PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: 47378

Project Name

/ Sierra Leone Public Financial Management
Region / AFRICA
Sector / General public administration sector (100%)
Project ID / P108069
Borrower(s) / GOVERNMENT OF SIERRA LEONE
Implementing Agency
Ministry of Finance and Economic Development
George Street
Freetown
Sierra Leone
Public Financial Management Reform Unit
Ministry of Finance and Economic Develop
George Street, Freetown
Sierra Leon
Environment Category / [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / January 15, 2009
Date of Appraisal Authorization / January 29, 2009
Date of Board Approval / April 16, 2009

I.  STRATEGIC CONTEXT AND RATIONALE

1.  Country and sector issues

1.  Since the end of the civil war in January 2002, Sierra Leone has made strong progress in building peace, achieving macro-economic stability, re-establishing democratic institutions, strengthening core systems and bringing decisions and resources closer to citizens through a significant decentralization initiative. Growth averaged over 7.0% from 2004 – 2006 and moderated somewhat to about to 6.4% in 2007 and an estimated 5.5% in 2008. In September 2007, the APC, which had been in opposition, won the Presidential and parliamentary elections, which were followed by a peaceful transfer of power from the SLPP to it. This was a major achievement in the democratic development of the country.

2.  The Government of Sierra Leone (GoSL) is in the process of finalizing a new poverty reduction strategy (PRSP-II[1]) which will set the direction and priorities for the new administration. With the central objective of faster growth and poverty elimination, the PRS prioritizes investments in energy, transport, health and. The growth and poverty reduction strategy is based on a foundation of good governance that includes strengthening the civil service, decentralization and local government, fighting corruption and strengthening public financial management. This requires a budget that fully reflects these and other GoSL priorities. In view of the importance of PFM to the effective implementation of the poverty reduction strategy, to reducing opportunities for corruption, and to attract budget support assistance from the development partners (DPs), the effective functioning of public financial management (PFM) institutions and systems at central and local levels of government in Sierra Leone has been identified as a high priority,.

3.  Since 2002, the GoSL has made good progress in strengthening its public financial management framework and systems, and has implemented most of the recommendations made in the Country Financial Accountability Assessment (CFAA) of 2002[2]. This process has been supported by IDA through the Institutional Reform and Capacity Building Project (IRCBP)[3] and technical assistance from the European Commission (EC), UK Department for International Development (DFID), and the African Development Bank (ADB). Major achievements include establishment of the legal and regulatory framework for budgeting, accountability and procurement, implementation of a financial management information system (FMIS) in the Accountant General’s Department in 2005 with roll out to several ministries, departments and agencies (MDAs) by 2007[4], removal of the backlog of annual financial statements (the 2007 accounts were produced within four months of the year end), and establishment of basic budgeting, procurement and accounting procedures in the local councils.

4.  As a result, despite the very low starting point at the end of the civil war, the scores from the Public Expenditure and Financial Accountability (PEFA) assessment for Sierra Leone carried out in early 2007 were similar to the average for other countries in the region. While, since then, the timeliness of financial statements and audit reports has improved, budget credibility hit a low point in 2007 which was an election year. This and other analyses such as the IMF red cover report Sierra Leone: Implementing Public Financial Management Reforms,[5] indicate that areas of major weakness remain. The analyses identify lack of budget credibility and predictability, fiscal management challenges, weaknesses in expenditure control (including payroll), and low levels of transparency; and note that much remains to be done to move the system from one that is functioning at a rudimentary level to one that is able to direct resources to priority areas and support high quality expenditure outcomes. These weaknesses were highlighted by the major shortfalls in revenue and the disruption to expenditure that occurred during budget implementation in 2007. The challenges are compounded by the current reliance on DP-funded Sierra Leonean contract staff (Local Technical Assistance – LTA) for many line functions in the Ministry of Finance and Economic Development (MoFED). The DP-funded LTAs make up 30% of the total staff of the MoFED and at the professional level (grades 7 and above) they significantly outnumber the regular civil servants[6].

5.  In order to build on the progress to date and to tackle these challenges, the GoSL has prepared a comprehensive program of PFM reforms for the period for 2009-2012[7]. This process is directed by the PFM Oversight Committee, chaired by the Financial Secretary of the MoFED[8]. In addition to the need to strengthen fiscal and budget management, accounting, reporting and oversight, payroll management and cross-cutting issues of capacity development and organizational strengthening, the program identifies the need for a phased reduction in the dependence on DP funding for key line positions in the MoFED.

6.  The MoFED has emphasized the importance of the DPs providing space to the GoSL to develop its IPFMRP at its own pace and without major external involvement so as to ensure strong ownership. The exercise has been led by the MoFED’s Public Financial Management Reform Unit (PFMRU), which is currently supported by the Institutional Reform and Capacity Building Project (IRCBP). The DFID/Bank PFM adviser, an EC budget specialist, a DFID-funded consultancy on phasing out DP funding of MoFED staff, and an EC-funded consultancy on capacity building have provided some technical assistance.

2.  Rationale for Bank involvement

7.  The institutions and systems of public financial management, including the effectiveness of the MoFED in its central role, have a critical impact on service delivery and on the implementation of the Poverty Reduction Strategy Paper (PRSP). Critical factors are whether (i) resources are available to public service providers on time and in accordance with the budget, (ii) resources are directed to stated government priorities, (iii) resources are used for the purposes intended, (v) resources are susceptible to misappropriation, (iv) the government can execute the budget without running up arrears and creating macro-fiscal instability, and (vi) whether the government can show its citizens how it spent resources on their behalf. The social and infrastructure sectors are dependent on reliable and well-managed finances and without this their ability to deliver key services and projects is fundamentally undermined. Building PFM from a rudimentary to a well-performing system is therefore a central element of the development and governance agenda in Sierra Leone.

8.  So far, International Development Association (IDA) project support for good governance has principally been delivered through the IRCBP, which has supported the process of decentralization and the strengthening of PFM since July 2004[9]. Follow up support for the decentralization component of the project is being provided through a DFID and EC funded multi-donor trust fund (MDTF) managed by IDA. This project will pick up from the IRCBP on PFM reforms and will support a more comprehensive multi donor approach.

9.  Through the IRCBP, the Bank has been one of the GoSL’s main partners contributing to the developments that have been achieved in PFM. However, the support provided by the Bank, EC, DFID and ADB for PFM has been fragmented and has lacked in coherence and comprehensiveness. At the request of the GoSL and the DPs, the Bank has taken the role of coordinating through this project joint DP support to the core components of the next phase of reform as defined in the GoSL’s IPFMRP[10]. The Bank is seen by the GoSL as a key partner in PFM reform with the required integrative and technical skills. This institutional and capacity building technical assistance project will complement policy engagement on PFM exercised through the Government Reform & Growth Credits and the Multi-Donor Budget Support (MDBS) programs.

3.  Higher level objectives to which the project contributes

10.  The project will contribute to the GoSL’s higher level objective of improving strategic allocation of resources and quality of expenditures required for the implementation of the PRS.

11.  The project contributes to the FY06-09 Country Assistance Strategy (CAS)’s Strategic Priority 1: Governance, Decentralization and Public Financial Management, particularly those outcomes involving improved strategic orientation of the budget, transparency of resource envelope and allocation, accountability of spending units, transparency and accountability of procurement, and staffing. It falls under the Public Sector Reform/Capacity Building planned for FY09.

II.  PROJECT DESCRIPTION

1.  Lending instrument

12.  A technical assistance IDA grant will be used over a period of four years from June 2009 to May 2013. The IDA grant will be pooled with DFID and EC (referred to as “DPs”) grant resources to support the implementation of the GoSL’s IPFMRP. The DFID and EC resources will be channeled through a Bank-administered Trust Fund and will be pooled with IDA resources to finance project activities. The IDA contribution will be USD 4 million and commitments from DFID and EC are GBP 5 million and Euro 8 million, respectively. The estimated project size is approximately USD 20 million[11]. The African Development Bank (ADB) will use its budget support operation (currently under preparation) to support this project by using prior actions and triggers that complement the objectives of this project[12]

13.  The DP resource pool will jointly support the program described in this document.

2.  Program objective and phases

14.  The project is designed to support the Core PFM components of the GoSL’s IPFMRP. As noted in the GoSL’s IPFMRP, the long term vision of the GoSL is a PFM system that supports the achievement of fiscal discipline; strategic, efficient and effective allocation and use of funds; and value for money, and probity in the use of public funds.

15.  The GoSL IPFMRP is a comprehensive sector program for PFM, which builds upon its existing National Action Plan for PFM reform and on the progress achieved to date. It includes three main parts, the first of which will be supported by this project:

(a)  Core PFM components relating to budget management, accounting and transparency in the use of public funds. The institutional responsibility for implementing these components is with the MoFED, the National Public Procurement Authority (NPPA) and MDAs, with the Parliament and Non-State Actors exercising oversight. This core part of the IPFMRP will be supported through this project, jointly with DFID and EU with the possibility of the ADB also joining the pool.

(b)  Strengthening of revenue administration, to be implemented by the National Revenue Authority (NRA). This part of the IPFMRP is supported by separate DP funding and will not be supported by this project.

(c)  Strengthening of external audit, to be implemented by the Audit Service Sierra Leone. This part of the IPFMRP is also being supported separately from this project by DFID.

16.  While only the first part of IPFMRP will receive funding from this project, all three parts will be under the overall direction and scrutiny of the PFM Oversight Committee.

17.  A number of strategic priorities for the core IPFMRP have been identified by GoSL, drawing in part from the analysis provided by the IMF Fiscal Affairs Department (FAD) mission of March 2008 as well as GoSL analysis and the PEFA assessment. The priorities identified are the need to restore budget credibility and supplier confidence, improve cash management, increase adherence to the legal framework (with amendments as needed) and build PFM capacity in MDAs (ministries, departments and agencies). Ongoing reforms supported by the IRCBP will continue to be supported by the IPFMRP so that the present momentum will be maintained and the benefits fully realized. These reforms include the rollout of the Integrated Financial Management Information Systems (IFMIS) to remaining MDAs, the verification of government payrolls, improved procurement, the extension and deepening of internal audit, strengthening local government financial management, and legal and regulatory reform.

18.  The project adopts an integrated approach in that it provides joint DP support to the MoFED and other PFM actors in the implementation of the GoSL’s integrated reform program.[13] The project support builds on the developments made to date in the core areas of budget management, accounting and control, in a phased manner. It draws on the FAD report recommendations, the PEFA assessment and consultancies in budget management, capacity building and the phasing out of DP support for MoFED staff. The program in Sierra Leone has identified as a priority the need to improve budget credibility and the first phase in particular is geared towards delivering discernible improvement in this key area. The project also employs aspects of the platform approach to draw attention to a logical sequence of capabilities.

19.  The desired initial platform (Platform 1) outcome is one in which budgets are credible and transparent so as to enhance the confidence of all stakeholders that the Government can translate an approved budget into actual revenue and expenditure, both in aggregate and at the agency level.[14] This will allow the government to stress the need for increased compliance with regulations and laws, and will remove many excuses for lackluster performance. Building on the budget discipline achieved in the first platform, Platform 2 activties focus on improved allocation of all available resources in accordance with the Second Poverty Reduction Strategy Paper (PRSP-II) and sectoral strategies, and reallocations arising from changes in cash flow projections. Platform 3 activities should see a strong effort to achieve greater efficiency and probity in resource use leading to improved service delivery. This outcome logically follows on from the predictable funding achieved in platform 1 and the improved allocation of resources achieved in platform 2.This is shown in figure 1.

Figure 1:

Sierra Leone PFM Platforms