Ghana - Public Sector Management Reform Project

Document of The World Bank ReportNo: 19004-GH PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 10.5 MILLION (US$ 14.3 MILLION EQUIVALENT) TO THE REPUBLIC OF GHANA FORA PUBLIC SECTOR MANAGEMENT REFORM PROJECT IN SUPPORT OF THE FIRST PHASE OF THE PUBLIC SECTOR MANAGEMENT REFORM PROGRAM April 6, 1999 Capacity Building Unit Country Departnent 10 Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 1998) Currency Unit = Cedi Cedi = US$ 0.00043 US$ 1.00 = 2,340 Cedis FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Lending BPEMS Budget and Public Expenditure Management System CAS Country Assistance Strategy CIDA Canadian International Development Agency CMA Central Management Agencies CSPIP Civil Service Performance Improvement Programme CSRP Civil Service Reform Program DANIDA Danish International Development Association DFID Department for International Development (UK) ERSO Economic Support Operation EU European Union GoG Government of Ghana GTZ German Technical Cooperation IPPD Integrated Personnel and Payroll Database KfW Kreditanstalt fuer Wiederaufbau (Germany) NMLGRD Ministry of Local Government and Rural Development MoF Ministry of Finance MTrEF Medium Term Expenditure Framework NDPC National Development Planning Commission NIRP National Institutional Renewal Programme NOC National Overview Committee OHCS Office of the Head of Civil Service PHRD Policy and Human Resources Development Fund (Japan) PMG Policy Management Group PPF Project Preparation Facility PSC Public Services Commission PSM Public Sector Management PUFMARP Public Financial Management Reform Programme PUSERMOS Public Sector Re-invention and Modernization Strategy for Ghana SA Subvented Agency TA Technical Assistance SOE State Owned Enterprise UNDP United Nations Development Programme USAID United States Agency for International Development Vice President: Jean Louis Sarbib Country Director: Peter Harrold Sector Manager: Brian Levy Task Team Leader: David Steedman Task Manager: Guenter Heidenhof  Ghana Public Sector Management Reform Program CONTENTS A Program Purpose and Program Development Objective ......................................................3 1. Program purpose and program phasing ................................................................ 3 2. Program development objective ................................................................3 3. Key performance indicators ................................................................3 B Strategic Context ................................................................3 1. Sector-related Country Assistance Strategy (CAS) goal supported by the program ....... 3 2. Main sector issues and Government strategy ...............................................................3 3. Sector issues to be addressed by the program and strategic choices ..............................5 4. Program description and performance triggers for subsequent loans .............................5 C Program Description Summary ...............................................................7 1. Program components ................................................................7 2. Key policy and institutional reforms supported by the program ....................................8 3. Benefits and target population ................................................................8 4. Institutional and implementation arrangements ............................................................9 D Program Rationale ............................................................... 10 1. Program alternatives considered and reasons for rejection ........................................... 10 2. Major related projects financed by the Bank and/or other development agencies .......... 11 3. Lessons learned and reflected in the program design ................................................... 11 4. Indications of borrower commitment and ownership ................................................... 12 5. Value added of Bank support in this program ............................................................. 13 E Summary Program Analysis ............................................................... 13 1. Economic ............................................................... 13 2. Financial ............................................................... 14 3. Technical ............................................................... 14 4. Institutional ............................................................... 14 5. Social ............................................................... 15 6. Environmental assessment ............................................................... 15 7. Participatory approach ............................................................... 15 F Sustainability and Risks ............................................................... 16 1. Sustainability ............................................................... 16 2. CriticalRisks ............................................................... 17 3. Possible Controversial Aspects ............................................................... 19  G Main Loan Conditions ........................ 19 1. Effectiveness Conditions ................. 19 2. Other ................. 19 H Readiness for Implementation ....................... 20 I Compliance with Bank Policies ....................... 20 Annexes Annex 1. Program Design Summary 21 Annex 2. Detailed Program Description 27 Annex 3. Program Phases, Performance Indicators and Exit Strategies 45 Annex 4. Estimated Program Costs 48 Annex 5. Financial Summary 50 Annex 6. Procurement and Disbursement Arrangements 53 Table A. Program Costs by Procurement Arrangements 56 Table B. Thresholds for Procurement Methods and Prior Review 57 Table C. Allocation of Loan Proceeds 58 Annex 7. Financial Management 59 Annex 8. Program Processing Budget and Schedule 61 Annex 9. Documents in Project File 62 Annex 10. Statement of Loans and Credits 64 Annex 11. Country at a Glance 66 Annex 12. Letter of Development Program from the Govermment of Ghana 68 Annex 13 List of Subvented Agencies 73  Ghana Public Sector Management Reform Program Project Appraisal Document Africa Region Country Departmnent 10 Date: March 29, 1999 Task Team Leader: David Steedman Task Manager: Guenter Heidenhof Country Director: Peter Hafrold Sector Manager: Brian Levy Project ID: GH-PE-50615 Sector: Public Sector Management Lending Instrument: APL Theme(s): Redefining the Role of State, Rationalizing Structures and Systems in the Ghana Public Sector Poverty Targeted Intervention: [ I Yes [x] No PSM 1I 35.4 45 43.4 55 78.8 2002 2005 (2002-2005)___ __ PSM III 33.8 45 41.2 55 75.0 2006 2009 (2006-2009) Total 83.5 48 89.5 52 173.0 1999 2009 Program Financing Data [ ] Loan [x] Credit [ Grant [] Guarantee [] Other Amount (US$m): Proposed terms: [ To be defined [x] Multicurrency f] Single currency [G Standard Variable [x] Fixed [] LIBOR-based Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5% Service charge: 0.75% Govemment of Ghana 72.1 17.4 89.5 IDA 66.4 17.1 83.5 Program Costs 138.5 33.5 173.0 OCS APL PAD Form: November 4, 1998  Page 2 Borrower: Republic of Ghana Responsible agency(ies): Office of the Vice President, Ministry of Finance, Accra/Ghana Annual 5.0 4.7 4.6 8.9 8.8 8.9 8.8 8.5 8.4 8.5 8.1 Cumulative 5.0 9.7 14.3 23.2 32.0 40.9 49.7 58.2 66.6 75.1 83.5 Program implementation period: 1999 - 2010 (11 calendar years) Expected effectiveness date: 1999 Expected closing date: 2010 Implementing agency: National Institutional Renewal Programme, National Coordinator, AccralGhana Contact person: Dr. Appiah Koranteng, National Coordinator Address: P.O.Box 1618, Accra/Ghana Tel: +233-21-780295 Fax: +233-21-780294 E-mail: NIRP@IGHMAIL.COM  Page 3 A: Program Purpose and Program Development Objective 1. Program purpose and program phasing: (see Annex 1) The Public Sector Management Reform Program aims at: * Redefining the role and functions of the state, * Designing appropriate institutions and systems to implement this role, and * Rationalizing the existing structure and systems to meet the new design. The necessary logical sequencing of activities, which include institutional development, capacity building and organizational & regulatory changes, can best be addressed with a flexible lending instrument. The Adaptable Program Lending (APL) is ideally suited for a comprehensive reform program which consists of sequenced activities to be achieved over a certain period of time. The Public Sector Management Reform Program has therefore been designed as an eleven-year APL operation with a first phase of three years, and two subsequent phases of four years each (see Annex 1, 2 for details). Phase I is designed as the pilot phase for the entire program. It aims at setting the stage for the full-scale implementation of the reform program. The first phase of the program is relatively short and the financial implications of this phase are moderate. This phase is a test of the commitment of the government and the (managerial) capacity to implement a major reform program. The success of phase I would pave the way for the overall program and considerably reduce risk of the two subsequent phases II & III in which the reforms will be broadened and further advanced. 2. Program development objective: (see Annex 1) The development objective of the program is to improve efficiency, effectiveness and quality of public services in Ghana. It is expected to improve Ghana's overall fiscal performance in the medium term. 3. Key performance indicators: (see Annex l,2a) The key indicators to measure the progress of the program are outlined in Annex 3. Specific performance expectations which are the triggers for subsequent APL financing include: Number of institutions targeted in the three phases of the program, publication of progress reports for the reform of public sector institutions, and Cabinet decisions to be made to support program implementation. Annex 3 also includes exit strategies for the different components/phases of the program in case performance expectations are not met. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the program: (see Annex 1) CAS document number: 17002-GH Date of latest CAS discussion: September 2, 1997 The program is consistent with the Bank's CAS for Ghana (Report No. 17002-GH, date August 13, 1997, and discussed by the Board on September 2, 1997) in that it aims to improve overall fiscal performance through comprehensive reform of structures, organizations, systems and processes in Ghana's public sector. 2. Main sector issues and Government strategy: In 1994, the Government of Ghana (GoG) created the National Institutional Renewal Program (NIRP) in order to focus and give strategic direction to the many reform activities taking place within the public sector. The program includes efforts to reform financial management, a new remuneration and grading system, reform of the subvented agencies (implementing agencies which derive their funding from public  Page 4 subsidies), and a proposal to strengthen policy formulation and implementation including the decision making process within the administration and the Cabinet. In order to articulate and specify a clear vision for Ghana indicating the long-term directionof development, in 1995 the GoG published the "Ghana: Vision 2020" document. The major government objective set out in this strategic document is to systematically reduce poverty through macroeconomic stability and the promotion of sustained accelerated economic growth. A pre-condition for achieving this objective is the existence of an efficient public sector which designs and implements consistent policies and creates an enabling environment for private sector-led development. In October 1997 the government issued the "Public Sector Re-invention and Modernization Strategy for Ghana: Transforming Vision into Reality" (PUSERMOS). In this strategic document the govermnent has committed itself to reform the public sector in general and in particular review and reform public sector institutions in terms of their mandate, approach and scope of activities. The document provides a framework for integrating, sequencing and monitoring the reforms which address the key weaknesses of the puablic sector: lack of qualified staff in critical areas such as economics, finance, policy analysis, general management and information systems combined with inadequate incentives; confused regulatory and organizational environment; weaknesses in systems for planning, budgeting, implementation and monitoring combined with an inefficient management regime. Although the government has made some efforts to reform the public sector since the early 90s, the history of public sector reform in Ghana is largely negative: A civil service reform program (CSRP) was launched in 1987 but the program had few positive results mainly because it lacked ownership by various groups which had a stake in the outcome. Efforts to control the wage bill at 4.5 percent of GDP, which were finally achieved in 1990, were undone by the 1992 wage hike in the context of the national elections that raised the wage bill to 8 percent of GDP. In 1996 the wage bill was 5.6 percent of GDP Efforts to reduce the size of the public service have not been sustained: The number of central government public servants fell from 301,000 in 1986 to 260,000 in 1990; but, by the end of 1996 it had grown to 330,000, an increase of more than 25 percent since 1990.1 With a civil service employment of 1.8 percent of the population (1996) Ghana remains far above the average in Sub-Saharan Africa.2 The constraints to efficient and effective functioning of Ghana's public sector have been the subject of numerous studies over the last ten years. The mainproblems which have been identified are related to human resources, resource allocation and financial management. Existing weaknesses are explained by deficiencies in * Critical processes, e.g. policy design, coordination and implementation; * Core systems, e.g. the rules governing the use of human and financial resources; and * Structures, e.g. unclear mandates, responsibilities and operational objectives of public sector institutions. The consequence is that performance and motivation of public servants are poor resulting in unsatisfactory quantity and quality of service delivery. In addition, a "result- and performance-oriented" management culture in the public sector is lacking. Several on-going reform initiatives seek to transform the public sector but the overall impact of most reforms has been relatively low (see Annex 2 for details). It has proven difficult to move from analysis to action and implementation. The main reasons are: * Weak co-ordination mechanisms for the implementation process combined with * Unclear mandates of the "driving forces" of the change process; * Fragmentation of change process responsibilities; I IMF WP/97/179, A Decade of Civil Service Refonn in Sub-Saharan Africa, page 43 2 IMF WP/971179, page 44  Page 5 * Little experience with the implementation of a major reform program; and * Inadequate capacity (managerial, staff, administrative, technical) to manage and institutionalize the necessary changes. Until the end of 1997, the government's response to correct these problems was mixed. While stressing the need for a comprehensive public sector reform, the government failed to address the implementation problems, particularly improving the intergovernmental co-ordination and assigning clear responsibilities for the change process. The National Overview Committee (NOC), which should provide the strategic focus and coordinate the reform activities, was not able to decisively target the major obstacles for an effective public sector reform such as diffuse mandates, systems and processes. One reason is that some NOC-members represent agencies which are themselves part of the problem. NOC consists of stakeholders (senior officials) who have a vested interest in maintaining the present regulatory and management set-up. It tolerated an environment where strong and competing interests hamper the implementation process and the establishment of a comprehensive action plan. Because of the wavering commitment of the government, and the magnitude of the challenge, the Bank resisted pressures to develop a comprehensive program earlier. Previous Bank support concentrated on the development of a consistent government strategy for public sector reform. With the appointment of the Vice-President as Chainnan of the NOC to oversee all public sector reform activities, the pace of the reform efforts has significantly changed, and the political support for the reforms has substantially improved. A blueprint for a comprehensive change agenda was outlined at the end of 1997 in the PUSERMOS document. Since the middle of 1998 the reform agenda has been further operationalized. With assistance from the Bank, the NIRP Secretariat developed action plans for the structural reforms in the public sector. These plans were further refined by a number of focus group discussions. They provide the basis for the proposals presented in this document. These proposals (including sequencing and timing) were discussed with the GoG and adopted by the NOC in December 1998. 3. Sector issues to be addressed by the program and strategic choices: The main sector issues to be addressed by the program are an analysis and a definition of role and functions of the state, in particular, the differentiation of responsibilities among the various levels of government and the private sector. Based on clear mandates and output targets for the Central Management Agencies (CMAs)3 and other public sector organizations, the necessary institutional adjustments will be made to improve service delivery, and to reduce overlaps & duplications of authority. In addition, systemic changes will be introduced to improve efficiency of public sector operations, in particular the perfornance orientation within the public sector. The inappropriate staff size of the public sector in Ghana will be specifically targeted as part of the adjustment process. Special attention will be given to privatization of public services, to support government withdrawal from areas which can be better handled by the private sector. In this context, the program aims to reduce the importance of the public sector in the economy. This will particularly affect the large and diverse Subvented Agency sector, which has a significant potential for privatization. The SA-reform which is the most important component of the reforms aims at significantly reducing government subsidies and transfers, and thus improving the cost-effectiveness of public sector operations. 4. Program description and performance triggers for subsequent loans (see Annex 3): The program would assist the GoG in its efforts to move from the planning to the implementation stage of 3 Main CMAs include: Public Services Commission (PSC), Ministry of Finance (MoF) including the Controller and Accountant General, National Development Planning Commission (N1DPC), Office of the Head of Civil Service (OHCS)  Page 6 the reform agenda. It develops a critical path for the public sector reform in Ghana, which integrates the various activities at the different levels of government, and provides guidelines for the step-by-step implementation of public sector reforms. The program targets the central government level, which it aims to restructure in line with the decentralization policy of the GoG. It will be coordinated with sector- related activities of the Bank (particularly health & education) and other donors (decentralization). The program would be implemented in three phases, the first covering a period of three years, and the second and the third covering four years each. Thefirst phase (1999 - 2001) would concentrate on first implementation steps in priority areas (closing down or restructuring at least 17 pilot Subvented Agencies, realigning the Central Management Agencies (CMAs), introducing key systems, developing a public-private partnership program, operationalizing project management system for the implementation of the reform agenda), and thus set the stage for full scale implementation. This first phase can build on a number of reform initiatives which are already under way, and which target particularly the systemic constraints in the public sector (PUFMARP, CSPIP, incomes policy). Though the results of these activities have been mixed (see Annex 2 for details), the work that has already been done in these initiatives provides substantial input for the first phase of the proposed program. Of particular importance is the recent introduction of the Medium-Term Expenditure Framework (MTEF), to improve the budget system and procedures in Ghana. A well-performing budget system will assist the Government set and achieve macroeconomic and fiscal targets, allocate resources strategically to political priorities disciplined by cost, and implement programs and projects efficiently and effectively. The MTEF will make the costs of existing policies and programs more transparent. It is designed to shift budgeting incentives away from incrementalism, and encourage strategic choices. The MTEF is therefore an important precondition for a program which seeks to improve corporate planning, operational efficiency and service delivery in the public sector. Assuming that performance expectations have been met during the first phase, the second phase (2002 - 2005) would broaden the reform and expand the focus to all levels of central government (e.g. another 70 Subvented Agencies closed down or restructured, and realignment of a first group of sector ministries (10) and departments (25). The third phase (2006 - 2009) would further advance the reform, particularly focusing on the Subvented Agency sector, and on reforming processes and structures in the remaining ministries (1 1) and departments (25) at the central government level. Annax 3 provides an overview of the three different phases, and the specific performance indicators for each component/phase, which are the key triggers for subsequent APL financing. In addition to these component specific triggers, subsequent APL-funding in phase II of the program will be subject to two general triggers: * The existence of an adequate budget planning process based on the MTEF in Ghana's public sector, and * The introduction of a comprehensive and systematic stakeholder analysis and consultation process to assess the impact of the reform program (social assessment). Bank assistance will mainly focus on two areas: * Support for consultancy services for the different program components (30% of total program costs), and * Costs for retraining of public servants to enable them to effectively fulfill their new roles and responsibilities (9% of total program costs). As a consequence of the reform process, a significant number of public servants must leave the public sector. While reducing the public sector to an appropriate size is one of the goals of the reform program, it is essential to avoid social unrest which would endanger the implementation of the reforms. Therefore, termination and redundancy benefits have been built into the program. Based on a comprehensive social  Page 7 assessment, early in phase I of the reform program, an alternative employment concept will be developed to carefuUly establish eligibility criteria for severance payments, and identify the public servants who qualify under these criteria. It is estimated that approximately 10% of the employees of the targeted institutions will be eligible for termination and redundancy benefits. These payments represent 57% of total program costs. Under its current operational policies, IDA is able to support severance pay as part of a technical assistance operation only for a limited number of subvented agencies. Annex 13 identifies the institutions which might qualify under the existing policy. It is estimated that approximately 2000 public servants are eligible for IDA funded severance pay. Consequently, the PAD assigns redundancy payments which are not eligible for IDA assistance to the Government contribution to the program. This would include, in addition to the Government's own domestic resources, funding deriving from possible future adjustment assistance. With respect to phase I of the program, an amount of US$3.5 milion equivalent was proposed to be included in IDA's forthcoming ERSO II credit to the Government of Ghana which is scheduled to be negotiated in April 1999. C: Program Description Summary 1. Program components: (see Annex 2 for a detailed description and Annex 4 for a detailed cost breakdown) The program will address three different areas which have been identified as the essential elements for the public sector reform agenda: * Reform of Subvented Agencies (SAs) This component aims at making the sector cost-effective and reducing the financial burden on government budget, by criticaly reviewing the mandates of thel76 subvented agencies (see Annex 12), closing down those without a clear mandate, and restructuring those with a viable mandate; * Adjustment of central government structures and organizations This component would critically review the mandates, responsibilities and operational objectives of CMAs, ministries & departments based on a functional analysis. It will remove duplications and overlaps, develop new roles & missions, and realign functions in line with the decentralization policy with the staff size adequately curtailed. It aims at improving service delivery and performance orientation based on clearly defined output targets, and at enhancing skills and capacity for efficient public sector management; * Improvement of systems and processes This component will specifically target systemic constraints in Ghana's public sector. It wiUl develop and implement some key elements for effective public sector operations including a human resource management system, a performance management system, an incentive system, and a management information system. These elements are required to improve public sector management and to sustain institutional changes. This component will also develop and introduce a public-private partnership program. This program aims to increase private sector input (exchange programs, joint activities etc.) and apply private sector standards (audit, supervision etc.) on government operations. It will enhance cooperation at all levels of government, and actively involve the private sector in policy design and decision-making of government (private sector representation on public sector boards etc.); In addition, the program will support the establishment of a comprehensive project management system for the change process to ensure effective implementation of the reform agenda.  Page 8 Improvement of systems & BBA4.2 2.4 4.1 97.6 processes in Ghana's public sector Project management for change, BY 6.7 3.9 6.2 92.5 process _ Total 161.0 93.1 72.4 45.0 Unallocated Funds 11.0 6.4 10.1 91.8 Total Program Costs 172.0 99.4 82.5 48.0 PPF-Refinancing 1.0 0.6 1.0 Total Financing Required 173.0 1 100.0 83.5 48.3 2. Key policy and institutional reforms supported by the program: The program will criticaly review and realign roles and responsibilities at the centl goverment level (Centra Management Agencies, sector ministries & departments). The change process can build on previous analytical work that has been done with Bank support on the role of the state and the areas it should cover to provide services for its citizens. It wil fiuther refine this analysis andoperationalize the new roles and responsibilities based on specific targets and outputs assigned to the different goverment institutions. It wil fiuther refine the expected outputs by developing perfornance targets for the various operational levels, to ensure greater transparency and accountability. The program also aims to systematically strengthen the collaboration between the private and the public sector, to secure more effective decision-making and private sector-led economic development. Key institutional reforms would include: comprehensive reorganization and restucturing of Ghana's diverse public sector including decentralization and commercialization of government activities; institutional development and introduction of performance-based management principles for more efficient public services, with increased customer-orientation, transparency and accountability, and capacity building for better public management at the different levels of govermnent. 3. Benefits and target population: The main benefits of the program would be: g An efficient public sector providing more and better services to its customers; * Significantly reduced public sector expenditures focusing on core governent functions; * Improved financial managemnent; t Enhanced private and public sector collaboration, with increased private sector input to govemrnent decision-making and operations;