PUBLIC FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT TECHNICAL ANNEX Table of Contents Page No. I. THE PROJECT 1 A. Background I B. Detailed Project Description I Budget Preparation Sub-System 2 Problem 2 Proposed Component Objectives and Activities 4 Budget Implementation Sub-system 5 Problem 5 Proposed Component Objectives and Activities 5 Accounting Sub-System 5 Problem 5 Proposed Component Objectives and Activities 6 Cash Management Sub-System 6 Problem 6 Proposed Component Objectives and Activities 7 Aid and Debt Management Sub-System 7 Problem 7 Proposed Component Objectives and Activities 8 Revenue Management Sub-System 8 Internal Revenue 8 Problem 8 Proposed Component Objectives and Activities 8 Customs, Excise, and Preventive Services 9 Problem 9 Proposed Component Objectives and Activities 9 Indirect Tax Reforms 9 Problem 9 Proposed Component Objectives and Activities 9 National Revenue Secretariat 10 Problem 10 Proposed Component Objectives and Activities 11 Audit Sub-System 11 Problem 11 Proposed Component Objectives and Activities 11 Procurement Sub-System 12 Problem 12  ii Proposed Component Objectives and Activities 12 Information Technology Strategy 12 Application Software 13 Hardware 1 3 Human Resource Development 13 Legal Framework Revision 14 Development of Manuals 14 Communications Strategy 15 Inception Workshops 15 PUFMARP Newsletter 15 Project Management 15 C. Project Monitoring and Evaluation 16 II. PROJECT ADMINISTRATION AND IMPLEMENTATION 17 A. Project Implementation 17 Steering Committee 17 PUFMARP Implementation Team 17 B. Bank Role in Project Implementation 18 C. Implementation Schedules 18 D. Project Financing and Costs 19 Project Financing 19 Project Costs 19 E. Procurement Arrangements 20 Procurement of Goods 20 Procurement of Consulting Services 21 Procurement of Civil Works 21 Prior Review 21 F. Disbursement Plan 21 G. Accounts, Audit, and Reporting 21 Annexes A. Performance Indicators 22 B. Schedule of Project Activities 26 C. Terms of Reference for Consultancy Services for the Design and Implementation of BPEMS 31  1. THE PROJECT A. Background I . Since the start of the ERP, the Government of Ghana (GoG) has, under vanrous donor- funded programs, sought to improve its financial management. Under the Structural Adjustment Institutional Support Project (SAIS)' which accompanied and complemented the Bank's first Structural Adjustment Credit (SAC I), progress was made in, among other areas, external debt management, tax administration, and policy analysis. The Economic Management Support Project (EMS), which was approved by the Board in 1991, further sought improvements in budgeting, auditing, expenditure reporting, and tax administration. In particular, it supported the introduction of an Integrated Personnel and Payroll Database (IPPD) which linked personnel information to payroll and allowed for the automated processing of the Government payroll and analysis of personnel information. The Debt Recording and Management System (DRMS), developed by the Commonwealth Secretariat, was installed and operationalized in the Aid and Debt Management Unit (ADMU) of the Ministry of Finance, the Bank of Ghana (BoG), and the Controller and Accountant-General's Department (CAGD). Customs administration was improved through the introduction of the Automated System for Customs Database (ASYCUDA) which was extended to the primary ports. The Financial Sector Adjustment Credit (FINSAC) has addressed institutional strengthening of the Institute of Chartered Accountants (ICA) and the banking sector by the introduction of accounting standards through the Ghana Accounting Standards Board and of new legislation improving financial reporting supervision on the part of the BoG. It has also supported a diagnostic study of the Audit Service which has come up with recommendations on enhancing the capabilities of the Audit Service. However, these efforts were of a piece-meal nature and were not guided by the requirements of an integrated financial management system. 2. The Government is now committed to implanting an integrated financial management system in the country. The motivation for this is from three sources. First, better financial management is critical to effective macroeconomic management and outcomes, particularly in an era of uncertain donor flows. Second, with Ghana adopting a democratic government since 1992, higher levels of accountability are perceived as critical to consolidating and sustaining the democratic process. The 1992 Constitution has set the framework for greater participation of citizens in society and has specifically defined the roles and responsibilities of the judicial, legislative and executive arms of Government to create the basis for maintaining the necessary set of checks and balances essential to a democratic society. Third, effective financial management, particularly at the decentralized local level, is a pre-condition to the implementation of the Government's decentralization program which is embedded in the Constitution. B. Detailed Project Description 3. The Project will develop an integrated public financial management system in Ghana. This is an inter-related set of sub-systems which plans, processes, and reports upon financial resources, covers a broad spectrum of financial management areas, and is computer-based. The principal factor which "integrates" the system is a common, reliable, unified database to, and from which, all financial data flows and which is shared by all the financial users. 1 Approved in 1987 and closed in 1993.  2 4. The Project will support the development of eight critical components or sub-systems (the shaded boxes in Chart 1): (i) the budget preparation sub-system; (ii) the budget implementation sub-system; (iii) the accounting sub-system; (iv) the cash management sub-system; (v) the aid and debt management sub-system; (vi) the revenue sub-system; (vii) the procurement sub-system; and (viii) the auditing sub-system. Even though these eight components are functionally different, the first three components are logically united in their operations and the Project seeks to develop them as such. Thus, a comprehensive Budget and Public Expenditure Management System (BPEMS) wvill be developed which will integrate in a single common system the information systems for budget preparation, budget implementation, and accounting. The following sections provide a description of the individual components of the Project. Budget Preparation Sub-System 5. Problem. The current process of budget preparation has several weaknesses, some of which were identified by the 1993 PER. These weaknesses have generally led to a lack of ownership of the budget by the sector ministries and has undermined the utility of the budget as an instrument for achieving national priorities and for managing the financial resources of the government. 6. Some of the main weaknesses in budget preparation are: (a) preparation of the recurrent budget on an incremental basis, i.e. by adding a certain percentage (based, for instance, on inflation) to the previous year's estimates of expenditures, without reviewing whether the particular activities are in line with government priorities or whether they are being implemented in the most cost-effective manner; (b) absence of a medium-term outlook, or a lack of forward planning, of the recurrent budget such that forward estimates of the recurrent costs of current policies and programs are not developed, (c) lack of critical review of the government's own priorities in the preparation of the development budget, and the absence of the estimation of its recurrent cost implications and whether sufficient funds will be available to cover these recurrent costs; and (d) lack of adequate budget guidance to the ministries, including the lack of hard expenditure ceilings in the budget guidelines reflecting the Government's expenditure priorities. 7. The above weaknesses in the budgeting process result in an inappropriate allocation of resources. The need for restructuring of public expenditures is particularly acute now because (a) a successful inflation management strategy is critically dependent on prudent public expenditure management; (b) strategies for economic reform and poverty alleviation (being developed by the Government will) require changes in the budget, both inter- and intra-sectorally; and (c) scope for additional revenue generation is limited and the future of donor flows increasingly uncertain. Hence, for an accelerated growth strategy, the efficiency of public expenditures is critical. 2 2 In the short-term, such efforts may be constrained by the large size of wage and wage-related expenditures (the restructuring of which will need to await the outcome of the National Institutional Renewal Program-NIRP) and the interest burden.  | ~~~~~~Chart 1: Ghana -Functional View of Public Financial Management Function Bftnk of Debt NDPC Ministry of Finance C6AG Minstries, Departrnents Revenue Collection Paylgg/gecv. Audit Servlce Ghana anaaernent Budget ProP., Exec., Mfmt Cash Managem nt, Treasury, Accountin and Agencies NRS, IRS, VAT Sectt, cEPS Cnks Macro LEGEND *- Arrows show Informatlornfows. FUtN lstndlc te Economic Systems fbr Macro-Economic Forecasting M ctroric fows, dotted nes, palW basd flws Forecasting Aorecasting 1 Focus Areas for the Tectscail Assistance Project Mahcro-Ecoromc Frmnwodrk "ita an hlla7Econorrc Frafwork MDAs Tax & CustomsI | pr vics | SY. for Expend] Systems I A wndcurrnt (Policy)_F__ __L Estimaton (Foe*ack "W F ~ - Bu`dge Guike5ss Budget GOkies from Aurt Budget Systems for Budge t Budtg Expew- irop.sais Preparation * "tMD"- ation I - BaSe Me data Rov r Estknates elvd Ft an Pro-jcds .. .. . D vknt rwrwt Budget AppoPrbtkns ... ~~~~~~~~~~~~~~Approv d t MOAs - --.W .. . ~~~~~~~~~~~~~~~~~~Noattocbn to Lhoe A9 ncbes \ xetr Budget systems Budget Appr. Core Government Execution Syst. Execution, for & Tr Accounting ____,_P___ Accounting Budge nttrs System _R_e __ and Fiscal me of Impentsttion on an W ank R*conc lIaton Reporting mirwndsw aig !rt an PuoPc DetA S,stems for lWontlorhng 4 ity rca Data an Projets tmnvstmntr Prjol s * of hwvo nwt Proi| Bank i~ ~ ~~~~~~~~~~~~~~~~~~~~.C W tctat an projsc 1s ||Systtms *4 Procurement Cash Cash Reiements _.__| Ca ._c ash _Exp_nd __F__ _ Management Borwg Req i kemuvl al Debt Aid & Debt Managmen Management P Lm D o S rvic Pnts/La n r cs' |Tax & Custorns Revenue Administration Management | stems ISy" fo