Mozambique - Public Sector Reform Project

Document of The World Bank Report No: 23815-MOZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 19.4 MILLION (US$25.6 MILLION EQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR A PUBLIC SECTOR RE FORM PROJECT IN SUPPORT OF THE FIRST PHASE OF THE PUBLIC SECTOR REFORM PROGRAM February 13, 2003 Public Sector Reform and Capacity Building Unit Country Department 2 Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective January 31, 2003) Currency Unit = Meticais US$1.0 = MZM 23,300 MZM 1 = US$0.000043 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACCRONYMS APL Adaptable Program Loan AT Administrative Tribunal CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CG Consultative Group CIRESP Inter-ministerial Conrmission for the Reform of the Public Sector CM Council of Ministers CPAR Country Procurement Assessment Review CPIA Country Policy Institutional Assessment CQ Consultant's Qualifications DANIDA Danish Aid DFID Department for International Development EGFE General Statutes of Civil Servants EU European Union FMR Financial Monitoring Reports FMS Financial Management System FMU Financial Management Unit GOM Government of Mozambique GOVNET Government Network GOVSYS Electronic Documentation Center GPM Prime Minister's Office GPN General Procurement Notices HIPC Heavily-Indebted Poor Countries HRM Human Resources Management IAPSO Inter-Agency Procurement Services Office of the UNDP IAS International Accounting Standards IBRD International Bank For Reconstruction and Development IDA International Development Agency SISTAFE Integrated Financial Management System IGF Government Audit Unit LC Least Cost Selection M & E Monitoring And Evaluation MADER Ministry of Agriculture and Rural Development MAE Ministry of State Administration MPF Ministry of Planning and Finance MINED Ministry of Education  MS Ministry of Health MTC Ministry of Transport and Commnunication MTEF Medium Term Expenditure Framework NBER National Bureau Of Economic Research NCB National Competitive Bidding NGO Non Governmental Organization NORAD Norwegian Aid PARPA Action Plan for the Reduction of Absolute Poverty PER Public Expenditure Review PHRD Policy and Human Resources Development Fund PIF Fundo de Melhoramento do Desempenho (Performance Improvement Facility) PS Permanent Secretary PPF Project Preparation Fund PR Presidency PRSC Poverty Reduction Strategy Credits QCBS Quality- and Cost-Based Selection RFP Request for Proposals SCR Compensation and Remuneration System SIDA Swedish International Development Cooperation Agency SIFAP Public Service Training System SIP Personnel Information System SOE Statement of Expenditure TOR Terms of Reference UNDP United Nations Development Program UTRAFE Technical Unit for the Reform of the Administration of State Finances UTRESP Technical Unit for the Reform of the Public Sector Vice President Callisto Madavo Country Director Darius Mans Sector Manager Brian Levy Task Team Leader Harry Gamett  MOZAMBIQUE PUBLIC SECTOR REFORM PROJECT CONTENTS A. Program Purpose and Project Development Objective .................................................1 1. Program purpose and program phasing ............................................................1 2. Project development objective ............................................................2 3. Key performance indicators ............................................................2 B. Strategic Context ............................................................3 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project . . 3 2. Main sector issues and Government strategy ..........................................................4 3. Sector issues to be addressed by the project and strategic choices . . . 1 4. Program description and performance triggers for subsequent grants . . 11 C. Program and Project Description Summary ....................................... 12 1. Project components ........................................................... 12 2. Key policy and institutional reforms supported by the project . ....................................... 15 3. Benefits and target population ...........................................................1 5 4. Institutional and implementation arrangements ........................................................... 16 D. Project Rationale ........................................................... 20 1. Project alternatives considered and reasons for rejection ................................................ 20 2. Major related projects financed by the Bank and/or other development agencies ... 22 3. Lessons learned and reflected in the project design ........................................................ 25 4. Indications of recipient commitment and ownership ...................................................... 27 5. Value added of Bank support in this project ........................................................... 28 E. Summary Project Analysis ........................................................... 28 1. Economic ........................................................... 28 2. Financial ........................................................... 28 3. Technical ........................................................... 28 4. Institutional ........................................................... 29 5. Environmental ........................................................... 30 6. Social ........................................................... 30 7. Safeguard Policies ........................................................... 31 F. Sustainability and Risks ........................................................... 32 1. Sustainability ........................................................... 32 2. Critical Risks ........................................................... 32 3. Possible Controversial Aspects ........................................................... 33 G. Main Grant Conditions ........................................................... 33 1. Effectiveness Condition ........................................................... 33 H. Readiness for Implementation ........................................................... 33 I. Compliance with Bank Policies ........................................................... 34 Annex 1: Project Design Summary ........................................................... 35 Annex 2: Detailed Project Description ........................................... 40 Annex 3: Estimated Project Costs ........................................................... 48 Annex 4: Cost Benefit Analysis Summary ........................................ 49 Annex 5: Financial Summary ........................................................... 50 Annex 5a: Financial Management Assessment Report . .............................................. 51  Annex 6: Procurement and Disbursement Arrangements ............................................ 57 Annex 7: Project Processing Schedule .............................................. 64 Annex 8: Documents in the Project File .............................................. 65 Annex 9: Statement of Loans and Credits ................. ............................. 66 Annex 10: Country at a Glance .............................................. 68 Annex 11: President Chissano's Speech on Public Sector Reform .................. ........... 70 Annex 12: Letter of Sectoral Policy .............................................. 72 Annex 13: Performance Improvement Facility: An Outline ....................................... 78 Annex 14: CPAR 2002, Executive Summary .............................................. 84 Annex 15: Ministerial Restructuring .............................................. 92 MAP(S) IBRD No. 29996  MOZAMBIQUE Public Sector Reform Project Project Appraisal Document Africa Regional Office AFTPR Date: February 13, 2003 Team Leader: Harry C. Garnett Country Director: Darius Mans Sector Manager: Brian D. Levy Project ID: P072080 Sector(s): Central Government Administration Lending Instrument: APL (Grant) Theme(s): Public Sector Poverty Targeted Intervention: Y Estimated AIPL Indicative Financing Plan Implementation Period lBank FY) Recipient IDA Others Total Commitment Closing US$ m % US$ m US$ m Date Date APL 1 25.6 57% 19.4 45.0 2003 2006 Govt. of Loan/ Mozambique G rant _ _ _ _ __ _ _ _ _ _ _ _ _ _ APL 2 30.0 42% 40.0 70.0 2006 2013 Govt. of Loan/ Mozambique G rant _ _ _ _ _ _ _ __ _ _ _ _ _ _ Total 55.6 59.4 115.0 [ ] Loan [ l Credit [X I Grant [ Guarantee [ 1 Other: For Loans/Grants/Others: Total Bank Financing (US$m): 25.6 Proposed Terms (IDA): Standard Grant RECIPIENT 2.6 1.4 4.0 IDA _ _ _ _ _ _ _ __ _ _ __12.6 13.0 25.6 Others 6.0 9.4 15.4 Total: 21.2 23.8 45.0 Recipient: GOVERNMENT OF MOZAMBIQUE Responsible agency: GOVERNMENT OF MOZAMBIQUE, UNIT FOR THE REFORM OF THE PUBLIC SECTOR (UTRESP) Address: Ave. Guerra Popular, 20-7, Predio CPD, Maputo Contact Person: Adelino da Cruz, Director Tel: 258-1-310620 Fax: 258-1-307674 Email: dacruz@zebra.uem.mz Estimated disbursements (Bank FY/US$m): Annual 5.8 9.5 7.4 2.8 Cumulative 5.8 15.3 22.8 25.6 Project implementation period: Phase 1: 3 years; Phase 2: 7 years Expected effectiveness date: April 30, 2003 Expected closing date: June 30, 2006   A. Program Purpose and Project Development Objective 1. Program purpose and program phasing The development objective of the ten-year program is: To provide capacity building support to the Government of Mozambique's Action Plan for the Reduction of Absolute Poverty (PARPA) by transforming the public service so that the poor throughout Mozambique receive the services they need and the economy can afford, and entrepreneurs throughout Mozambique are encouraged to invest. The ten-year program will assist in bringing about a transformation of the public service so that by the end of the program, poor as well as rich citizens in all parts of the country will have much better access to public services and businesses will have to deal with less red tape as they invest to provide the basis for sustainable economic growth. Services will be provided by the citizen's own local governments, via partnerships between the public and private sector, the private sector, and executive agencies, all accountable to citizens. It will be a citizen's right rather than privilege to have access to services. A much slimmer center of government will focus on formulating and monitoring policy. Public resources will be allocated in accordance with the priority needs of citizens and businesses, but also in ways that foster sustainable economic growth and social development. The Bank's program is part of a larger multi-donor program that will support the Government of Mozambique's Public Sector Reform Program, launched by the President in June, 2001. The program as a whole will lay the foundations for greater donor reliance on budget support, in the case of the Bank, through Poverty Reduction Strategy Credits (PRSC) planned for FY2004 and beyond. By supporting the implementation recommendations of the 2001 Country Financial Accountability Assessment (CFAA), the 2001 Public Expenditure Review (PER) and the 2002 Country Procurement Assessment Review (CPAR), the program will help to make public servants much more accountable to the public for the services they provide. Public sector reform is defined as reform of the crosscutting issues, common to all sectors, such as restructuring government for decentralized service delivery, accountability, wages, and human resources management. Thus the public sector reform program will support improvements in service delivery carried out by the sectors. Public sector reform also deals with fundamental issues such as the role, structure and processes of government. Phasing There will be two phases to the program. Phase 1. The basic conditions for the transformation will be established in the three-year first phase (the project). In-country capacity for change management support will be developed to help ministries improve service delivery. With support from the Performance Improvement Facility, service delivery processes will be reengineered through the Quick Wins Program and restructuring plans will be prepared in key ministries. Capacity will be developed to establish effective linkages between PARPA, MTEF, and sector programs. A public sector accounting profession will be established. Staff will be trained in the basics of expenditure management and accounting. New systems of expenditure management and accountability will be introduced with support from donors, in line with CFAA, PER, CPAR, and HPIC Assessment and Action Plan 1  recommendations agreed by the Government. Taken together, these improvements in accountability will assist in reducing corruption. Salary incentives will be introduced to make it easier to recruit, motivate and retain key staff. Support will continue for improved human resources management, including decentralization of the function. There will be substantial training capacity development during this phase. Phase 2. On the basis of, and depending on, progress in phase 1, a process of restructuring, reengineering, and decentralization, and monitoring and adjustment will take place in the second, seven-year phase as the reforms in the processes and structures of government are rolled out throughout the public sector with funding from the Performance Improvement Facility. The integrated financial management system will become progressively fully operational in central and local government resulting in a much stronger linkage being established between MTEF- based budget allocations in line with PARPA targets and expenditure tracking. Local and central government will develop the capacity to adhere to international accounting standards. Accountability to citizens will improve as audit capacity is decentralized and more service delivery functions devolved to local government. An increasing number of key staff will have salaries that will be competitive with the private sector as more budgetary resources can be made available from the budget. 2. Project development objective (see Annex 1) To support the Govemment to restructure the public service for decentralized service delivery, professionalize the public service, and improve govemance. 3. Key performance indicators (see Annex 1) The ten-year program: Access to basic services by the poor in rural areas is significantly improved. Data on this would be collected via poverty assessments. The three-year project: * At least six reengineering "quick wins" will have been implemented that will be recognized by the Ministries' clients (through service delivery surveys) as improving the quality of its services; * Three ministries will have begun to implement their plans to reengineer, restructure and decentralize the delivery of services (implementation to mean: structures have been revised and staffing changes made); * The regulations required to establish a professional accounting body will have been approved by the Council of Ministers; * A process will have begun under which key technical and professional staff will have their salaries increased in line with the Salary Reform Strategy and the restructuring plans (the number to be impacted, and thus the exact indicator, will be determined during the first year of the project in accordance with the Strategy, once it has been approved by the Council of Ministers); * The new policy process by which policies are formulated and submitted to the Council of Ministers, and which will link policy to resources and involve widespread consultation, will have been designed and have begun to be implemented.  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1) Document number: 20521 MOZ Date of latest CAS discussion: June 1, 2000 1.1. Country Assistance Strategy goals supported by the project: The 2000 CAS for Mozambique has three pillars: 1) increasing economic opportunities through private sector led growth; 2) improving governance and citizen empowerment; and 3) improving human capabilities. This project mainly supports the second pillar. There is a strong focus on improving accountability for the use of public resources, and involving citizens and businesses both in policy formulation and in monitoring service delivery performance. This project will also have an impact on the other two pillars of the CAS strategy. By making government more responsive to business needs, it will promote private sector growth. (An indicator covering this objective is one of the program indicators). Improved delivery of social and economnic services will help citizens reach their full productive potential. In addition, the project will provide substantial funding for training of those providing public services. Mozambique has particularly weak public institutions and human resources. The project will complement both a future Poverty Reduction Strategy Credit (PRSC) and the Government's Poverty Reduction Strategy Paper (PARPA) on which it is based, since in essence the project is providing the multi-sectoral capacity building support, through technical assistance and training, needed to achieve the reforms required to reduce poverty. The proposed project will also support the improvements in fiduciary responsibility that will be required to track the impacts of the budgetary support given under a PRSC. It will provide funding for the sectors to re-structure in preparation for the budget support under the forthcomning PRSC. The project will also support the implementation selected recommendations of the 2001 CFAA and PER, both of which highlight severe accountability problems. The 2002 CPAR identifies serious procurement problems, which will also be addressed by the project. The Executive Directors discussed the PRSP (IDA/SecM2001-0550) on September 25, 2001. Rationale for the use of the IDA grant: As an IDA-only country with a GNI per capita of less than $360 per annum, Mozambique has been allocated IDA grants of SDR 19.8 million for FY03. The full amount is proposed to be applied to the Mozambique Public Sector Reform Project. (An additional SDR 41.4 million in IDA grants was allocated to Mozambique for HIV/AIDS and will be fully utilized to support an upcoming HIV/AIDS project being developed under the framework of the Multi-country AIDS Program.). Of the three projects proposed in FY03 in the Mozambique program, this project was selected for grant financing in the "other poor countries" category for the following five reasons: 3  * Strong human development impact. The proposed project will support restructuring in key PARPA ministries, including health and education. The objective of this restructuring is to decentralize the delivery of basic services to the poor. Thus this operation will help Mozambique to accelerate progress towards achieving the Millennium Development Goals (MDGs) for human development. * Centrality of public sector reform to all poverty-reducing activities. Mozambique's Public Sector Reform program, which the proposed project would support, is central to Mozambique's medium- and long-term development strategy and central to the Bank's CAS. As donors continue to move towards higher levels of financing in the form of budget support in Mozambique, an increasing percentage of poverty-reduction activities will be channeled through the public sector. Improving the public sector's ability to deliver services in a cost- effective manner will therefore have a multiplicative effect. By improving accountability, rationalizing wages and human resource management, and modernizing the structure and processes of government, the Public Sector Reform program will make a crucial contribution to improved public service delivery and so to poverty reduction. * Better collaboration between IDA and other donors supporting the Government's Public Sector Reform Program. The use of an IDA grant to support the Government's Public Sector Reform Program will facilitate closer collaboration between IDA and the other donors that are supporting program implementation. Many donors have participated in the preparation and appraisal of the project and have, together with the Bank, been funding the Government's Public Sector Reform Secretariat (UTRESP). These donors are putting together a multi- donor pool to support the Government program through UTRESP. Having the funds in the same form will facilitate their management by UTRESP. * Stronger public support. The use of grant resources will also help to secure popular support for a reform program which is ambitious and which challenges vested interests, who might tend to use the fact that the government has had to borrow to implement this poverty reduction focused program to oppose its implementation. * The impact of the grant funds on poverty reduction will be monitored and evaluated. A Monitoring and Evaluation Manager will be appointed to UTRESP prior to effectiveness. That manager will not only be responsible for monitoring against the indicators in the logical framework (such a system is already in place in UTRESP) but also for studying the relative impact of a grant versus a credit. A baseline survey will be carried out by senior officials in the key ministries' and other stakeholders' expectations as to the relative impacts, with a follow up survey at the time of the midterm review. Government preference. The Government has shown strong ownership of this program and has explicitly requested grant financing for this project. It sees significant benefit in the popular support for this program and seeks to boost the momentum for country-wide results. 2. Main sector issues and Government strategy Although Mozambique's policy performance has been good (the overall CPIA rating for 2000 was above the average for Africa), starting from a very low base following the civil war, there are substantial concerns about the sustainability of that performance. The critical problems are as follows:  * quality of civil servants: civil servants in Mozambique are among the most poorly educated in Africa, they are also poorly paid, technical and professional staff are particularly poorly paid compared to their counterparts in the private sector and parastatals; * weak accountability: there is no accounting profession in Mozambique, and not a single Mozambican qualified to international accounting standards; weak internal and external auditing capacity hence weak oversight by the National Assembly and citizens; and almost no follow-up on the implementation of policies; * complex service delivery processes: centralized, complicated and confusing. 2.1 Main sector issues "We want a public sector that transmits efficiency... a new culture for the public service should be developed as we advance toward a market system", the Prime Minister. In this quotation, the Prime Minister admits that the public service is inefficient and not well organized to support Mozambique's transformation from a centrally planned to a market economy. From its independence in 1975 to the mid-1980s, Mozambique followed a central planning model. The civil war from the mid-1970s to the Peace accord in 1992 destroyed social and economic infrastructure. Market-oriented economic reforms in place since 1987 have reduced inflation and attracted foreign investment. A new constitution was enacted in 1990. Since the signing of the peace agreement in 1992, the country has successfully held two democratic elections. In this relatively stable political environment, economic growth has been impressive, exceeding 10 percent on average in the past few years. However, the challenges of development remain daunting. The public sector is staffed with poorly qualified, badly paid civil servants. Not surprisingly, corruption is a problem. A high proportion, especially of the better educated, are based in Maputo. Many citizens do not receive any public services at all. The rest suffer from very poor service delivery. Public servants, many of whom are still directly involved in service delivery still treat the receipt of public service as a privilege not a right. Processes need profound restructuring. Over-regulation exemplifies the situation. A 1996 World Bank study, "Mozambique, Administrative Barriers to Investment: the Red Tape Analysis", describes the lengthy, unpredictable and highly complicated administrative processes for investment, leading to significant costs at the outset and during the life of the business, leading to lost output and employment. An outdated legal and regulatory framework, uncertainties of changing legal rules, lack of transparency and poor training of public servants in the implementation of the rules make life difficult for businesses as well as citizens. New research confirms that the situation did not improve much since that study. Rated with 74 other countries on the time and cost of entry of a start-up firm, Mozambique comes second to last (Djankov, La Porta, Lopez-de-Silanes and Schleifer, NBER Working paper 7982, 2000). The public sector is still very much functioning on the basis of a self-centered paradigm. Neither the culture nor the practice of the executive branch of government being effectively accountable to the legislative branch has taken root. Furthermore, the notion of accountability of the public servant to the users and citizens is still relatively new, and participation of citizen groups or the 5  private sector in the oversight of public administration, as well as in information sharing, is still poorly developed. This is also because civil society is still relatively poorly organized. The issues discussed below are based upon the studies and workshops undertaken over the past 3 years. These are listed in Box 1. Service delivery is sti1l highly centralized The Mozambican State still functions in a paradigm of centralism and hierarchy. A process of gradual deconcentration is ongoing but suffers under dual subordination to the center, through the sector ministries and governors and provincial administrations. The traditional practice of treating provincial services as extensions of central programs has done little to encourage the staffing of local administration with well-qualified staff. Similarly, equipment and infrastructures are very limited outside the capital, and working conditions generally very poor. Following a constitutional change in 1996, 33 municipalities were created in 1997. However, many of the enabling regulations that need to accompany the decentralization law remain to be enacted. There is the potential for conflict between the municipalities and the deconcentrated administrations of the sector ministries. This first step towards genuine decentralization (locally based service delivery, with accountability to local citizens) needs to be accompanied by structured policies of transfer of powers and resources, which obviously must be gradual, in view of the extremely low capacities at the municipal level. In particular the capacity of municipalities and the local office of ministries to manage finances is very weak. Although there is a widespread appreciation that gradualism is required, there is no clear timetable for the reforms. The move of key public sector functions down to different sub-national tiers of government must occur in parallel with a change of the role of the center, from provider to facilitator. Functions of state organizations at the center should be reoriented towards formulating, monitoring and facilitating the implementation of policies. To assist in the design of the project, a study on the administrative constraints to service delivery was undertaken ("Note on Administrative Constraints to Service Delivery with a Focus on the Sub-National Level"). This study compared the formal and informal service delivery systems in key sectors, through interviews with Bank's team leaders in the key sectors and analysis of the findings of the PER. It provides pointers for reforming key public sector rnanagement systems (personnel, finance). Civil servants lack the skills and incentives to serve citizens and businesses well Despite continuing efforts to improve the educational level of its population, Mozambique is still facing an acute shortage of higher-educated people. In 1999, total enrollment in higher education was 11,600, but the total number of new higher education graduates in Mozambique was only 483 in 1998. The result is that out of over 100,000 civil servants (excluding the armed forces), only about 3 percent have a degree, almost all of whom are based in Maputo. Furthermore, 52 per cent of managers do not have the academic qualifications required for their jobs. On the demand side poor working conditions and low pay levels compared to the "international donor sector" and even to the private sector impede the public sector from attracting enough skilled staff. Absence of a sound human resources management policy, and of links between 6  recruitment and promotion and perfornance are aggravated by the complexity of the rules and lack of clarity of the mandates. A recent study has shown that only 13 per cent of civil servants are appointed through a competitive process - family and party connections are more important. Poor formal incentives are breeding ground for corruption. Very few channels of communication exist between top civil servants and their staff and little knowledge of the rules contributes to slow implementation and lack of individual initiative. Public institutions are assessed in terms of following procedures correctly rather than in terms of performance against expected results. Furthermore, as a result of the very recent democratization and of years of armed conflict, the public sector tends to be somewhat politicized. Top civil servants and governors are appointed by the leaders of the party in power more on the basis of their loyalty than their technical merit. There is little accountability for the use of scarce resources Despite some improvement in terms of a more transparent and comprehensive budgeting process, several factors contribute to a relatively poor allocation and use of resources. These findings were confirned by the 2001-2002 PER and CFAA: * the functional classification is not sufficiently disaggregated, hindering the efforts to efficiently measure and monitor the impact of public expenditures; * the Inspectorate General of Finance (internal audit) and the National Administrative Tribunal (external audit) lack trained and qualified staff as well as budgetary resources. There is no value-for-money audit; * the MTEF has not been formally institutionalized; * the level of extra-budgetary flows leave important resources unaccounted for; * neither parliament, civil society nor the private sector participates effectively in the planning, budgeting and financial management process; * the legal framework for accountability is deficient inasmuch as public information about the Government's performance is insufficient. The current framework does not require leaders to declare their assets and liabilities, there is no freedom of access to information in place that would provide for citizens to be better informed, there is no whistle-blower legislation in place that would provide protection to citizens who report corrupt practice, and the rules of evidence do not require leaders and other public officials to explain how they became wealthy while in office. Policy coordination, monitoring and evaluation are weak Public policies are not formulated according to a standard format. Little effective analysis precedes their submission to the Council of Ministers. The linkage between policy and resources is weak. There is little coordination either at the center or in the provinces in the preparation and implementation of policies, and there is virtually no monitoring of the implementation of policies or evaluations of their impact. 7  Box 1 Analytical Underpinning for the Project A number of preparatory activities have been undertaken by the Bank and the Government over the past three years: 1. Review of Public Sector Reform in Mozambique, July, 1998, carried out by Bank staff in collaboration with Government. 2. Reform of the Mozambican Public Sector: Strategy and Actions, August, 1998, Government of Mozambique - based upon above study. 3. Workshop on public sector reform issues, February, 2000: meeting of senior officials and academics to identify administrative constraints and possible solutions. 4. Pay policy study, ongoing, 2000-2001: preparation of sustainable pay reform options and design of medium term donor support scheme. 5. Policy process study, 2001: study of the process by which policy is formulated, decided upon, implemented and monitored. 6. Workshops in 2001 to discuss reform issues with groups of stakeholders: permanent secretaries, NGOs, religious groups, journalists, trade unions, donors, private sector, and national directors. Each participant completed a questionnaire identifying key constraints. 7. Country Financial Accountability Assessment, 2002. 8. Public Expenditure Review, 2002. 9. PARPA. 10. Civil Service Management System: An Analysis of Reforms To Date and Emerging Next Steps, Draft, July, 2001. 11. Politica Salarial a Medio Prazo, UTRESP, Draft, May, 2001. 12. Improving Expenditure Management in Mozambique, World Bank, July, 2001. 13. Administrative Constraints to Decentralized Service Delivery, World Bank, August, 2001. 14. Changing role of govermment and decentralization, UITRESP, Draft, December 2001. 15. Policy management study, UTRESP, Draft, October 2001. 16. Future studies: govemance baseline survey (households', businesses', and public servants' experiences and perceptions of service delivery), salary survey (financed by the PPF). 8  HIEV/AIDS is having a growing adverse impact on public sector capacity HIV/AIDS impacts public sector capacity in two ways, by increasing the demand for public services in some sectors, while reducing the public sector capacity, since civil servants are affected by the disease (lower productivity, high attrition environment). GoM has requested the support from IDA in preparing a MAP project. 2.2 Government strategy Issued in August 1998, the "Reform of the Mozambican Public Sector, Strategy and Actions" (Republic of Mozambique), describes the different areas already undergoing reform, and the need for articulating a strategy to move "in the direction of a new organizational culture for the public sector, centered on efficacy and transparency", as well as the changes to be made to transform the public sector, currently centered around the delivery of service, to being a "facilitator". This document, presented at the 1998 CG meeting together with a public sector study jointly undertaken by the World Bank and the GoM, provides the first, underpinning diagnosis for the elaboration of the public sector reform strategy. Reform actions of the past few years have focused on three main issues: * the rationalization of human resources, through the establishment of a new Career and Remuneration System, measures of salary decompression and the implementation of a Human Resources Management System (computerized database), as well as the establishment of a program of training for public servants (Public Service Training System, SIFAP) and a State Administrative Inspectorate; * institutional reform through measures towards deconcentration and decentralization (creation of local governments, municipal elections); * reform of the budget system, with the enactment of a new Budget Law (1997) and its corresponding regulations, and enactment of a new Public Finance Law (2001). Over the past year, following the 1999 elections, the President established the Inter-ministerial Commission for the Reform of the Public Service (CIRESP), chaired by the Prime Minister. The Council of Ministers then set up the Technical Unit for the Reform of the Public Service (UTRESP) to be a secretariat to CIRESP. CIRESP recently approved the reform strategy prepared by UTRESP: Estrategia da Reforna do Sector Publico 2001-2011 (June 2001). The strategy defines public sector reform as the cross and multi-sectoral reforms in processes and institutions needed to support reforms in the separate sectors leading to improvements in the delivery of services to all citizens and businesses. The Council of Ministers has decided that the reform will cover all institutions financed directly or indirectly by the State and will focus on restructuring the State so that public servants will become more results-oriented. The Strategy includes a Quick Wins Program, which consists of identification of measures that could be successfully implemented in a relatively short period, and would be highly visible, partly to build up support for the reform program. The CM has requested that all ministries prepare and implement quick wins; The Prime Minister has taken responsibility for this program. The GoM Strategy takes account of the GoM's poverty reduction objectives set forth in PARPA. Good governance is described in PARPA as one of the fundamental conditions for poverty 9  reduction, improved public service delivery and sustainable economic growth. Stakeholders consulted as part of the PARPA process stressed the need for good governance (and in particular decentralization and deconcentration policies that favored participative development at the local levels). They also highlighted the need for the State to improve its capacity to act energetically on its policy and program choices, as well as the importance of fighting corruption and establishing a more mutually supportive relationship between public institutions and citizens. President Chissano launched the reform of the public sector, based upon this Strategy, on June 25th, 2001, National Day, in a speech to the nation. His speech is summarized in Annex 11. Key points from the speech are shown in Box 2. He confirmed his commitment to public sector reform in a speech to the National Assembly in April, 2002. The Government Strategy has been published and widely disseminated. GoM has prepared an Implementation Plan and has implemented a number of Quick Wins. Box 2 Quotations from the President's Speech Launching the Public Sector Reform Program National Day, June 25, 2001, Bagamoio barrio, Maputo The public sector has generally operated with low levels of efficiency and has provided the citizens with low levels of efficiency. There is now a generalized trend for civil servants to demand illicit payments for providing the services that are the job of the civil service. Examples of corruption: The mother or father of a family who must "offer thanks" in order to enroll their son at school. The patient who is only cared for if he gives the health worker "a little envelope" . . .the driver who must buy a beer or "act like a man" to the police to avoid a fine. The Government wants a public service that is flexible, decentralized, free of red tape, simplified, modernized, competitive, and concerned with the results and quality of services provided to the citizens. The public service must be transparent ... endowed with qualified, professional staff. I want to see participatory mechanisms institutionalized which allow us to identify more securely the desires and needs of citizens. At the top of the list of reforms is the rationalization of procedures and the decentralization of administrative structures and processes in order to make them more efficient and accessible to the citizens. From 2001 to 2004 the basic conditions would be established for the profound transformation of the public sector. Up to 2011, programs with a much broader impact would be inplemented .... the public sector will be a sector working for results and for citizens. 10  3. Sector issues to be addressed by the project and strategic choices The Bank's support will focus on five of the components of the GoM strategy: decentralization and institutional restructuring, strengthening policy formulation and monitoring, the professionalization of human resources, including pay reform, accounting and financial management, and change management. The phasing of the support is consistent with the Government's strategy, which will focus on quick wins and the preparation of plans to implement the strategy over the coming year, and establish the basic conditions for a longer reform program in its first, 3-year phase. The Bank will share support with a number of other donors. This project will support institutional reforms already underway in key sectors such as education, health and transport, all supported by multi-donor programs by focusing on crosscutting issues and, through the Performance Improvement Facility, providing the funding and incentives for reform. Reform in the sectors will be managed by the sectors themselves, just as reform in the Ministry of Finance and Planning, the Administrative Tribunal and the Secretariat to the Assembly will be managed and implemented by those agencies themselves. The program and project will provide leadership, coordination and monitoring and evaluation services, as well as funding. The reform team will be in a position to deal with major issues since it is led by the Prime Minister and his Inter-ministerial Commission, with a direct line to the Council of Ministers. 4. Program description and performance triggers for subsequent grants Phase 1 will begin to address the basic structure of government and incentive issues. In doing so, the project will seek to address the capacity issues identified in the GoM Public Sector Reform Strategy. Systems will begin to be put in place to make sure that individuals and service delivery units will be rewarded for performing well; and, if they do not perform well, they will be disciplined. Process reengineering for improved service delivery will be undertaken as part of the Quick Wins Program. Restructuring support, through the Performance Improvement Facility, will be given to ministries that have already demonstrated a willingness to reform. The project will also support the realignment of the center of government with a view to further decentralization of service delivery functions in support of the Bank's Municipal Development and Development Planning and Finance Projects. By helping to establish an accounting profession and reforming procurement processes, the project will support improvements in expenditure management and accountability funded by other donors. The agreed performance triggers are: * At least six reengineering "quick wins" will have been implemented that will be recognized by the Ministries' clients (through service delivery surveys) as improving the quality of its services; * Three ministries will have begun to implement their plans to reengineer, restructure and decentralize the delivery of services (implementation to mean: structures have been revised and staffing changes made); * The legislation and regulations required to establish a professional accounting body will have been presented to the National Assembly; * A process will have begun under which key technical and professional staff will have their salaries increased in line with the Salary Reform Strategy and the restructuring plans 11  (the number to be impacted, and thus the exact indicator, will be determined during the first year of the project in accordance with the Strategy, once it has been approved by the Council of Ministers); * The new policy process by which policies are formulated and submitted to the Council of Ministers, and which will link policy to resources and involve widespread consultation, will have been designed and have begun to be implemented. Phase 2 will continue to implement the restructuring, reengineering and decentralization and associated capacity building, with support from the Performance Improvement Facility. The Facility will provide incentives for reform - those who begin to reform will be rewarded with additional funding for further reform. Wage reform will continue. As more resources become available for wages, more staff will be moved towards salary levels prevailing in competitive markets. More senior staff will be placed on performance contracts. There will be very careful monitoring of the restructuring and decentralization experience. There will be unexpected outcomes to which adjustments will have to be made. Progress with improved service delivery will be monitored using the governance survey by comparing results with the baseline survey to be undertaken this year. C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown) 1.1 Restructuring Objective: To begin a process of restructuring central government so that service delivery will be improve through decentralization and rationalization ofprocedures. Phase 1 will focus on supporting key ministries committed to reform to prepare plans to decentralize, deconcentrate, and privatize the delivery of services and at the same time move towards focusing the ministries on policy formulation, monitoring and evaluation. Some ministries may be ready to implement the reforms before the end of the first phase. The Government public sector reform and team and country team members have confurned the readiness of a number of ministries for restructuring; the Prime Minister has asked that all rninistries prepare restructuring plans. The implementation of the reforms, and the associated capacity building, will be supported by the Fundo de Melhoramento do Desempenho (Performance Improvement Facility, PIF), which will be designed and begin to be implemented in Phase 1 (see Annex 13 for a description of how the fund will be operated). The Facility will include an incentive structure that will reward ministries and agencies that are committed to reform and meet their reform targets. The preparation of the plans, and the actual restructuring, will be carried out by the ministries themselves. The project's role will be to define the process, establish a change management team to support the ministries, train ministry staff in change management and strategic planning, and monitor progress (see Annex 15 for a description of the ministerial restructuring process). The project will help the Council of Ministers to exercise its collective responsibility for poverty reduction and the implementation of PARPA by improving the policy formulation, decision- making, implementation, monitoring and evaluation process. The project will strengthen the capacity of the Office of the Prime Minister - i.e. the managers of the policy process - through adequate staffing, training and equipment and will build capacity to link policy and resources more closely, especially through the Medium Term Expenditure Framework (MTEF) and the 12  Poverty Reduction Strategy Plan (PARPA), and monitor implementation. These activities will also help to realign the center of govemment on policy and monitoring as service delivery is progressively decentralized. The project will also provide capacity building support for reorganizing district administration and improving working conditions at the district level through the provision of training and equipment. Also, since it is important to be able to demonstrate progress while long-term structural changes are planned and implemented, the project will provide funding support to the GoM Quick Wins Program through the PIF. The quick wins will involve reengineering existing process to improve the delivery of services. Linkages will be established between restructuring and reengineering capacity building support under this project and the sectoral reform targets set for the first PRSCs. The PIEF will in effect provide funding to build the capacity of the sector ministries to prepare for the reforms the implementation of which would be funded by the PRSC. 1.2 Professionalization Objective: Motivate public servants to become more responsive to the needs of citizens and businesses and increase professionalism. There are immediate and long-term issues to be addressed. The leaders, managers, and key technical and professional staff essential to prepare and implement the reforms needed under this project and the sectoral reform programs have to have the incentives needed to become fully committed to reform and to their roles in the reform programs. There is an immediate need to enhance their conditions of employment to achieve this. There is also a medium term need to reform the salaries in the public service to meet the needs of a restructured and reoriented public sector: restructured for decentralized service delivery, and reoriented to service the public and facilitate business development. These basic medium term reforms of pay and conditions can only be executed alongside the restructuring, since the restructuring will help to define which are the key positions that are below market. In addition, some restructuring may be required to create the resources needed to pay the higher salaries. The process of preparing the restructuring plans will trade off higher salaries against other uses of funding to meet the redefined objectives of the ministries concemed. Since the restructuring plans will be prepared during phase I and for the most part implemented in phase 2, it will only be possible to implement the more basic, longer term pay reforms in phase 2. Thus the project will fund capacity building for the preparation of a sustainable medium term pay strategy, the design of a scheme to enhance the salaries of key staff in the short term, and the associated implementation plans, as well as substantial training in the skills required for the current and progressively reformed public service. It is assumed that the funding for the salary enhancement will be funded by the budget. To underpin the strategy, studies will be undertaken into both supply and demand aspects of the labor market of which the public sector is part. The enhancement would begin during Phase 1 and the implementation of the strategy would take place over a number of years, as resources became available, partly as a result of the restructuring. 13  The mainstreaming of gender and HIV-AIDS programs as part of public sector reform will be carried out with the support of other donors who are members of the Public Sector Reform Donor Working Group and who participated in the appraisal. Capacity building support will be given for the following: * Support design and implementation of sustainable medium term pay strategy to establish the priorities for raising the salaries of civil servants within the context of the revenue expectations of government and the policy priorities established in MTEF (study is nearing completion); * Prepare plans to introduce results oriented performance management for senior managers and in key central coordination agencies; * Reform Human Resources Management processes to improve responsiveness and efficienicy, and to encourage the increasing professionalization of the public service, including establishing equal opportunities for women. 1.3. Governance Objective: Improve allocation, efficient use and accountability ofpublic resources. The important reforms of expenditure management and accountability (referred to as the SISTAFE reform in Mozambique) which are part of the Government's Public Sector Reform Strategy and Implementation Plan, will be supported by the G10 group of donors, led by the IMF. The project will support the governance agenda by helping to establish an accounting profession for the first time in Mozambique, raising the policy profile of procurement reform, decentralizing procurement capacity, and strengthening the oversight capacity of the National Assembly through technical assistance and training for its Secretariat. 1.4 Program Coordination Objective: Enhance UTRESP and CIRESP capacity to coordinate and monitor the reforms and communicate with key stakeholders. * Build capacity of UTRESP to coordinate, administer, and monitor the Government's Public Sector Reform Program, including those parts supported by other donors, through training, advisory services and equipment. * Build change management capacity at UTRESP and in ministries. * Establish Council of Advisors drawn from outside the public service. 3 Governance PFM 20.8 46/ 11-- 261 4. Program Coordination CSR 3.7 8/ 3.2 70/ Total Project Cost I 45. 100%