Document of The World Bank FOR OFFICIAL USE ONLY Report No: ICR00004787 IMPLEMENTATION COMPLETION AND RESULTS REPORT (TF-17118) ON A GRANT IN THE AMOUNT OF US$22 MILLION TO THE REPUBLIC OF ZAMBIA FOR THE PUBLIC FINANCIAL MANAGEMENT REFORM PROGRAM (Phase I) June 24, 2019 Governance Global Practice Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective June 4, 2019) Currency Unit = Zambian Kwacha (Kwacha) Kwacha 11.85 = US$1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ABB Activity-Based Budget ACL Audit Command Language AG Accountant General AGD Accountant General Department AMS Audit Management System ASYCUDA Automated System for Customs Data BEPS Base Erosion and Profit Shifting BoP Balance of Payments BoZ Bank of Zambia CA Chartered Accountant COA Chart of Accounts CAS Country Assistance Strategy CPS Country Partnership Strategy DFID Department for International Development (UK) DMFAS Debt Management and Financial Analysis System DSA Debt Sustainability Analysis DTA Double Taxation Agreement e-GP Electronic Government Procurement e-FA Electronic Framework Agreement ERMS Electronic Record Management System ESGP Economic Stabilization and Growth Program FM Financial Management FSP Financial Services Provider FSU Financial Systems Unit GDP Gross Domestic Product GIZ German International Development Agency GRZ Government of Republic of Zambia GSD Geological Survey Department HR Human Resources IAES Increased Access to Electricity Services ICR Implementation Completion and Results ICT Information and Communications Technology IDA International Development Association IDI INTOSAI Development Initiative IDM Investment and Debt Management IFMIS Integrated Financial Management Information System IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions IP Implementation Progress IPF Investment Program Financing IPR Independent Post Review IPSAS International Public Sector Accounting Standards ISR Implementation Status and Results IT Information Technology JGDC Joint Government Donor Committee LAN Local Area Network LIMS Laboratory Information Management System LTO Large Taxpayer Office MAPS Methodology for Assessing Procurement Systems MDG Millennium Development Goals MDTF Multi-Donor Trust Fund M&E Monitoring and Evaluation METR Marginal Effective Tax Rates MIDAC Mineral Data Analysis Center MoF Ministry of Finance MoFNP Ministry of Finance and National Planning MoLGH Ministry of Local Government and Housing MOSES Mineral Output Statistical and Evaluation System MOU Memorandum of Understanding MPSA Ministries, Provinces and Spending Agencies MTEF Medium-Term Expenditure Framework MTO Medium Taxpayer Office MTR Mid-Term Review MTU Mining Tax Unit MVCMP Mineral Value Chain Monitoring Project OAG Office of the Auditor General OBB Output-Based Budgeting OECD Organisation of Economic Co-operation and Development OGA Other Government Agencies PAD Project Appraisal Document PDO Project Development Objective PE Public Enterprises PEFA Public Expenditure and Financial Accountability PEFMA Public Expenditure Management and Financial Accountability Program PEMFA Public Expenditure Management and Financial Accountability PF Patriotic Front PFM Public Financial Management PFMRP Public Financial Management Reform Program PFMRU Public Financial Management Reform Unit PFMRS Public Financial Management Reform Strategy PIMA Public Investment Management Assessment PIMS Public Investment Management System PMF Performance Management Framework PMIS Procurement Management Information System PPR Procurement Post Reviews PS Permanent Secretary PSRPSC Public Sector Reform Program Steering Committee PSU Procurement and Supply Unit RAT Revenue Appeals Tribunal RF Results Framework ROSC A&A Report on the Observance of Standards and Codes Accounting and Auditing RSNDP Revised Sixth National Development Plan SAI Supreme Audit Institution SAI PMF Supreme Audit Institutions Performance Management Framework SAP System Application Product SLA Service Level Agreements SNDP Sixth National Development Plan SOEs State-Owned Enterprises ST Secretary to the Treasury 7NDP Seventh National Development Planning TA Technical Assistance TADAT Tax Administration Diagnostic Assessment Tool TC Technical Committee TIMS Tax Invoice Management System TSA Treasury Single Account TSU Treasury Services Unit TTL Task Team Leader UPS Uninterrupted Power System VAT Value Added Tax VSAT Very Small Aperture Terminal XRF X – Ray Fluorescence ZICA Zambia Institute of Chartered Accountants ZIPS Zambia Institute of Purchasing and Supplies ZPPA Zambia Public Procurement Authority ZRA Zambia Revenue Authority ZMW Zambian Kwacha Vice President: Hafez M.H. Ghanem Country Director: Paul Noumba Um Senior Global Practice Director: Edward Olowo-Okere Practice Manager: Hisham Waly Task Team Leaders: Srinivas Gurazada ICR Task Team Leader Srinivas Gurazada ICR Main Contributor: Sathyanadhan Achath TABLE OF CONTENTS DATA SHEET .....................................................................................................................................1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ............................................................7 A. CONTEXT AT APPRAISAL .........................................................................................................7 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ..................................... 11 II. OUTCOME............................................................................................................................... 15 A. RELEVANCE OF PDOs ............................................................................................................ 15 B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 15 C. EFFICIENCY ........................................................................................................................... 23 D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 28 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ............................................................................ 29 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................... 30 A. KEY FACTORS DURING PREPARATION ................................................................................... 30 B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 32 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME ... 34 A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 34 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 36 C. BANK PERFORMANCE ........................................................................................................... 36 D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 38 V. LESSONS AND RECOMMENDATIONS .................................................................................... 39 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ................................................................ 41 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ............................ 59 ANNEX 3. PROJECT COST BY COMPONENT .................................................................................. 61 ANNEX 4. EFFICIENCY ANALYSIS ................................................................................................... 62 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS .... 63 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ............................................................................ 65 The World Bank Public Financial Management Reform Program Phase I (P147343) DATA SHEET BASIC INFORMATION Product Information Project ID Project Name P147343 Public Financial Management Reform Program Phase I Country Financing Instrument Zambia Investment Project Financing Original EA Category Revised EA Category Not Required (C) Not Required (C) Organizations Borrower Implementing Agency Republic of Zambia Ministry Of Finance Project Development Objective (PDO) Original PDO The project development objective (PDO) is to contribute to improving the efficiency and accountability of public resources. Page 1 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) FINANCING Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing 22,000,000 22,000,000 22,000,000 TF-17118 Total 22,000,000 22,000,000 22,000,000 Non-World Bank Financing 0 0 0 Borrower/Recipient 0 0 0 Total 0 0 0 Total Project Cost 22,000,000 22,000,000 22,000,000 KEY DATES Approval Effectiveness MTR Review Original Closing Actual Closing 06-May-2014 17-Jul-2014 24-May-2016 31-Dec-2017 31-Dec-2018 RESTRUCTURING AND/OR ADDITIONAL FINANCING Date(s) Amount Disbursed (US$M) Key Revisions 29-Dec-2017 17.00 Change in Results Framework Change in Loan Closing Date(s) 18-Feb-2018 17.00 Change in Components and Cost Change in Implementation Schedule KEY RATINGS Outcome Bank Performance M&E Quality Satisfactory Satisfactory Substantial RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 29-Jan-2015 Moderately Satisfactory Moderately Satisfactory 2.00 Page 2 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 02 20-Oct-2015 Moderately Satisfactory Moderately Satisfactory 8.43 03 12-Apr-2016 Moderately Satisfactory Moderately Satisfactory 9.03 04 19-Oct-2016 Moderately Satisfactory Moderately Satisfactory 11.03 05 08-Mar-2017 Moderately Satisfactory Moderately Satisfactory 15.03 06 16-Jun-2017 Satisfactory Satisfactory 15.03 07 13-Feb-2018 Satisfactory Satisfactory 17.00 08 13-Sep-2018 Satisfactory Satisfactory 22.00 SECTORS AND THEMES Sectors Major Sector/Sector (%) Public Administration 100 Central Government (Central Agencies) 2 Other Public Administration 98 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Economic Policy 2 Fiscal Policy 2 Tax policy 2 Public Sector Management 98 Public Finance Management 50 Public Expenditure Management 48 Domestic Revenue Administration 2 Public Administration 48 Transparency, Accountability and Good 48 Governance Page 3 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) ADM STAFF Role At Approval At ICR Regional Vice President: Makhtar Diop Hafez M. H. Ghanem Country Director: Kundhavi Kadiresan Paul Noumba Um Senior Global Practice Director: Edward Olowo-Okere Edward Olowo-Okere Practice Manager: Patricia McKenzie Hisham Ahmed Waly Task Team Leader(s): Pazhayannur K. Subramanian Srinivas Gurazada ICR Contributing Author: Sathyanadhan Achath Page 4 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Executive Summary The Public Financial Management Reform Program – Phase I (PFMRP, 2014-2018) aimed at improving the efficiency and accountability in the governance of public resources in Zambia. The Project was an integral part of the World Bank's Country Partnership Strategy (CPS) with Zambia. Improved revenue mobilization and effective budget execution were viewed as critical to strengthening public financial management (PFM). Strengthened budget execution controls through the implementation of an Integrated Financial Management Information System (IFMIS) would ensure enhanced compliance with the budget, a basic prerequisite to achieving planned fiscal deficit targets and macro-fiscal stability in the long term. The Project is rated ‘Satisfactory’ as it has met project objectives. The Project successfully laid the foundation in building governance and public sector capacity through public expenditure management systems. The Project was completed in close to 4.5 years, including a one-year extension, at a total cost of US$22 million. The Project’s key achievements can be summarized as follows: (i) the PFM Act 2018 was passed by the Parliament, which is expected to provide a major impetus for financial control, accountability and transparency; (ii) the IFMIS was implemented in 51 out of the 55 (91 percent) targeted ministries; (v) the Treasury Single Account (TSA) was implemented in 51 out of the 51 (100 percent) ministries (where the IFMIS was launched), paving the way for consolidation of Government cash balances and savings on interest costs; (iii) the Zambia Revenue Authority (ZRA) introduced the Minerals Value Chain Monitoring Project — the first of its kind in Africa — to effectively monitor mining resources and increased revenue mobilization; (iv) the e- government procurement system and ‘end-to-end’ automation of procurement processes was successfully developed, signaling a new era of transparency and efficiency in procurement processes in Zambia; and (v) the revised chartered accountancy qualification on international standards was implemented. These achievements have provided the basis for transparency and accountability of budget management, a fundamental prerequisite for institutional development and good governance in PFM. In addition, a Public Expenditure and Financial Accountability (PEFA) Report on the Observance of Standards and Codes in Accounting and Auditing (ROSC A&A), a Public Investment Management Assessment (PIMA), and a Supreme Audit Institutions Performance Management Framework (SAI PMF) Assessment were all financed and conducted under the Project as recipient-executed activities. The Project activities, including these assessments, provided a strong basis for the next generation of PFM reforms that were built into the new PFM Reform Strategy (PFMRS, 2019-22) prepared by the Government under the Project. The project performance is summarized below: Relevance Efficacy Efficiency Overall Bank M&E Quality Outcome Performance High Substantial Substantial Substantial Satisfactory Satisfactory The Project offers several important lessons. First, it is useful to secure strong commitments from the key leaders in the ministries at the outset to fully support the reforms and to overcome change management and communication issues. Second, intra-ministerial coordination within the Ministry of Finance (MoF) is critical to ensuring complementarities and coordination. Third, the benefits for the line ministries, such as the service delivery ministries, are better demonstrated through providing them with financial reports, especially reports on donor funds for the line ministries dependent on these funds. Fourth, high turnover of project staff and related bureaucrats should be minimized for smooth project implementation. Fifth, a strong project Page 5 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) management unit should be in place from day one with full staffing, along with the right persons and constructive attitudes. Equally important is to have a competitively selected blend of government employees and external candidates. Sixth, the monitoring framework should be more reflective to capture project achievements rather than inputs and activities. Seventh, it is important to keep donors informed of the project’s progress on a regular basis. Eighth, for effective implementation of the IFMIS, consultants should be based at the project site rather than making periodic visits. Ninth, analog complements for the digital systems such as the IFMIS are critical for success. In Zambia, the IFMIS rollout was carried out in tandem with TSA reforms, significantly improving the impact of the IFMIS implementation. Tenth, the strong commitment and active involvement of beneficiary entities contributes to successful implementation. This was evident in most of the beneficiary entities, including the Zambia Institute of Chartered Accountants (ZICA), and the Internal Audit, Office of the Auditor-General. Eleventh, World Bank team members with PFM global experience, knowledge and skills contributed to successful implementation of the program, sharing global experiences and adapting them to Zambia’s specific environment. Twelfth, the use of PEFA indicators as Project Development Objective (PDO) indicators may not be as straightforward as appears, raising both relevance and measurement challenges which need to be addressed upfront (for example, by elaborating on the extent to which an upgrade from C+ to B should be deemed reflecting substantial progress). Thirteenth, the internalization/ institutionalization of project achievements should be factored in the project rating (particularly with regard to governance reforms). This is particularly warranted in a phased or programmatic perspective when a project is supposed to establish the building blocks for follow up progress, that is, when a project is not construed as a stand-alone operation, especially with regard to governance reforms. Page 6 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. CONTEXT AT APPRAISAL Country Context 1. Zambia’s recent economic performance has been encouraging, with a decade of rapid economic expansion and growth rates averaging 6 percent per year from 2004 to 2014. In 2013, Zambia’s real gross domestic product (GDP) was projected to grow at 6 percent, much lower than the initially projected 7.8 percent. Despite a rebound in copper output and strong growth in the public sector, contracting agriculture output of about 7.4 percent brought down overall growth in 2013. The final growth outcome depended on how the much larger-than-planned fiscal deficit was financed during the rest of 2013. Thus, the 2013 budget came under tremendous stress due to several unplanned expenditures and a shortfall in revenue collection. Additional expenditures included public sector wage awards, accumulated fuel supply losses not initially budgeted for, and higher spending on the Farm Input Support Program. 2. Despite impressive economic growth, poverty levels remained persistently high, particularly in the rural areas. During 1998-2006, the poverty head count experienced a modest decline from 67 to 59 percent. Rural poverty remained significantly high, falling from 83 to 77 percent. Broad-based and higher growth rates were needed if Zambia was to reach its first Millennium Development Goal (MDG) to reduce extreme poverty by 50 percent. Less than half of Zambia’s 23 million hectares of potential arable land were used for agriculture, and its substantial water resources were largely underutilized. The Revised Sixth National Development Plan (RSNDP) promised to depart from the past, with emphasis placed on enhancing inclusive growth and rural development. 3. The Government strongly signaled continued attention to macroeconomic stability, as well as public service and business environment reforms as these would be the enablers of poverty-reducing and job- creating growth. The International Monetary Fund (IMF) Article IV Consultation in 2013 found that the Zambian economy had continued to expand at a rapid pace, although experiencing pressures in some areas. As the main economic challenges were in the fiscal area, the government planned to comprehensively address the fiscal challenges in the budget for 2014. The IMF observed that adhering to the budget was important for macroeconomic stability to support the continued strong growth of the Zambian economy. PFM was an essential ingredient for efficient service delivery, strategic resource allocation, sound management of resources and fiscal discipline. It was also imperative for curbing corruption in public service. The Public Financial Management Reform Program (PFMRP) was expected to assist in addressing some of the underlying technical weaknesses at the national, sub-national and sectoral levels. The PFMRP aimed to enhance fiscal management through an improved IFMIS, linking budgeting and accounting processes, as well as improved revenue and procurement management. It also aimed to enhance PFM, including through control over contingent liabilities. This was to be achieved by reviewing the legislative framework and improving internal controls and governance in support of attaining Bank’s twin goals of reducing poverty and boosting shared prosperity. Page 7 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Sectoral and Institutional Context 4. In the early 2000s, Zambia embarked on a series of PFM reforms supported by donors to improve transparency, accountability and efficiency. The Public Expenditure Management and Financial Accountability (PEMFA) Program, implemented a comprehensive PFM reform of about US$75 million from 2005 to December 2012. The initial phase of the PEMFA implemented between January 2005 and December 2010 had components covering commitment controls and financial management systems, IFMIS implementation, improved fiscal policy and economic planning, among others. PEMFA was extended for two years with a focus on IFMIS implementation, improved internal audit, revenue administration and public procurement reform. An independent evaluation of the implementation of the PEMFA program (July 2010) indicated that it was difficult to attribute the improvements in the PFM environment to PEMFA, as the program "had either failed to deliver what it set out to achieve or had delivered late." A number of factors contributed to this disappointing outcome, including a lack of government ownership, weak leadership, bad management design, and over-ambitious plans in terms of both time scale and scope of reforms. 5. The Government had instituted the Sixth National Development Plan (SNDP) covering the period 2011- 2015 and a revised draft SNDP for 2013-16. The macroeconomic focus of the revised SNDP was to improve the livelihood of the Zambian people through the promotion of growth in sectors and stability in the prices of essential and other commodities. In order to raise and broaden economic growth and employment, the growth and investment strategy was accompanied by continued implementation of reforms. The Government recognized the need to continue with the PFM reforms to achieve its SNDP medium- and long-term objectives. It was the view of the Government that the continued implementation of the PFM reforms should lead to the attainment of economic development, poverty reduction and improved public service delivery. The Government had since developed a three-year (2013–2015) PFM Reform Strategy (PFMRS) focusing on improving efficiency, effectiveness, accountability and transparency in the use of public resources. 6. The Public Expenditure and Financial Accountability (PEFA1) assessment in 2012, together with the IMF review of the Government’s PFM Reform Strategy and Article IV Consultations, found that there was room for improvement in all the areas contained in the PFMRS. Regarding the PFM reform strategy, the IMF report cautioned that the breadth of the reform strategy should not exceed the absorptive capacity and resources of the Government. In addition, the IMF noted that the strategy should focus on core ongoing reforms (macro- fiscal forecasting, budget formulation, cash management, the TSA, fiscal reporting and the IFMIS), which would create a platform for future, more advanced PFM reforms. It also stressed the need for the strategy to facilitate more active engagement of the MoF’s senior management in planning, decision-making, progress monitoring, and problem resolution. Theory of Change (Results Chain) 7. Various aspects of the program design were taken into consideration, including similar program documents, consultation with a broad range of stakeholders, as well as analyzing data to understand what had worked before. During the program design process, the team described critical activities that would lead to the long-term goal of improving transparency and efficiency of public resources, thus leading to improved 1 PEFA is a methodological framework for assessing and reporting on the strengths and weaknesses of PFM using quantitative indicators to measure performance. PEFA is designed to provide a snapshot of PFM performance at specific points in time using a methodology that can be replicated in successive assessments, providing a summary of changes over time. Page 8 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) governance. Figure 1 illustrates the interrelationship between the activities and their outcomes. Consequently, a Results Framework was prepared which articulated the program’s pathway from planned interventions to the intended outcomes. Figure 1: Results Chain Activities Intermediate Outcomes Outcomes Activities related to • IFMIS planning and budgeting module fully planning and budgeting, operational including revision of the • IFMIS rolled out in all Ministries, Provinces and PFM legal framework Spending Agencies (MPSAs) • TSA implementation plan developed Strengthening IFMIS and • Periodic budget execution consolidated, and cash management activities reports issued • Cash Management Module fully operational • Improved fiscal • E-procurement pilots initiated using a phased discipline Strengthening Zambia approach • Increased Public Procurement • System to compare reference prices to support a transparency in Authority (ZPPA) oversight competitive procedure for pricing public finances role in Public Procurement • Increased • Improve internal audit quality assurance and Resources: $22 million performance improvement standards effectiveness in Training auditors and revenue strengthening internal audit • Electronic records management system and administration and control systems implementation of mining value chain monitoring mechanism • Strengthened procurement • Cargo transit tracking and system for monitoring balance of payments is in place • Enhanced internal Increasing the effectiveness controls and audits of the Zambia Revenue • Completion of Supreme Audit Institution (SAI) Authority Performance Management Framework (PMF) Assessment Tax policy formulation in • Development and implementation of Audit the Budget Office, MoF Management System; revised Zambia Chartered Accountancy qualification PFM intervention on emerging issues Underlying Assumption: Enhanced fiscal management through improved IFMIS, linking budgeting and accounting processes, and improving revenue and procurement management. Project Development Objectives (PDOs) Page 9 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 8. The PDO was to contribute to improving the efficiency and accountability of public resources. Key Expected Outcomes and Outcome Indicators 1. The PDO achievements were assessed through the project’s impact on PFM processes vis-a-vis relevant PEFA performance indicators. Table 1: Key Expected PDO Indicators 2013 Baseline Indicator Name Rating 2018 Target Outcome Improved fiscal discipline (PI-2) D+ C Improved transparency in public finance (budget reporting) PI-24 C B+ Increased transparency in procurement PI-19 D+ B Enhanced internal control and internal audit PI-21 C+ B Effectiveness of collection of taxes PI -15 B D+ B Project Description Components: 2. The Program supported the following eight components: 3. Component 1: Integrated Planning and Budgeting (US$1.87 million): This component aimed at improving development planning and budgeting processes to enhance the development and service delivery impact of the public sector. It sought to enhance the legal basis for robust PFM arrangements to strengthen the linkage of budgetary allocations with the policy objectives of the Government. The Program included a review of the 2004 Public Finance Act and related laws and regulations covering fiscal decentralization, management of public debt, management of government investments, audits and monitoring and evaluation. The component also supported initiatives of the Budget Department of the MoF to rationalize program classification with better linkages to planning, pilot-testing and the potential rolling out of the budget module in the IFMIS. 4. Component 2: IFMIS and Cash Management (US$7.64 million): This component aimed at enhancing financial management systems and standards to promote good corporate governance practices in the public service. It sought to ensure that: (a) the budget was executed as planned; (b) the quality and timeliness of financial reports was improved for better fiscal management; and (c) cash management efficiency was enhanced to reduce borrowing. Page 10 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 5. Component 3: Public Procurement (US$4.06 million): This component aimed at: (a) establishing and strengthening the Zambia Public Procurement Authority’s (ZPPA) oversight and regulatory role in public procurement; and (b) strengthening the capacity of the Zambia Institute of Purchasing and Supplies (ZIPS) to establish and maintain quality standards of purchasing and supplying professionals. This component had four sub-components including: (i) institutionalizing procurement capacity development; (ii) furthering procurement policy reform and strengthening ZPPA’s capacity; (iii) introducing information technology in the procurement system; and (iv) enhancing the capacity of ZIPS and its educational program. 6. Component 4: Enhanced Internal Audit and Control (US$1.70 million): This component aimed at strengthening and promoting internal control systems to enhance transparency and accountability in the use of public resources. It supported the development of a local curriculum for public sector internal auditors; upgrading of internal audit work and quality assurance procedures to international standards; strengthening Audit Committees in the ministries; and greater use of information technology (IT) auditing tools and skills. 7. Component 5: Revenue Administration (US$10.08 million): This component aimed at increasing the effectiveness of revenue administration by the Zambia Revenue Authority (ZRA) and supporting change initiatives for the workforce to generate increased revenues for the Government. The component had seven sub-components including: (i) implementing a mining sector monitoring mechanism; (ii) introducing a system for monitoring the balance of payments; (iii) creating a transit tracking and suspense regime using new technology; (iv) instituting a capacity-building program for the staff of the Medium Taxpayer Office (MTO); (v) providing support for investigation and internal affairs and provision of specialist equipment; (vi) conducting bulk intelligence data analysis and enhancing the capability to collect and disseminate information on discrepancies related to taxes or customs; and (vii) creating an electronic records management system and introducing scanning technology into the Central Registry and at all offices. 8. Component 6: Tax Policy Formulation (US$0.58 million): This component aimed at enhancing capacity of the tax policy unit in the MoF and provided support in the following activities: (i) undertaking studies and research projects to support tax policy formulation; (ii) enhancing staff capacity in tax policy unit through specific training and mentoring; and (iii) improving access to information to aid tax policy formulation to help the unit source that material needed to support their tax policy analyses. 9. Component 7: Program Management (US$1.52 million): This component aimed to provide procurement, financial management and monitoring and evaluation (M&E) support to the implementing departments to monitor the objectives and performance against the indicators. 10. Component 8: Other PFM Interventions (US$2.55 million): This component provided funds to support the Office of the Auditor General to enhance its capacity with regard to the efficiency and effectiveness in the conduct of audits, as well as support to the Zambia Institute of Chartered Accountants (ZICA) which focused on implementation of a revised ZICA Chartered Accountant qualification (CA Zambia) with a public sector accounting stream for students wanting to work in the public sector. B. SIGNIFICANT CHANGES DURING IMPLEMENTATION 11. (i) Revised Results Framework (RF) Page 11 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Revised PDO Indicators: The RF was assessed during the Project mid-term review (MTR) in May 2016. It was confirmed that the PDO remained relevant. However, the PDO-level indicators (PEFA-centered) were slightly modified to better align the targeted outcomes with Project components and activities. Table 2: Revised PDO Indicators End PDO Indicator Name Baseline Target 1. Improved fiscal discipline (Budget Credibility)- PI-2 D Dropped 2. Improved transparency in public finances - Improved transparency in public finance (Budget Reporting) - PI 24 C B+ 3. Transparent procurement systems - Increased procurement transparency PI – 19 D+ B 4. Enhanced internal control and internal audit C+ B - Enhanced internal control and internal audit PI-20 5. Improved revenue mobilization Achieved D+ - Revenue achievement2 annually 6. Budget credibility - Aggregate expenditure outturn vis-à-vis the originally approved budget -PI D C 1 12. (ii) Revised Intermediate Indicators: The intermediate-level indicators were also revised in order to drop several process-/output-oriented indicators, while still ensuring that the monitoring and evaluation framework remained relevant, robust and comprehensive to allow for the proper tracking of Project performance. The new indicators were more focused on outcomes than outputs, and captured more clearly the contribution of the Project toward achieving outcomes. Because nine of the intermediate level indicators had already been achieved (at MTR), six new indicators were added to the RF. These included: (i) a coordination framework between planning and budget; (ii) the closing of a number of commercial bank accounts; (iii) contracts published; (iv) procurement process time reduced; (v) the introduction of a new Zambia Chartered Accountant qualification; and (vi) the assessment of the SAI PMF. 13. The RF with revised intermediate indicators is shown in Table 3. Table 3: Revised Intermediate Indicators Intermediate Results Indicators Baseline End Target 1. Integrated Planning and Budgeting - Planning and budgeting - 2018 budget preparation - The IFMIS planning and budgeting module is not using IFMIS budget modules. module is fully operational, including operational. 2Instead of using PI – 15 as basis of measurement, the restructuring measured the performance by comparing the annual achievement of revenue targets. Page 12 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) the uploading of appropriated funds and authorized budget reallocations and amendments. 2. IFMIS and Cash Management - 51 - The IFMIS is launched in all Ministries, - TSA Completed and Provinces and Spending Agencies - 36 functional (MPSAs). - TSA initiated - Inventory of all government - The TSA implementation plan is - No accurate inventory accounts completed and 70 developed and agreed by Secretary of government percent of bank accounts Treasury to establish a comprehensive accounts. linked with TSA or TSA. - Consolidation done, inactivated. - No TSA implementation. but with considerable - Reports issued within 30 - The budget execution consolidated delays. days after end of quarter. reports issued within 30 days after the - MoF using cash - Quarterly/monthly cash end of the quarter. management module. forecasts prepared/used for - The Cash Management Module is fully release in all MPSAs. operational. 3. Public Procurement Reforms - E-procurement pilots are launched using a phased approach. - 0.00 - 7.00 - System to compare reference prices to - None established. - Final system established. support a competitive procedure for pricing based on market information, government wage policies and ceilings. 4. Enhanced Internal Audit and Control - At least 85 percent of - Audit Committees meet quarterly. internal audit - Irregular or no - Improve internal audit quality recommendations followed meetings. assurance and performance up every year. - 30.00 improvement standards. - 90.00 - No electronic records management system is in place. - Scanning system is 5. Revenue Administration No minerals value chain operational. - Electronic records management system - monitoring system is in - Systems is operational is established. place. (copper/cobalt). - Implementation of minerals value chain - No capacity exists for - Feasibility study conducted. monitoring system bulk intelligence data - Transit tracking system - Develop bulk intelligence data analysis analysis. operational (all routes and capability. - No cargo transit types of traffic). - Cargo transit tracking system is in place. tracking system is in - Automated System for - A system to monitor the balance of place. Customs Data (ASYCUDA) payments is in place. - No balance of payment world enhanced capability. monitoring system is in place. Page 13 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 6. Other PFM Interventions - The Office of the - Completion of SAI Performance Auditor General (OAG) - Final Assessment report is Management Framework Assessment. has never undergone issued. - Develop Audit Management System SAI PMF Assessment. - AMS is piloted. (AMS). - No system is in place. - CA Zambia training program - Develop revised Chartered Accountancy - ZICA Accountancy commences. qualification (CA Zambia). Qualification is in place. (iii) Extension of the Grant Closing Date: Despite significant achievements, the Project team realized that key activities3/ could likely go beyond the Project closing date of December 31, 2017. As a result, and upon the Government’s request, a one-year extension was approved by the Bank on December 29, 2017. The extension was to allow the Government to fully disburse the grant balance and to complete critical project activities to achieve its PDO4/. (iv) Amendment to the Grant Amount: The Investment Program Financing (IPF) amount, originally appraised at US$30 million, was reduced to US$22 million due to exchange rate fluctuations and a reduction of British pounds GBP2.35 million in commitments by one of the contributing Multi-Donor Trust Fund (MDTF) partners5 (Table 4). Table 4: Revised Component Costs (US$ millions) Overall Reduction Original Cost Component Name Revised Cost % 1. Integrated Planning and Budgeting 1.87 1.37 0.50 27% 2. IFMIS and Cash Management 7.64 5.26 2.38 31% 3. Public Procurement 4.06 3.68 0.38 9% 4. Enhanced Internal Audit and Control 1.70 1.25 0.45 26% 5. Revenue Administration 10.08 7.64 2.44 24% 6. Tax Policy Formulation 0.58 0.43 0.15 26% 7. Program Management 1.52 1.26 0.26 17% 8. Other PFM Interventions 2.55 1.11 1.44 56% Project Cost: 30.00 22.00 8.00 27% Rationale for Changes and their Implications on the Original Theory of Change 14. The above changes did not have any major implications on the theory of change. In fact, the changes provided more clarity in measuring the PDO because some of the original indicators were replaced by the improved indicators having clear links to the results chain. Also, the additional time (extensions) and resource reallocation contributed to more effective linkages in the results chains. While the overall PDO remained the same, the scope of activities was reduced by focusing only on selected components of the Government’s 3 Among others, this includes the development of the public investment management framework; the rolling out of output- based budgeting, the electronic government procurement system, and so on. 4 Restructuring Paper, World Bank Report No. RES28701 5 World Bank Grant Agreement dated February 28, 2018. Page 14 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) PFM Reform Strategy. Also, the Resident Advisors were funded by the German International Development Agency (Deutsche Gesellschaft für Internationale Zusammenarbeit) (GIZ) to provide support on internal audit and budgeting components. The Government continued to invest its own resources into PFM reforms facilitating the achievement of objectives. II. OUTCOME A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating 15. Relevance of PDO is rated as High. The PDO was relevant to the Government’s own priorities, the World Bank Group’s goals, and the donor-supported reform objectives. It also reflected key priorities of the Government’s Sixth SNDP, launched in 2011, covering the period 2011-15. The Project was in line with the World Bank’s Country Partnership Strategy6 for Zambia, which stressed improving governance and economic management as a foundation to strengthening systems and processes for public sector performance, as well as better access to information for citizens. The PDO also supported policy reforms that contributed toward strengthening controls in the management of public finances and reducing key fiduciary risks in the PFM system. This was in line with the World Bank Africa Region Strategy's to build governance and public sector capacity through public expenditure management systems. It must be noted that the PDO continues to be relevant even after the Project closing, as it is imbedded into the Government’s PFM Reform Strategy currently under implementation, as developed through this Project. Objective 3.1 under the fiscal and financial fitness section of the Country Partnership Strategy (2019-2023) emphasizes the Bank’s commitment to support PFM reforms in Zambia, thereby highlighting the continued relevance of the PDO. While the PDO specifically focused on the efficiency and accountability of public resources, in view of the interrelated nature of the comprehensive reforms, the project also contributed to improved transparency and effectiveness. B. ACHIEVEMENT OF PDOs (EFFICACY) Assessment of Achievement of each Objective/Outcome 16. Overall, the Project has achieved its objectives and the efficacy rating is deemed Substantial. The Project successfully laid the foundation for building governance and public sector capacity through public expenditure management systems. For example, the Public Finance Management Act 2018 was passed by the Parliament. This is expected to provide a major impetus for financial control, accountability and transparency. The project significantly improved the efficiency and accountability of public sector financial management in its entire cycle from budget formulation, revenue mobilization, and budget execution to oversight of finances. 17. The assessment of the achievement against each PDO indicator is highlighted in Table 5. Table 5: Assessment against PDO Indicators PDO Indicator Name Baseline End Target Actual 1. Improved transparency in public finances C B+ B - Improved transparency in public finance PI-24 6 World Bank Report No: 75089-ZM dated February 15, 2013, covering the period 2013-2016. Page 15 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 2. Transparent procurement systems - Increased procurement transparency PI-19 D+ B C+ 3. Enhanced internal control and internal audit C+ B B - Enhanced internal control and audit - PI 20 4. Improved revenue mobilization Achieved D+ Achieved - Revenue achievement Annually 5. Budget credibility - Aggregate expenditure outturn versus originally approved budget - PI 1 D C C 1. The key achievements are highlighted as follows: Ministry of National Development Planning 2. With the support of the project, the Public Investment Management System (PIMS) has been created. The alignment of the Ministry of Planning, the IMF and the Bank team also facilitated the PIMA, which provided the Government with a clear picture of current public investment problems in Zambia. The PIMA was also instrumental in improving the project’s performance on public investment management. This would ensure comprehensive analysis of government investment projects from conception, preparation and packaging to the time when the project is considered for financing and implementation. It would also mean that the Government projects are procured ensuring Value for Money. In other words, the system would ensure that costs are optimized so that the Government does not pay more or less to deliver the specific output. Also, implementation should not extend beyond the intended time. 3. The planning and budget bill has been finalized and is in the process of being considered by the Parliament. It is expected to become a law soon. This bill would change the way current budgeting is being done, effectively changing the status quo. Though the Bill has yet to be passed into law, its principles are currently being partly applied. This reform effort has brought about a more focused and results-oriented way of planning and budgeting. It has ensured that the policy priorities of the line ministries are in sync with the National Development Plans and relevant government policy documents — and that assumptions underpinning the budget estimates for the line Ministries are as realistic as possible. Broadly speaking, policies and priorities are reflected and linked to the budget. The policies and structural interventions announced in the 2018 and 2019 budgets have been aligned to the five pillars of the Seventh National Development Plan, the Economic Stabilization and Growth Program (ESGP) dubbed ‘Zambia Plus’, and the Medium-Term Expenditure Framework (MTEF). Ministry of Finance (i) Internal Audit (Controller of Internal Audit) 4. The reform efforts have enabled the Internal Audit Department to undergo restructuring. It has since created a standards and policy section, which has a mandate to realign and ensure that audit work is being carried out in accordance with international audit standards. This section has ensured the standardization of Page 16 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) audit processes and reports in MPSAs. In addition, it contributed to efficiency in terms of time, cost and easier follow up work. 5. The revision of the Audit Committee Handbook was meant to enhance the effectiveness of the Audit Committee by aligning it to the revised Public Finance Management Act No. 1 of 2018. As such, it has brought about improved efficiency in the oversight role of the Audit Committee members due to increased operational and reporting requirements in committee operations. With the revision of the Audit Committee Handbook and increased sensitivity to the various stakeholders, the hosting of meetings has significantly improved. Furthermore, the constitution of a high-level Internal Audit Oversight Committee chaired by the Secretary to the Cabinet has begun to review Audit Committee minutes to ascertain implementation of the recommendations. This has brought about an increase in the frequency of Audit Committee meetings in the MPSAs. There is improved efficiency in the feed forward and feedback reporting channels among the Heads of Internal Audit, Audit Committee members, Controlling Officers and the Secretary to the Treasury — including improved responses to internal audit recommendations arising from internal audit reports. 6. The capacity-building programs implemented for the IT audit training in the IFMIS/TSA and spearheaded by Deloitte have helped the department with the audit scope for the IT Audit of the IFMIS/TSA. In this regard, the Accountant General’s Office takes note of the observations and has begun implementing the recommendations thereof. The galvanizing of specialized skills of internal auditors in information systems and risk-based auditing has assisted in the undertaking of increased specialized system audits across government entities. The application of risk-based auditing methodologies has resulted in improved efficiency and a reduction in costs. The planning of audit assignments using the risk-based audit approach focuses attention on risk areas using the audit risk matrix. This has improved efficiency in managing audit assignments and has helped to save on costs because certain audit areas that were less risky are not audited as often now. 7. The capacity of internal auditors has been strengthened through Audit Command Language (ACL) and specialized training in Performance Audits, IT Audits, Risk Audits, and Quality Improvement Assessments, as well as the development of Audit Manuals and the Audit Committee Handbook. A large percentage of staff at the Controller of Internal Audit benefitted from the training programs. These help to ensure financial accountability and better management of the risks pertaining to public resources. (ii) Accountant General (AG) 8. TSA. The introduction of the TSA and its roll out to 51 MPSAs contributed to greater efficiency in cash management, as well as improved timeliness in the processing of payments by the government to suppliers of goods and services. The Government has increased TSA coverage to 80 percent of budget disbursements, which is a significant improvement from the baseline7. About 74 percent of the budgeted payments are made directly to the beneficiaries through the TSA, and the remaining payments are drawn from the TSA but paid to the beneficiaries through intermediaries. For example, these include payments made through district education officers for further transfer to primary schools. The AG approved the TSA Manual in August 2018 and it was subsequently issued in the first quarter of 2019. Due to TSA reforms, significant improvements have been noted in the management of cash balances, resulting in reduced borrowings and interest charges. 7 At the time of Project appraisal, the TSA had not yet been adopted. Page 17 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 9. This reform effort has resulted in a reduction in the time it takes to move funds from the Main Revenue Account (Control 99) to other accounts, a reduction in bank accounts held at the Bank of Zambia and commercial banks and a reduction of bank charges that the Government pays to commercial banks. The consolidation of cash balances has led to effective cash management. The freeing of significant amounts of cash provides easy access and options to the Treasury. It has also assisted in easing budget execution pressures, thereby avoiding short-term borrowing to meet statutory obligations. Furthermore, the consolidation of cash balances daily provides real time information to make better decisions about government cash resources. 10. IFMIS-enabled expenditure controls and fiscal reporting have also seen significant improvements. The IFMIS has been rolled out at 51 MPSAs, including Commissioners’ offices at nine provincial headquarters (HQs), a remarkable improvement from the baseline of only 36 MPSAs. The remaining seven MPSAs in Lusaka — including Zambia Army, Zambia Navy, Zambia Air Force, the Office of the Present Electoral Commission, the State House, and the Zambia National Service — were dropped from the target according to the Government’s decision. In this regard, it cited security reasons to justify a stand-alone IFMIS for these institutions. IFMIS enhancements in areas such as multi-year commitments, business intelligence, and project reports, are at an advanced stage of development and are likely to be completed in the next few weeks. The IFMIS has emerged as a major tool in supporting the authorities to prevent accumulation of future payment arrears. SAP based IFMIS in Zambia went through extended periods of planning, implementation details and suboptimal utilization prior the project. The critical contributions under the project included: (i) mainstreaming the IFMIS from project mode into the Government; (ii) the development of a medium-term roadmap; (iii) the conducting of IT security audits of the IFMIS; and (iv) functionality enhancements (including budget control and planning module) and development of interfaces, resulting in the higher functioning of the IFMIS system. The implementation of the TSA has also facilitated the increased use of the IFMIS (for example, transactions outside the system are no longer frequent), since payments are linked to the IFMS. The IFMIS information and communications technology (ICT) infrastructure has been optimized and this has resulted in improved security, enhanced systems availability, and better risk management. It has also helped to enhance business continuity. 11. The Government decided to implement the International Public Sector Accounting Standards (IPSAS) accrual progressively. As such, the project supported the development of a roadmap for improvement in cash basis accounting, as well as a migration to accrual basis IPSAS. 12. Parallel legacy financial management information systems for ex-post processing of payments and disbursements have been discontinued for better budget control. The fiscal reports and annual financial statements are prepared using the system generated data, which has led to improved fiscal reporting. 13. Payroll system. This system was on the brink of a hardware crash, as the server capacity had hit its ultimate limit to processing the payroll. It was salvaged through a major intervention financed through the project. However, this was not within the original scope of the Project. The payroll system is now migrated to the new hardware platform, hosted in the G-Cloud environment. The interface work with the financial system has been nearly completed. This will lead to improved payroll controls involving integrated position management, payroll, budget and financial reporting. (iii) Budget Office 14. Budget Formulation Unit: The approach to the budget has been strengthened because of the transformation from activities-based budgeting (ABB) to output-based budgeting (OBB). The shift from ABB to Page 18 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) OBB has improved the performance of the implementation of the budget by focusing on actual results and the mandate of the spending agency. Additionally, production costs for budget books such as yellow books have been drastically reduced due to the reduced number of pages from thousands to hundreds of pages. Auditing has also been expanded from mere compliance audits of looking at whether the resources were spent according to the budget allocation to whether the outputs were actually delivered. Further, the Chart of Accounts (COA) and budget classifications were improved for more transparent fiscal reporting. 15. The OBB has been rolled out to seven MPSAs. Most of the remaining MPSAs have been provided with training and support, thereby enabling them to develop their program structures, target outputs, and costing. The budget for these seven ministries was prepared, and subsequent budget releases made at the Program/Sub- Program/Fund Center/Commitment Item levels. In a significant departure from the tedious and manually intensive practices, the activity level budgeting and release procedures were discontinued. The OBB Manual has also been prepared and approved. The Budget Module of the IFMIS has been re-configured to the latest version of the BPC (Business Planning and Consolidation), which is used for budget execution after its preparation in the legacy system. Further, the COA and budget classifications were unified and harmonized for improved and more transparent fiscal reporting. 16. Tax Policy Unit. The Project has strengthened the ability of the Tax Policy Unit to identify gaps in tax formulation, as well as tax havens/tax treaties. The Project assistance was in two parts. The first concerned tax studies, and the second part involved a shift from capacity building to supporting the introduction of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiatives. Three tax studies were undertaken, including studies on the Marginal Effective Tax Rates. Tax Expenditures (to assess the cost of tax exemptions and relief), and Assessing the Tax Gap (taxes not collected). These studies were expected to inform future tax policy judgments. The main impact of the BEPS work has been to amend the tax transfer pricing rules to affect key aspects of the multilateral BEPS reforms; but a start was also made on renegotiating double taxation treaties. 17. Limit base erosion through interest deductions and other financial payments. Tax revenue measures for the 2019 budget include a measure to limit the deductibility of interest on debts owed by a taxpayer to 30 percent of the tax earnings before interest, tax, depreciation and amortization. The provision in the law actualizing this measure is contained in the Income Tax (Amendment) Act No. 17 of 2018. 18. Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. The Zambia Tax Treaty (Double Taxation Agreement - DTA) model was updated to include tax treaty anti-abuse provisions, thereby establishing better taxing rights for Zambia than those contained in the old agreements. The BEPS anti-abuse protection now in the Zambian model includes the ‘Principal Purpose Test rule’ and the ‘Limitation of Benefits rule’. Zambia renegotiated its Tax Treaty with Mauritius and the new draft tax treaty between the two nations contains these anti-abuse provisions. Further, a DTA agreement data base has been created. 19. Re-examine transfer pricing documentation. Transfer pricing regulations have been updated and transfer pricing documentation rules introduced after consultations with stakeholders. These rules are contained in Statutory Instrument No. 24 of 2018. They support a competitive procedure for pricing of minor goods and services, consulting and other public purchases based on market information and government wage policies and ceilings. This minimizes the risk of tax evasion through transfer pricing. Page 19 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 20. Capacity Building and Tax Studies. Tax policy staff were provided with capacity support and mentored in tax policy. Three studies were undertaken to inform evidence-based tax policy reforms. The three studies included: Marginal Effective Tax Rates (METRs), Tax Gap Analysis; and Tax Expenditure Analysis. Staff training workshops were conducted on the findings and methodology for the three studies by the consultants. The results of the three tax studies were used to inform and facilitate the Tax Policy Unit in its fine-tuning the approach to tax expenditure, considering the high cost of incentives in Zambia. Some of the findings highlight the fact that the current tax structure appears to be too generous and redundant in several respects. As a result, the government needs to clearly describe the relief granted, state the objectives, enact sunset and claw-back provisions, and design a clear framework for assessing the efficiency and effectiveness of such programs. Zambia Public Procurement Authority 21. The e-government procurement system and ‘end-to-end’ automation of procurement processes has been successfully developed, signaling a new era of transparency and efficiency in procurement processes in Zambia. The ZPPA’s capacity as a regulator has been strengthened through various training and capacity development initiatives. A new law for public procurement has been drafted and is awaiting legislative consent. Procurement decentralization has been mainstreamed in the country, with procurement units in the ministries and agencies conducting the procurements, and ZPPA performing its regulatory role, including the conducting of various procurement audits. A system of indicative price lists of commonly used items in Government has been brought into operation. THE ZPPA was provided with support to conduct various training programs across the procurement units. Framework contracts have been introduced for the first time in the country. Zambia Revenue Authority 22. Tax administration has been strengthened in the following ways: (i) Mineral Value Chain Monitoring Project (MVCMP). Mineral value chain monitoring has brought transparency and accountability to the mining sector. The target was “having systems fully in place and operational (for copper and cobalt)” by December 2018. This referred to having the two systems for production reporting and exports fully operational at the (12) large mines. This was fully achieved, with these mines attaining compliance especially with regard to Mineral Production Reporting and Export Permits. The ZRA also extended the same model and engaged small-scale mines (and other base metals) across the country where mining activities are taking place. As of end-December 2018, the team had engaged 250 small-scale mines, of which 65 have started submitting Mineral Production Reports using the Mineral Output Statistical and Evaluation System (MOSES). Previously, it would have taken four days to obtain the permit, but that has now been reduced to a maximum period of two days. Regarding production reporting, the level of compliance was very minimal such that mines were three months behind of the 15th day of the month deadline. However, now the situation has been turned around and all major mines do report before the deadline. This could be attributed to the change management activities and to the system-based controls that have been implemented, such as rejection of the application for a mineral export permit if the applicant has not reported mineral production in the system. Other controls include penalties for late submission of the monthly mineral production reports. This has helped in attaining 100 percent compliance among major mining entities. The introduction of these systems, backed by compliance monitoring, has seen a significant change in fiscal receipts from the mining industry: mineral royalties grew by 61 percent between 2017 and 2018 (K3,936 million, up from K2,435 million) and Page 20 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) company income taxes increased by 120 percent (K2.356 million up from K1,067 million). Taken together, these equate to a revenue increase of 1 percent of GDP. (ii) Cargo tracking transit system. The transit cargo tracking system is fully operational, and the seals are being used on all routes. The ZRA is now able to track high-risk goods that are being transported through and within Zambia to deter illegal diversions and revenue evasion. (iii) Electronic records management system (ERMS). Scanning hardware is in place and is being used at all planned locations, thereby ensuring ERMS functionality. However, the full ERMS system is presently being used at only selected locations and for selected functions. Part of the server hardware purchased for the ERMS was used temporarily to keep the main tax and customs revenue systems operational when experiencing server failures. Thus, the full deployment, especially on documents held in the Tax-on-line and ASYCUDA world systems, cannot be done at present due to IT server storage limitations. This will be progressively increased as the ZRA scales up its server capacity. (iv) Electronic Fiscal Devices. The User Requirements and Feasibility Study has led to the procurement of the Tax Invoice Management System (TIMS) under Government funding. The TIMs is able to transmit information (almost) in real time, enabling officers that monitor the taxpayers to see most of the sales by the taxpayers who are connected to the system. There was an upward movement in the amounts of net value- added tax (VAT) declared and recorded as total output tax from March 2018 to September 2018 as compared to the same period in 2017. This increase may mean that taxpayers were declaring correct monthly sales in their tax returns. (v) Capacity building in audit and debt management skills, procedures and policies. The reform effort has optimized revenue collections from delinquent debt. For example, debt recovery has significantly increased revenue collection since its inception in 2015. For example, in 2016 the total debt (tax arrears) recovered was K974,592,887 whereas in 2018, the total debt recovery increased to K5,932,265,589.15. Furthermore, this increased efficiency and helped to avoid duplication of efforts from the various divisions involved in debt management because the debt was done and coordinated under one unit. Additionally, the changes resulted in increased self-compliance among taxpayers in terms of filing and making tax payments. 23. Investigation improvements. The equipment for use by investigation staff was considerably enhanced and included a new radio network and an IT forensic laboratory. These were put to good use in ensuring the successful resolution of tax and customs investigations. 24. Improvements to IT infrastructure. The IT infrastructure of the ZRA was brought up to date with improved communications between offices using the Very Small Aperture Terminal (VSAT) with Uninterrupted Power System (UPS) equipment to ensure less disruption during power outages, as well as a new local area network (LAN) infrastructure to increase capacities in key offices. Zambia Institute of Chartered Accountants 25. The ZICA is now in a position of producing internationally recognized Chartered Accountants (CAs) in Zambia. The launch of the CA Zambia qualification and the development of training materials have brought best practices to the accountancy profession. Page 21 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Zambia Institute of Purchasing and Supply (ZIPS) 26. As the statutory professional organization for public procurement, the ZIPS has implemented a full suite of courses including the certificate, diploma and degree courses. Exams are conducted on a timely basis. The ZIPS administrative and governance arrangements have undergone a transformative change during project implementation. As a result, the ZIPS is now emerging as a better governed organization on the path to evolving into a financially self-sustaining organization. The branding, logo and communications approaches have improved, presenting a positive impression of a professionally run institution. Zambian students now have the option of obtaining sound professional qualifications in public procurement based on national requirements at a fraction of the cost when compared to global certifications. The ZIPS has also been strengthened as an institution in terms of monitoring and regulating procurement procedures in Zambia. In addition, a procurement cadre has been launched into the market. Other strategic cross-cutting reforms and achievements 27. Overall Government Structure: Following the successful implementation of the reform efforts under the project, the Government has incidentally upgraded the office of the Accountant General and the Office Controller of Internal Audit to the level of Permanent Secretary (by the President). With these upgrades, the Ministry of Finance is in the process of strengthening the cohesion and functionality of the Audit Committees in the ministries, provinces and other controlling bodies. Furthermore, the Government has created Finance Director positions with well-defined and superior reporting lines. These efforts will go a long way toward instituting effective public financial management. 28. Results of legal reforms: The Government’s commitment to transparency and accountability in the utilization of public resources through implementation of PFM reforms is bearing substantial results, especially after the enactment of the Public Financial Management Act, 2018. In accordance with the 2017 Auditor General’s Report revelations released in 2018, eighty officials were dismissed and the misappropriated funds by the dismissed officials will be recovered from their terminal and pension benefits. The Public Financial Management Act, 2018 is now the principal act governing public financial management matters. Since its coming into force, the Act has helped to facilitate easy enforcement of regulations. It also offers clear guidance on management of financial resources and stipulates offenses and penalties related to mismanagement of public resources in both local and central governments. The Public Financial Management Act, 2018 is also embedded with provisions that have now operationalized the IFMIS and the Treasury Single Account in law. 29. Controlling officers: sensitization PFM workshops. With the successful implementation of the reform efforts under the project, the Government has conducted several PFM sensitization workshops to enable controlling officers to more effectively manage public resources. Workshops dealt with topics such as the 2017 PEFA results and 2016 Auditor General’s Report. These were conducted in 2018, followed by a PIM workshop in 2019. Page 22 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) C. EFFICIENCY Page 23 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Assessment of Efficiency and Rating 30. The overall Efficiency is rated as Substantial. (i) Implementation of the Project is considered efficient. Although no formal economic analysis was attempted, the efficiency analysis was built into the project monitoring by the task team, as well as by the Joint Government Donor Committee (including the Government, MDTF Donors and the World Bank), which periodically reviewed the value in terms of overall efficiency based on reports prepared by the PFM Coordination Unit. All the planned activities were completed within budget, and there was no cost overrun. The one-year extension was provided at no cost to help develop the public investment management framework, launch the output-based budgeting and electronic government procurement systems, and so on. (ii) Integrated Planning, Budgeting and Revision of the PFM Legal Framework (a) The harmonization of the budget classification and Chart of Accounts improved implementation of the budget and fiscal reporting through the IFMIS. This target was fully achieved on time and within budget. (b) The development of OBB, among others, has contributed to enhancing policy orientation regarding resource allocations, as well as the efficient utilization of financial resources. So far, seven MPSAs are currently using OBB. With the shift from ABB to OBB, the focus has changed to outputs expected from public expenditures. Through this effort, the public will clearly see what the Government intends to attain and how the legislature will prioritize resources for outputs and assess the effectiveness of appropriated public funds. Thus, OBB provides a means of refocusing on the performance of the MPSAs compared to the resources allocated and released to them. (c) Programs are now better aligned to the priorities in the Seventh National Development Plan. (ii) Strengthening IFMIS and Cash Management The benefits of TSA implementation are as follows: (a) Consolidation of cash balances has led to effective cash management. The freeing of significant amounts of cash provides easy access and options to the Treasury. This has assisted in easing budget execution pressures, thereby avoiding short-term borrowing to meet statutory obligations. The consolidation of cash balances provides real-time information about the government’s cash resources for decision-making purposes. (b) Time reduction for a beneficiary to receive money. Prior to the implementation of the TSA, a check would be issued and then collected by the beneficiaries, who in turn would deposit the check into their accounts before accessing the money. This took at least two days. With the implementation of the TSA, money is made available to the beneficiary’s bank account within 10 minutes of the Treasury processing the transaction in the IFMIS. (c) Time reduction to move funds from the Main Revenue Account (Control 99) to other accounts. Page 24 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) (d) Reduction in bank accounts held at the Bank of Zambia (BOZ) and commercial banks. This has led to the reduction of bank charges that the Government pays to commercial banks. (iii) Public Procurement Reforms8 (a) Extensive training was provided to MPSA staff (33), the ZPPA (20), and the internal auditors. This has resulted in a notable drop in the number of appeals submitted, and it can be attributed to several factors, including bidders being sensitized about when they can legitimately file an appeal. There have also been improvements in the number of Procurement Committee minutes submitted and in the number of submissions of Annual Procurement Plans. In addition, there has been an improvement in the quality of solicitation documents for both low- and high-value tenders. The training in aspects of contract management has reflected an improvement in contract execution, with fewer contracts being abandoned or litigated. The submission of quarterly procurement reports has demonstrated overall improvements in procurement and the management of contracts awarded. There has also been a reduction in the number of audit queries as reported in the Auditor General’s report. (b) A system of comparable references. Once the benchmarking system of comparable reference prices is fully operationalized, it would serve as a bench-mark pricing system for use by Procurement Units. As such, it would help to bring about uniform understanding and application of the pricing dynamics around commonly used items that guarantee value for money. The prices would be used as reference points for planning and budgeting purposes, as well as for assessing the competitiveness of bid prices. (iv) Enhanced Internal Audit and Control Substantial benefits have been achieved as follows: (a) Improved efficiency due to the standardization of internal audit work resulting from the use of standardized audit working papers and audit methodologies. All audits primarily utilize a risk-based approach based on manuals aligned to international standards. (b) Time savings as a result of improved efficiency in the execution of audit assignments. This is due to a reduction in time spent in applying the traditional methodologies of auditing as opposed to the new standardized working papers and Internal Audit Manuals. (c) Improved efficiency and reduction in costs due to the application of methodologies of risk-based auditing. (d) The planning of audit assignments using the risk-based audit approach focuses attention on risk areas using the audit risk matrix. This has improved efficiency in managing audit assignments and has saved on costs as certain audit areas that are less risky and not audited so often. (e) Improved efficiency in the oversight role of the Audit Committee members due to increased operational and reporting requirements of the Audit Committees. 8 Procurement Audits were carried out by the ZPPA under this component. Page 25 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) (f) Improved efficiency in the feed forward and feedback reporting channels among the heads of internal audit, Audit Committee members, Controlling Officers and the Secretary to the Treasury. This includes improved responses to internal audit recommendations arising from internal audit reports. (g) Efficiency was improved in ICT audits through: (a) the training and conducting of systems audit with the TSA; and (b) value addition in the audit of the IFMIS systems. (v) Increasing the Effectiveness of Revenue Administration (a) Overall, the key measure of success was the achievement of the annual Parliamentary revenue collection targets. This has provided the Zambian Government with increased fiscal space. The details for 2018 are shown in Table 6. Table 6: Effectiveness of Revenue Administration 2018 Tax Revenues Zambian Kwacha (millions) Parliament Targets Gross Refunds Net Target Variance 1. Tax Revenues 57,546.3 9,369.6 48,176.7 44,402.1 3,774.6 9% A. Income taxes 24,470.0 333.5 24,136.5 23,934.0 309.1 1% 1. Company taxes 6,187.46 214.00 5,973.46 6,115.9 (142.5) -2% Non-mining company taxes 3,616.70 0.00 3,616.70 4,167.7 (551.0) -13% Mining company taxes 2,570.76 214.00 2,356.76 1,948.3 408.5 21% 2. PAYE 10,487.77 61.55 10,426.22 10,167.6 258.6 3% 3. Withholding and other taxes 3,858.08 57.90 3,800.17 4,054.0 (253.9) -6% 4. Mineral royalty tax 3,936.69 0.00 3,936.69 3,527.7 408.9 12% B. Insurance premium 106.47 0.00 106.47 68.6 37.9 100% C. Excise taxes 3,429.56 0.00 3,429.56 4,744.8 (1,315.3) -28% D. VAT on domestic goods 15,492.6 8,995.4 6,497.1 4,060.4 2,436.7 60% E. Trade taxes 14,047.69 40.73 14,006.96 11,662.9 2,344.1 20% 1. VAT on imports 10,854.5 0.0 10,854.5 8,309.0 2,545.4 31% 2. Customs duties (import tariffs) 3,184.6 40.7 3,143.9 3,302.3 (158.3) -5% 3. Export duties 8.6 0.0 8.6 51.6 (43.0) -83% In addition, increasing the effectiveness of revenue administration has had other positive impacts in other areas: (a) The implementation of the mineral sector monitoring mechanism has brought efficiencies in the mineral value chain, as exhibited in the case of the mineral production reporting and export permit application process. Subsequently as a result of the mechanism, the computation of taxes, such as mineral royalties, is being done using relative data with much more integrity. (b) The introduction of these systems, backed by compliance monitoring, has seen a significant change in fiscal receipts from the mining industry: mineral royalties grew by 61 percent between 2017 and 2018 (K3,936 million, up from K2,435 million) and company income taxes increased by 120 percent (K2,356 million up from Page 26 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) K1,067 million). Taken together, these equate to a revenue increase of 1 percent of GDP. These increases arose in part from audits of mining companies that declared returns. Specifically, this was done through an analysis of production data conducted by the Mineral Data Analysis Centre (MIDAC). (c) Repeats from previous sentence. The analysis of the data being collected has resulted in actual audits of some mining companies. In 2018, the estimated additional assessment of 10 million Kwachas (US$1 million) was raised against the audited companies. A total of approximately 4 million Kwachas was paid while the outstanding balance is yet to be paid. (d) The timeliness in receiving reports from the mining companies has improved from about 90 days beyond deadlines to as early as six days before the due date, which is the 15th of each month. (e) With the introduction of the online mineral production reporting module, the mining companies no longer travel to Lusaka to submit their reports on a monthly basis, resulting in operational cost savings. By end October 2018, 362 permits had been issued online. There has been a reduction in the amount of time it takes for an export permit to be issued, that is, from an average of four days to about two days. The delay is due mainly to the mining companies taking their time to make payments. (f) Other improvements include the easy verification of figures and quantities submitted by the mining companies due to the capability to crosscheck the reports from other mines and systems, such as the ‘ASYCUDA World’ system that captures mineral export data. In addition, the Government now has the capacity to cross check mining data from different systems. (g) The Government is now able to have clear oversight of the movement of minerals. As such, it is expected that some non-compliant players may be forced into compliance, thereby reducing the potential of possible revenue leakages as a result of industry malpractice. (h) Adherence to the law is in the design of the export permit module. As such, more export permits are now being issued than in the past when exporters would apply for a single export permit for several buyers. This will result in more fees for export permits collected by the Ministry of Mines. (vi) Strengthening Tax Policy Formulation (a) Implementation of Base Erosion and Profit Shifting (BEPS) actions. These actions limit base erosion via interest deductions and other financial payments. The use of third party and related party debt to achieve excessive interest deduction is the simplest technique available to tax planners. Excessive interest deducted by corporate entities is detrimental to Zambia’s domestic mobilization enhancement efforts. By implementing BEPS Actions, Zambia will safeguard its tax base. It is estimated that the limitation of interest deductions and other financial payments will result in efficiency gains to the Treasury of around 471 million Kwachas during 2019-2021. (b) Preventing the granting of treaty benefits in inappropriate circumstances. The benefit of tax concessions provided in the Tax treaty between Zambia and Mauritius is now limited to those entities that produce documents proving that they are residents of Mauritius. With the Zambia-Mauritius tax treaty in force, the new anti-abuse provisions in the treaty will save Zambia millions of Kwachas. Page 27 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) (c) Re-examine transfer pricing documentation. Revised transfer pricing guidelines have provided clarity to Zambian taxpayers regarding the implementation of the amended transfer pricing legislation. Given that the revised regulations are based on OECD and United Nations transfer pricing guidelines, implementing BEPS actions has introduced administrative efficiency in the sense that transfer pricing documentation requirements are now standardized for all entities. Such entities are now required to submit documents to support their respective related party transactions. (vii) Other PFM Interventions (a) The benefits realized from the Audit Management System (AMS) include a reduction in the time taken to conduct audits because a lot of information, such as Government financial statements, are pre-loaded in the AMS. As such, subsequent calculations at various stages of the audit process are automatically performed. Monitoring of the audit process was enhanced with the centralization of information storage. This makes it easier to see which work papers have been completed. The Public Accounts Committee recommendation follow-ups are easier to track as the prior year issues are included and are part of the information contained in the database. (b) After the launching of the audit management system to the remote regions (provinces), the auditors in those regions would be able to login in and conduct audits remotely as the system is web based. This helps to reduce costs for fuel, subsistence allowances, and vehicle maintenance. In addition, management at the head office can review the work of the auditors on location without travelling. On average, a round trip to a remote location would cost the office approximately US$2,100 per person for six nights in four provinces. Thus, the new system helps the government to save on such costs. (c) Program support enabled the ZICA to launch a new accountancy qualification called CA Zambia, which develops training and student learning materials for the qualification credential. The support also enabled the conducting of the Report on the Observance of Standards and Codes - Auditing and Accounting (ROSC A&A) that set out recommendations to further strengthen the accountancy profession in Zambia. This was done within the overall context of enhancing its contribution to Zambia’s economic growth agenda. D. JUSTIFICATION OF OVERALL OUTCOME RATING 31. The overall outcome is rated as Satisfactory. The rating takes into account both the original and the revised outcome targets, and is based on the individual High rating of Relevance, and Substantial ratings for Efficiency (Table 7). The Project achieved its objective and has successfully laid the foundation in building governance and public sector capacity through improved public expenditure management systems. Table 7: Overall Outcome Ratings Relevance of Objectives Efficacy Efficiency Overall Outcome High Substantial Substantial Satisfactory Page 28 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender 32. The Project complied with the Government’s policy of reducing the gender gap. It supported women by employing them and providing them with the necessary training at the various departments under the MoF. Anecdotal evidence gathered during the ICR mission showed that the project also has an indirect positive impact on gender equity through prioritization of public service programs and service delivery to Zambian citizens. Institutional Strengthening 33. The project contributed substantially to institutional strengthening in the following government agencies: the Ministry of National Development Planning; the Ministry of Finance; the ZPPA; the ZRA; the ZICA; the ZIPS, and the Office of the Auditor General. 34. For details see Section II B. Mobilizing Private Sector Financing N/A Poverty Reduction and Shared Prosperity 35. The Project contributed to an increase in revenue collection, thereby expanding budgetary resources. These resources could potentially enhance allocations to priority sectors such as health and education, public sector salaries, and other public services. Further, reforms in the public procurement process have reduced the scope for fraud, corruption, and irregularities. As such, there are potentially more resources available for poverty alleviation. In the long run, the project would benefit the poor through improved public finance performance and investment in the social sectors. Page 29 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Other Unintended Outcomes and Impacts 36. (a) Zambia has positioned itself as a pioneer on e-procurement. With its public procurement regulations, it has now become a top player in this field. Likewise, the mineral value chain monitoring project has made Zambia a global player and is bringing in additional revenue. 37. (b) The IFMIS system crashed during migration to the new environment in the G-Cloud. This unintended event was swiftly and effectively managed due to the project’s ongoing intervention, including the presence of the consultancy team working on the IFMIS. The team helped in recovering the IFMIS within three months. 38. (c) Reduction in available financing. Due to exchange rate losses and a reduction in donor funding, the Project did not receive the full, expected US$30 million contribution (para 21 (iv)). 39. (d) The payroll system was on the brink of collapse due to hardware capacity issues. Although this issue was not within the scope of the project, per se, the payroll systems was migrated from the failing hardware to the new server hosted in the G-Cloud. This has provided stability to the sensitive payroll operations of the government and improved controls through better automated linkages with positions management (number of civil servants) and budgeting (financial data). 40. (e) Although the e-GP was intended to be piloted for only six ministries, because of its success, it has been rolled out to more than 20 ministries — much more than what the project envisioned. Further, ZPPA’s achievements in e-GP have generated a lot of interest from other countries in learning about the system. These countries are also interested in replicating the system. 41. f) The linkage between the IFMIS and the debt management system has raised the seriousness of the issue for the government as it attempts to find a solution to debt management. The government is seriously considering options to fix the debt management issue. 42. (g) The alignment of the Ministry of Planning, the IMF and the World Bank team facilitated the Public Investment Management Assessment (PIMA), which provided the government with a clear picture of current public investment problems in Zambia. The PIMA was also instrumental in improving project performance on public Investment management. 43. (h) The mineral value chain monitoring program required good coordination across seven ministries, departments and agencies, as well as a close working relationship between the World Bank and the Government of Norway in terms of the assistance they provided. Those relationships are likely to be of considerable benefit in future years. As in the case of the e-GP, the novel outcomes from the MVCMP are proving to be of great interest to other countries. 44. (i) A new cooperating partner group on PFM issues was created in 2018, mainly because of the project results. This group meets once in a quarter. III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION Page 30 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 45. In the context of weak public sector governance, the project preparation team recognized the challenges of implementation and prepared the project design with sound background analysis, including a comprehensive assessment of the Government’s commitment. The team also took into consideration the IMF’s guidance and ensured that the breadth of the reform strategy would not exceed the absorptive capacity and resources of the Government. The team also sought to ensure that the strategy would focus on core ongoing reforms (macro-fiscal forecasting, budget formulation, cash management, TSA, fiscal reporting and the IFMIS), which would create a platform for more advanced PFM reforms in the future. 46. The project design was anchored in a realistic sequencing order. The project design was focused on a ‘phased’ approach in line with the Government’s PFM strategy. The Government’s reform program was formulated based on inputs from responsible departments and agencies. In any reform program, there is generally some initial resistance when bringing about new changes. There was also some resistance from selected agencies/departments/people to giving up some of the functions that they had been performing for a long time, or to take on new activities. This was managed by consulting and involving the stakeholders at every step to avoid the fear of the unknown. The phased implementation of the components provided sufficient opportunities for detailed consultations and the testing of new concepts. 47. The project was structured to be fully consistent with the PEFA, and it was designed to ensure maximum ownership by the Government and understanding by key donors. The project provided a broad vision, a sequenced strategy, and details regarding each agency’s responsibilities. Thus, the project rested on a solid foundation. The project activities also benefitted from technical assistance and financial support for PFM reforms implemented by several other donor partners under the PFM donor coordination structure. The donors included the African Development Bank, the European Union, Germany’s state-owned development bank, KfW, the IMF, Norway, Sweden, the United Kingdom’s Department for International Development (DFID), the United Nations Development Programme, the United States, and so on. 48. Lessons learned during project preparation included: (i) Major IT-related PFM reforms should adopt a modular approach that minimizes risks and costs. Launching the project in phases with major changes to the system was a challenge. It was addressed with adequate external technical support. (ii) Any major reform process should properly prepare for change management. Program components were developed in close consultation with relevant stakeholders on the basis of a reform strategy developed and owned by the government. (iii) A reform of the size, scope and complexity of the PEMFA should not be attempted without commissioning the provision of sufficiently experienced PFM expertise to advise on the direction of reform, as well as on some of the more complex reform areas. The implementation scope was reduced by focusing only on selected components of the Government’s PFM reform strategy in the first phase. Resident Advisors funded by the GIZ were available to provide support on internal audit and budgeting components. An IFMIS Specialist was hired Page 31 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) with donor support to provide real-time advice. The Bank implementation support team included audit, procurement and financial management specialists. A resident US Treasury Advisor also provided guidance on the TSA. (iv) The component managers need to be prepared for reform (including on issues pertaining to organizational restructuring, management training, and so on). Component managers and their second and third tier officers are involved in the component design. (v) Weakness in program monitoring and evaluation contributed to PEMFA program challenges, with the project remaining off track. A M&E framework was developed as part of the program and was used for regular monitoring. (vi) There is a need for specifying a senior official within the regular accountability framework of the government as the focal point person for managing the reform instead of performing this function through committees. A Permanent Secretary from the MoF was made responsible for the overall, periodic program monitoring. (vii) Establishing a PFM Secretariat to coordinate, monitor and report on the project activities. It was a challenge to appoint officials to serve in the Secretariat in a timely fashion, which impacted its effectiveness. 49. Risks and Risk Mitigation Measures. During project preparation, the Bank task team identified key risks and adopted mitigation measures. Efforts were made to link with training institutions for capacity building. The project entailed coordination with development partners and government training institutions to improve the quality of training. This resulted in institutionalizing sustainable capacity-building programs necessary to develop adequate and suitably qualified officials even after project closure. The risks identified were: (i) weak implementation capacity rated as substantial; and (ii) risks due to a delay in decision-making at various levels; this risk was rated as high. The overall residual program risk rating during preparation and implementation was assessed as ‘substantial’. To mitigate these risks, a dedicated implementation team was put in place to supervise the delivery of the outputs, monitor progress, and manage contracts. 50. Adequacy of government commitment. While the government demonstrated ownership and commitment, the project struggled initially during the first year. For example, meetings of the Technical Committee and the Joint Government Donor Committee were not regularly held and individuals from the PMU, the component heads, and the Bank’s MDTF team struggled to play their appropriate roles. However, this changed over time, reaching a stage of highly effective functioning by the end of 2015. Initiatives such as human resource management interventions and capacity development programs were undertaken, for example, linking with the Zambian training institutions. The Phase 1 of the project was designed to ensure sustainability and scalability for future expansion, paving the way for further fiscal decentralization efforts by the government. B. KEY FACTORS DURING IMPLEMENTATION 51. Factors which affected implementation in the first 18 months of the project included: 52. (i) Highly ambitious and unrealistic work plans; (ii) a huge disconnect between the complex procurement procedures and administrative processes in the government; (iii) a shortage of key staff and a lack of preparedness as a result of which the PMU was not able to effectively play its role; and (iv) absence Page 32 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) of a clear strategy on the part of the government regarding how to move forward on some critical components, such as the IFMIS. 53. Other factors affecting implementation during the entire project period included: 54. (i) Changes of staff in the government, including the head of the Procurement Authority, the Permanent Secretary Finance, the head of the Zambia Revenue Authority and the head of the Budget Expenditure Unit; these changes temporarily affected the pace of implementation. On a positive note, the renewed commitment by the new leadership at the Ministry of Finance after elections had a significant impact on implementation of reforms relating to the Treasury Single Account and domestic revenue mobilization (ZRA and Tax Policy Unit). 55. (ii) The Project faced a temporary setback under Component 2 (Strengthening the IFMIS and cash management), when the IFMIS system crashed during migration to the new environment in the G-Cloud in January 2018. While this caused some initial delays in the progress of activities related to the component, they were put back on track and completed before project closing in December 2018. Page 33 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) Page 34 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) M&E Design 56. The project’s Results Framework was prepared according to Bank guidelines. The PDO indicators and target were compatible with the Government’s approach, donor inputs, and the overall PFM reform agenda. Such an approach ensured that the M&E framework was grounded in reality and evolved during the reform process. However, it is worth noting that the initial Results Framework was quite cumbersome, with six PDO and 40+ intermediate results indicators. It was further simplified, although too close to the project implementation period (para. 19). Additional changes in the Results Framework were later introduced through project restructuring to enhance results monitoring. See Section I. B for details. M&E Implementation 57. Initially, there was a disconnect between the indicators and data collection. In addition, there was no M&E expert in the MoF during this period. As a result, M&E did not proceed well. When these shortcomings were realized, a new M&E framework was agreed between the Bank, the donors, and the government — even before restructuring. The Bank team and MDTF donor technical teams provided extensive technical inputs to a fully staffed and committed PMU team to develop and implement a good M&E structure from eighteen months into the project. After this eighteen-month period, the project had a good M&E structure. Nine implementation support/supervision missions helped to monitor progress and provide extensive support. The progress and guidance were recorded in eight Implementation Status and Result Reports (ISRs) and nine Aide-Memoires. The presence of the World Bank task team leader (TTL), based in Lusaka from project preparation until closure, ensured that implementation support was continuous. Indeed, it was provided on a daily basis, working with the Government teams for the life of the project. In addition to the main missions with dedicated Aide-Memoires for the project, there were numerous mini-missions across the life of the project during which one or more global technical experts provided in-country technical inputs to components. They helped to inform either other assessment reports (for example, the PEFA, the ROSC, the PIMA, the Tax Administration Diagnostic Assessment Tool (TADAT) (MAPS), and the PFM Reform Strategy) or Aide-Memoires for the PFMRP or other complementary Bank activities. The task team regularly collected detailed data, updated current progress against the baseline, and highlighted issues for Bank management attention. To stay on track, regular external reviews of the Project and overall PFMRP progress reviews were also conducted. In addition, a variety of other reports — including quarterly and annual progress reports, monthly fiscal reports, Public Expenditure and Financial Accountability (PEFA) Assessments, and other reports prepared by the Government with the support of the World Bank and MDTF partners — were used to monitor the Project’s outcome and results indicators. M&E Utilization 58. Appropriate data collected from the progress reports on indicators was evaluated and used to inform decision-making regarding certain activities. For example, based on the data and information collected from the mid-term review, the Bank and the government decided to restructure the project and extend the closing date. Modifications of annual work/procurement plans were done whenever required. The Bank also reconfigured the kind of technical assistance needed for the project, such as providing an OBB expert, professional accounting body experts and tax policy experts. Justification of Overall Rating of Quality of M&E Page 35 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) 59. The overall quality of M&E is considered Substantial. The M&E design was flexible, and the project team was able to adequately adjust the indictors and target values during implementation. M&E reports were prepared in a timely manner to keep track of the project status at any given time. The initial moderately satisfactory rating for M&E in the ISRs reflected the occasional challenges of delays in the submission of reports at the beginning of the project (when the PFM Reform Unit was not fully staffed), which was later effectively mitigated during implementation. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE 60. Environmental and social safeguards compliance: The project did not include any activity that involved significant social risks, nor did it deal directly with the population at large. The project financed consulting services, goods, training and workshops. No civil works or any activity that would have negative environmental implications was undertaken. The project was classified under category C. No environmental safeguard policies were triggered. 61. Fiduciary Compliance: The project complied with all fiduciary covenants during implementation. Internal control arrangements were put in place, and adequate financial management, procurement, and disbursement systems were maintained. 62. Financial Management (FM): The overall financial management performance rating of the project is considered Satisfactory. The FM Manual incorporated the necessary internal control guidelines using country finance systems. The internal controls of the project worked as intended. All key project staff attended a training workshop to them to fully understand the approved Manual. The quarterly interim unaudited financial reports were submitted to the Bank on time. The audits for the project were carried out by the Office of the Auditor General. The auditors expressed an ‘unqualified audit opinion’ on the financial statements for all the project years, which indicated that financial statements gave a true and fair view about the financial state of the project. 63. Procurement: The procurement performance is rated Satisfactory. All procurement packages were completed according to the approved procurement plan. All prerequisites were in place to help ensure successful procurement and implementation. The implementing agencies under the MoF (through its various departments), the Zambia Public Procurement Authority (ZPPA), the Zambia Revenue Authority (ZRA) and the Zambia Institute of Purchasing and Supply (ZIPS) maintained experienced professionals who had managed similar reform programs and were familiar with donor policies and procedures. These agencies gained further understanding of procurement procedures and satisfactorily implemented procurement contracts using competitive methods. All procurement contracts were awarded in line with the Bank’s procurement guidelines. While there were occasional delays in processing procurement packages, it was mainly due to weak coordination in obtaining all technical inputs on time to start the procurement work. However, the overall procurement performance was Satisfactory. C. BANK PERFORMANCE Quality at Entry 64. The overall quality of Bank performance in ensuring quality at entry was Satisfactory. The task team focused on the intervention gaps and opportunities in Zambia’s public sector to reach efficiency and transparency targets of similar transforming countries in the region. During project appraisal, the Bank Page 36 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) considered the adequacy of the project design and all major relevant aspects, such as technical, financial, economic, institutional, and procurement issues. The project also took into account the outcome of the analytical work carried out under the PEFA 2012 (Project Appraisal Document (PAD), page 13, paragraph 7). Major risk factors and lessons learned from earlier projects were considered and incorporated into the design. The project was well grounded in the realities of Zambia, including its public sector problems. The project was well-focused in terms of the implementation of the ‘phased’ approached in PFM reform. An experienced and committed task team was constituted to provide technical support to the project, which was critically important given that PFM reform implementation in any country is complex and challenging. Quality of Supervision 65. The quality of supervision was Satisfactory. The Bank’s full team included the Task Team Leader, technical experts, FM and procurement specialists, and consultants who consistently engaged closely with their counterparts, particularly with the MoF, the Joint Government-Donor Committee and the Reform Committee Secretariat. The task team responded in an appropriately and timely manner to the Government’s requests. The Bank’s technical and fiduciary teams, including FM and procurements teams, provided regular support to focus on maximizing the project's development impact, which resulted in adjustments, including project restructuring, and extending the project closing date. The project team also utilized resources adequately with the scaled-down and revised indicators. The task team conducted regular supervision missions, on average every six months, to take stock of progress. ISRs were candid, detailed, and well targeted to outline important events, thereby formulating a clear and complete picture. The supervision team also produced clear and detailed Aide-Memoires. Justification of Overall Rating of Bank Performance Rating: Satisfactory 66. Based on Satisfactory ratings for Quality at Entry and Quality of Supervision, the overall rating of the Bank Performance is considered Satisfactory. Page 37 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) D. RISK TO DEVELOPMENT OUTCOME 67. The overall risk to the development outcome is considered High. 68. Achievements of the following institutions are highly sustainable: the ZICA; the OAG; the Accountant General; the Tax Policy Unit; the ZRA; Internal Audit; and the Budget Office. 69. On the other hand, sustainability of the following achievements varies, as explained below: 70. Budget credibility is weak and can weaken the PFM outcomes. The operationalization of the warrant system has been initiated on a pilot basis. However, it is reportedly unlikely to be sustainable due to budget credibility issues. This is largely a result of insufficient cash availability to match the budget. During a field visit to the Ministry of General Education, it was informed that the Ministry received only around 53 percent of the budget during FY2018. The credibility of the composition of the budget is weak, with knock-on adverse effects for cash management and budget execution. (i) PIM. As a new unit with no funding source — and an ambitious national level agenda with limited technical skills within the team — the risk is substantial. In order to mitigate these risks, the government will need technical and financial support to complement its already strong political and financial commitment. Donors appear to be interested in providing support, and they can champion PIM by financing a PIM foundation. Some support is envisaged under the successor Bank operation, which is under preparation at the time of this writing. (ii) ZPPA. E-Procurement reforms need to sustain momentum. ZPPA staff have only limited experience in handling such a complex project. The procurement process is prone to corruption, and vested interests are attempting to derive benefits. As such, there is a need to further strengthen public procurement systems leveraging e-GP. Legal and institutional reforms need to be followed up with effective implementation and continued leadership support. The risk is high. (iii) IFMIS. In terms of using the IFMIS functional enhancements, including the multi-year commitment control, business intelligence reporting, and interfaces for improved budget controls and fiscal reporting coverage initiated under the project, the risk is high. Sustained technical support would be needed to maintain the momentum and strengthen commitment controls to reduce payment arrears, and expand IFMIS coverage to the deconcentrated levels for improved controls, as well as the timeliness and quality of fiscal reports. (iv) TSA coverage also needs to expand to ministry level bodies and deconcentrated service delivery ministries at the district level that control significant cash outside the TSA. The risk of TSA reforms losing momentum in the absence of donor support is high, as it will require the rollout of the IFMIS for enhanced coverage. (iv) IPSAS. The implementation risk is substantial, because the institutional structure is not in place, and it needs financial and technical assistance to make it more sustainable. (vi) ZIPS. The governance and financial risks are moderate. ZIPS members may not be able to pay adequate (membership) subscription fees to sustain the institution financially on membership fees Page 38 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) collections alone. There is need to focus on financial strengthening of the institution from other sources (for example, conferences / trainings it conducts, professional publications it produces etc can be sources). Further, there is a high turnover of staff which undermines its credibility and stability. V. LESSONS AND RECOMMENDATIONS 71. The project offers several important lessons, some specific to Zambia, as well as other lessons that are broader and more generally applicable. These are summarized as follows: (i) Change starts with the leadership: It is useful to secure strong commitments from the key leaders in the ministry at the outset to fully support the reforms and to overcome change management and manage communications issues. In Zambia, a multiplicity of actors at the middle management level with inadequate lines of communication, divergent perspectives and competing interests could muddle the future reforms. The MoF successfully mitigated this resistance through the top leadership who made consistent and repeated statements to demonstrate their unwavering support to the reforms. (ii) Intra-ministerial coordination within the MoF is critical to ensure complementarities and coordination. While this was observed in some areas, coordination between the Budget Department and the Accountant General Department (AGD) was lacking. As a result, the budget preparation for the IFMIS target was missed consistently every year during the life of the project. This occurred despite a high degree of commitment and efforts to ensure coordination from both the Permanent Secretary and the Accountant General. (iii) Benefits for the line ministries, such as the service delivery ministries, could be better demonstrated through the provision of financial reports, especially reports on donor funds for the line ministries dependent on these funds. This was slow. Therefore, the service delivery ministries did not see the potential benefits on this count, although they appreciated the use of the IFMIS for better expenditure controls and fiscal reports for the government’s own funds. (iv) A strong PMU with full staffing should be in place from day one. The PMU should be comprised of the right persons with the proper attitude. It is also important to have a blend of government employees and external candidates who are competitively selected. The head of the PMU should be at the director’s level in the government in order to more effectively navigate and speed the implementation process. This would help the PMU to work more efficiently and effectively. The PMU’s work plan should be realistic and not over-ambitious and impracticable. At the entry stage, there should be a clear definition and specification of all activities to be implemented, rather than a broad scope of activities. The project moved into an irreversible positive track once the full PMU team started functioning under the effective leadership of a competent PFM Coordinator. This coordinator took care of the project activities, and also coordinated the entire government’s PFM reforms. (v) The M&E framework should be more reflective of project achievements rather than inputs and activities. There should also be a clear distinction between outcomes and outputs to avoid confusion. Page 39 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) (vii) It is important to keep donors informed of the project’s progress on a regular basis . There should also be compatibility and alignment in results reporting on the part of MDTF donors, the government and the Bank for effective implementation. (vii) For effective implementation of the IFMIS, consultants should be based at the project site rather than making periodic visits. Further, knowledge transfer should be emphasized during implementation so that after the project period the system can be managed by the users themselves, rather than depending on consultants. Also, in these kinds of enhancement projects, the IFMIS unit will need budgeting and reporting consultants from the beginning of the project so that gaps in the required reports can be identified in time. (viii) Analog complements for the digital systems like the IFMIS are critical for success. In Zambia, the IFMIS rollout was carried out in tandem with TSA reforms, which significantly improved the impact of IFMIS rollout efforts. (ix) The strong commitment and active involvement of beneficiary entities contributes to successful implementation. This was evident in most of the beneficiary entities, including the ZICA, Internal Audit, and the OAG. (x) World Bank team members with global experience (some of them country-based), and PFM knowledge and skills contributed to the successful implementation of the program. They shared global experiences which were adapted to Zambia’s specific environment. (xi) The use of PEFA indicators as PDO indicators may not be as straightforward as it seems, raising both relevance and measurement challenges. These challenges need to be addressed upfront, that is, by elaborating on the extent to which an upgrade from C+ to B should be deemed as reflecting substantial progress. Page 40 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS 1. RESULTS INDICATORS A.1 PDO Indicators Objective/Outcome: Improved Transparency in Pubic Finances Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion 30-Sep-2016 Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Improved transparency in Text C B+ B public finance (Budget Reporting)PI - 24 31-Dec-2012 31-Dec-2018 Comments (achievements against targets): The quality and timeliness of in-year budget reporting varied during the project duration. The rolling out of the IFMIS and the harmonization of the Chart of Accounts has enhanced budget preparation and execution, as well as the accounting and reporting functions into a single system. This has resulted in improved quality of in-year budget performance reporting. However, it is below the target because of the delays in the uploading of the reports on the MoF websites. However, the quality and timeliness of annual financial statements significantly improved during the Page 41 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) project duration. Objective/Outcome: Transparent Procurement systems Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Increased Procurement Text D+ B C+ Transparency 31-Dec-2012 31-Dec-2018 Comments (achievements against targets): The competition, value for money and controls in procurement (PI-19) have improved from D+ to C+. This achievement can be attributed to the successful implementation of the e-GP system, which expanded from an initial target of 6 pilot procuring entities to a total of 37 procuring entities as of December 31, 2018. The introduction and use of the electronic procurement system in procurement entities has brought about guaranteed value for money through improved transparency. From the e-GP usage assessments carried out to date, it has been observed that the ability of users to utilize the e-GP system and realize the benefits of the system has increased. The submission of responsive bids has also led to efficiency gains in the procurement process. Objective/Outcome: Enhanced Internal Control and Internal Audit Page 42 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Comments (achievements against targets): The enhanced internal control and audit (PI-20) has improved from C+ to B. The improvement can be attributed to improved audit processes and functioning of the audit committees. The Controller of the Internal Audit Department has undergone restructuring, This resulted in the creation of a Standards and Policy Section, which has a mandate to realign and ensure that audit work is being carried out in accordance with international audit standards. This Section has ensured the standardization of audit processes and reports in the Ministries, Provinces and Spending Agencies (MPSAs) and has contributed to greater efficiency in terms of time, costs and easy follow-up. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Enhanced internal control Text C+ B B and internal audit - PI 21 31-Dec-2012 31-Dec-2018 Comments (achievements against targets): Objective/Outcome: Improved Revenue Mobilization Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Revenue achievement Text Not assessed Achieved Annually Target achieved 31-Dec-2012 31-Dec-2018 Comments (achievements against targets): Revenue targets announced each year have been achieved. This is a result of several initiatives of the Government, some of which are supported by the project. Specifically, the introduction of the MVCM systems, backed by compliance monitoring, has seen a significant change in fiscal receipts from the mining industry. Indeed, mineral royalties grew by 61 percent between 2017 and 2018 (K3,936 million, up from K2,435 million) and company income tax increased by 120 percent (K2,356 million up from K1,067 million). Taken together, these equate to a Page 43 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) revenue increase of 1 percent of GDP. Comments (achievements against targets): Objective/Outcome: Budget Credibility Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Aggregate expenditure Text D C C outturn compared to original approved budget - PI 1 31-Dec-2012 31-Dec-2018 Comments (achievements against targets): The indicator exceeded its target of C and was rated a B in 2016. However, toward the close of the project (2018), the rating dropped to a C with significantly higher variations between budget and actual expenditures. Several fundamental reforms were implemented, and capacity building was provided under the project (for example, the IFMIS, the TSA, PIM, OBB, Internal Audit, External Audit, and so on ). This resulted in marked improvements in the Government’s ability to strengthen budget credibility. The variation witnessed toward the end the project Page 44 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) does not undermine the effectiveness of the reform undertaken. Rather, other factors including macroeconomic conditions put pressure on the Government, possibly leading to high budget variances. The new Constitutional requirement that f all supplementary budgets be approved by the Parliament before expenditures are incurred will henceforth serve as a deterrent because sources of financing for the supplementary budgets are supposed to be identified. The indicator performance does not truly reflect the achievements, which are quite significant as narrated in various sections of this report. A.2 Intermediate Results Indicators Component: Integrated Planning and Budgeting Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion IFMIS planning and Text Planning and 2018 budget Budget parallel run budgeting module fully budgeting module not preparation using the through IFMIS is done. operational, including the operational. IFMIS budget module However, the use of uploading of appropriated the IFMIS as the funds and authorized budget primary system for reallocations and budget preparation amendments for the budgets was not achieved. 03-Apr-2014 31-Dec-2018 Comments (achievements against targets): Component: IFMIS and Cash Management Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Page 45 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) IFMIS rolled out in all MPSAs Number 36.00 56.00 51.00 03-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Treasury Single Account Text Initiated Treasury Single TSA implementation (TSA) implementation plan Account (TSA) plan deveped and developed and agreed by the implementation plan implemented. Secretary of the Treasury to developed establish a comprehensive TSA 08-Apr-2014 31-Dec-2018 No TSA implementation Text No accurate inventory Inventory of all TSA implemented in of all government government accounts 51 MPSAs. accounts complete, and 70 percent of bank accounts either linked with the TSA or inactivated according to legal provision 03-Apr-2014 31-Dec-2018 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at Page 46 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Target Completion Budget execution Text Consolidation done, Budget execution Budget execution consolidated reports issued but with considerable consolidated reports reports are being quarterly within thirty days delays issued quarterly posted on the MoF after the end of the quarter within thirty days portal within the after the end of the stipulated target dates quarter at the end of every quarter without significant delays. 03-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cash Management Module Text None MoF using the module Cash Management fully operational Manual developed and used in the MoF 03-Apr-2014 31-Dec-2018 Comments (achievements against targets): Component: Public Procurement Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Page 47 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) E-procurement pilots Number 0.00 6.00 36.00 implemented using a phased approach 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion System to compare reference Text None System for reference Final system prices to support a pricing for commonly established. The 10 competitive procedure for bought items in commonly used items pricing based on market ministries and have been identified information and government provinces fully and prices have been wage policies and ceilings established compared in 5 provinces. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Component: Enhanced Internal Audit and Control Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Audit Committees meeting Text Irregular or no At least 85 percent of All MPSAs have Audit regularly on a quarterly basis meetings the Internal Audit and committees. Eighty- OAG five percent of these recommendations are Audit Committees are Page 48 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) followed up every now meeting, year whereas 15 percent are still facing challenges in holding meetings. To ensure consistency across Ministries, a sub- committee has been formed under the Office of the Secretary to the Treasury to begin receiving reports from all Audit Committees. It will also deal with any hurdles in getting the Audit Committees to function more effectively. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Improve Internal Audit Percentage 30.00 90.00 50.00 quality assurance and performance improvement 08-Apr-2014 31-Dec-2018 standards Page 49 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Comments (achievements against targets): Component: Revenue Administration Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Electronic Records Text No system in place Scanning system The ERMS has been Management System (ERMS) operational at all developed and is locations being implemented. The system has been rolled out to the Large Taxpayer Office, the Board Secretary, Human Resources (HR), Internal Affairs, Debt Recovery and the Investigations Departments. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Implementation of Mining Text No systems in place Systems fully in place MVCMP production Value Chain monitoring and operational and export permit modules completed Page 50 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) mechanism and operationalized in all 12 large mines for all the base and precious metals. Production reporting extended to 24 small- scale mines 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Bulk intelligence data Text No capability Feasibility study and Feasibility study analysis capability business case conducted based on established. diluted focus in Phase I of the project. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cargo transit tracking system Text No system in place Systems fully in place Tracking operation for and operational for all container traffic on all Page 51 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) in place routes and types of arterial routes has traffic been done. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion System for monitoring Text No system in place System put in place. Successfully balance of payments in place ASYCUDA world completed and (S155) enhanced with this handed over to the capability Bank of Zambia for implementation. 08-Apr-2014 31-Dec-2018 Comments (achievements against targets): Component: Other PFM Interventions (Oversight Improvement etc.) Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Completion of Supreme Text OAG has never Final Assessment The SAI PMF Audit Institution (SAI) undergone a SAI PMF Report issued Assessment was Performance Management Assessment completed and the Framework (PMF) report issued. Page 52 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Assessment 06-Feb-2016 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Development and Text No system in place AMS piloted Development of AMS implementation of Audit completed and piloted. Management System (AMS) 06-Feb-2016 31-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Development and Text ZICA Accountancy CA Zambia CA Zambia implementation of a revised Qualification in place qualification training qualification training ZICA Chartered Accountancy has commenced. has commenced. qualification (CA Zambia) 06-Feb-2016 31-Dec-2018 Comments (achievements against targets): Page 53 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) A. KEY OUTPUTS BY COMPONENT Objective/Outcomes 1. Improved fiscal discipline (budget credibility). 2. Improved transparency in public finance (budget reporting). Outcome Indicators 3. Increased transparency in procurement. 4 Enhanced internal control and internal audit. 5. Effectiveness in the collection of taxes. 1. Integrated planning and budgeting. 2. IFMIS and cash management. 3. Public procurement reforms. Intermediate Results Indicators 4. Enhanced internal audit and control. 5. Revenue administration. 6. Other PFM interventions. Component 1: Integrated Planning, Budgeting PFM Act (2017) enacted; Draft Bill for Budgeting and Planning sent to the Parliament. Public Investment Management: (i) PIM operational guidelines prepared. (ii) Sector specific guidelines completed for roads, energy, education and health. (iii) Training sessions delivered for financial and risk analysis. Key Outputs by Components (linked to the achievement of the Output Based Budgeting (OBB) Objectives/Outcomes) (i) OBB rolled out to seven MPSAs. (ii) OBB Manual prepared. Warrant system (i) Budget classification and Chart of Accounts developed; warrant system introduced in pilot OBB ministries. Budget Generation to IFMIS as Primary System (i) IFMIS Budget Preparation Module produced. Page 54 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Component 2: IFMIS and Cash Management IFMIS rollout and availability of service (i) IFMIS rolled out to 51 MPSAs, including nine provincial HQs. (ii) IFMIS coverage in Lusaka completed as targeted. Governance risks and a new IT security audit (i) Smart Zambia Institute completed the technical work. Cabinet approval pending. Treasury Single Account (TSA) (i) TSA rolled out to 51 MPSAs; 80 percent of budget disbursements are done through the TSA. (ii) TSA Manual prepared. IPSAS roadmap developed and training conducted. Component 3: Public Procurement Reforms Electronic Government Procurement (e-GP) (i) e-GP expanded and rolled out to 36 entities. Review of the Public Procurement Act, regulations and guidelines (i) Review Law prepared by Parliament; enactment pending. ZIPS professional education curriculum and training materials development (i) Draft curriculum, curriculum chart for the ZIPS professional Diploma developed. Institutional capacity strengthening of the ZIPS Secretariat (i) ZIPS Finance Manual prepared. (ii) ZIPS Procurement Manual prepared. (iii) ZIPS HR and Administration Manual prepared. Page 55 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) ZIPS Regulations: (i) The regulations are developed and ready for submission to Ministry of Justice for legal review and clearance. Component 4: Enhanced Internal Audit and Control Audit Committees and Audit Committee Handbook: (i) Audit committees in place in all ministries. Audit Committee Handbook prepared. Development of the Internal Auditors Curriculum and Training Materials: (i) The curriculum has been developed and submitted to the MoF. Training materials have been completed. Enactment of the Institute of Internal Auditors Bill: (i) The draft Internal Audit Bill has been prepared. Cabinet approval is pending. IT audit of IFMIS and TSA: (i) Successfully completed. Pilot Performance Audits: (i) The joint audits with OAG have been completed. Component 5: Increasing the Effectiveness of Revenue Administration Mineral Value Chain Monitoring Project (MVCMP): (i) The Production Reporting Module on the Mineral Output Statistical Evaluation System (MOSES) implemented in 12 mines. (ii) Production reporting extended to 24 small-scale mines. (iii) Six Mining Bureaus equipped with ICT facilities to be used by small-scale mines. (iv) The Mineral Export Permit Module rolled-out for copper, cobalt and precious metals. (v) The interface for the MOSES and the ASYCUDA World, Tax Online and the export permit system in the Ministry of Mines have been put into place. Page 56 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) (vi) Laboratory information systems. The Laboratory Information Management System (LIMS) has been installed at the Zambia Bureau of Standards, the ZRA Lab in Kitwe and the Geological Survey Department (GSD). (vii) Three laboratories installed at the Geological Survey Department of the Ministry of Mines and Mineral Development, the Zambia Bureau of Standards and the Zambia Revenue Authority. (viii) Eighteen XRF Analyzers procured and deployed at the borders. System for Monitoring Balance of Payments: (i) The web services for the BoZ have been developed and the application installed on the BoZ servers. Transit Tracking and Suspense Regime: (i) Seals routinely affixed to trucks at Kasumbalesa, Chirundu, Kazungula and Nakonde perceived as “high risk”. Capacity-Building Program for Medium Taxpayer Office (MTO) staff: (i) Staff training; staff provided with new skills in operations at the Domestic Taxes Division. Support for Investigation and Internal Affairs: The radio system, (internal affairs) case management systems, and forensic laboratory installed and operational for forensic investigations. Electronic Records Management System: (i) The ERMS rolled out to the Large Taxpayer Office, the Board Secretary, and the Human Resource Department. Electronic fiscal devices: (i) Devices distributed and in use in Lusaka and the Copper-belt. IT Infrastructure Very Small Aperture Terminal (VSAT) and upgrading of office LANs: Upgraded VSAT services completed. IT Infrastructure – Provision of Uninterrupted Power System (UPS): Three large and 18 other UPSs delivered. Page 57 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Component 6: Strengthening Tax Policy Formulation (i) Key steps for implementing the OECD and G-20 (Tax) Base Erosion and Profit Shifting recommendations completed. (ii) Income Tax (Transfer Pricing) (Amendment) Regulations, (2018) put in place. (iii) All three of the planned tax studies (Tax expenditures, Tax gap and Marginal Effective Tax Rate) completed. Component 7: Program Management New PFM Strategy: (i) The final draft developed the new PFM Strategy for 2019-2022. Progress Reports: (i) The unit delivers timely progress reports with sufficient details. PFMRP Audit Reports: (i) Unqualified reports prepared regularly. Component 8: Other PFM Interventions Development and implementation of the Audit Management System (AMS): (i) AMS developed. Completion of SAI Performance Management Framework (PMF) Assessment: (i) The Supreme Audit Institution PMF Assessment has been completed, and the final report prepared. Implementation of a revised ZICA Chartered Accountancy qualification (CA Zambia): (i) Successfully delivered, closed and objectives achieved. Page 58 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION A. TASK TEAM MEMBERS Name Role Preparation Supervision/ICR Srinivas Gurazada Task Team Leader(s) Wedex Ilunga Procurement Specialist(s) Lingson Chikoti; Baison Banda Financial Management Specialists Lynette Doreen MacAdam Team Member Alexandra C. Sperling Counsel Pazhayannur K. Subramanian Window Manager Shawkat M.Q. Hasan Team Member Sanjay Srivastava Social Specialist Maiada Mahmoud Abdel Fattah Kassem Team Member Stephen Mugendi Mukaindo Counsel Khuram Farooq Team Member John Bosco Makumba Team Member Patrick Kabuya Program Manager Rajesh Kumar Shakya Team Member Stella Chepkorir Team Member Rama Krishnan Venkesweran Team Member Laurent Denis Sauvage Team Member Daniel Yaw Domelevo Team Member Krishna Pidatala Team Member Aleks Kocevski Team Member Steve Gurr Team Member Yoko Kagawa Team Member Zivanemoyo Chinzara Team Member Tuan Minh Le Team Member Page 59 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Mike Jacobs Team Member David Child Team Member Ali Hashim Team Member Nazaneen Ismail Ali Team Member Devesh Chandra Mishra Team Member Priscilla F. Kandoole Team Member Baison Banda Team Member Elliot Kalinda Team Member Ethel Tembo Mwanaumo Team Member Macdonald Nyazvigo Team Member Kutemba Kambole Team Member Jumbe J Ngoma Team Member Charity Inonge Mbangweta Team Member Francis Zulu Team Member Mwansa Lukwesa Environmental Specialist Njavwa Namposya Chilufya Social Specialist 1. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation Total 0.00 0.00 Supervision/ICR FY14 2.900 6,350.93 FY15 46.361 441,934.38 FY16 63.812 551,178.87 FY17 62.398 512,492.14 FY18 12.094 235,683.51 FY19 25.650 277,273.76 Page 60 of 66 The World Bank Public Financial Management Reform Program Phase I (P147343) Total 213.22 2,024,913.59 ANNEX 3. PROJECT COST BY COMPONENT Amount at Approval Actual at Project Percentage Components (US$M) Closing (US$M) of Approval (US$M) Integrated Planning and Budgeting 1.87 1.37 73.26 IFMIS and Cash Management 7.64 5.26 68.85 Public Procurement 4.06 3.68 90.64 Enhanced Internal Audit and Control 1.70 1.25 73.53 Revenue Administration 10.08 7.64 75.79 Tax Policy Formulation 0.58 0.43 74.14 Program Management 1.52 1.26 82.89 Other PFM Interventions (Oversight 2.55 1.11 43.53 Improvement, and so on) Total 30.00 22.00 73.33 Page 61 of 66 Project Closure Report ANNEX 4. EFFICIENCY ANALYSIS Although no formal economic analysis was attempted, the efficiency analysis was built into the project monitoring by the task team, as well as by the Joint Government Donor Committee (including the Government, MDTF Donors and the World Bank), which periodically reviewed the value in terms of overall efficiency based on reports prepared by the PFM Coordination Unit. All the planned activities were completed within budget, and there was no cost overrun. Confidential Page 62 6/27/2019 Project Closure Report ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS (Comments received from Government and KfW (MDTF partner)) Comments of Ministry of Finance, Government of Zambia: 1. The report as reviewed has captured and brought out a true reflection of the PFM Reform Program’s overall assessment. We agree that the program achieved its objectives and is rated satisfactory on various parameters. The programme utilized all the allocated and budgeted funds at programme closure period. The MDTF support has been complemented with Government’s own resources in implementing the Government’s PFM Reform agenda. The Government of the Republic of Zambia substantially contributed to financing the program through counterpart funding amounting to US$2.83million, in addition to regular Government expenditure on various aspects of PFM reforms. High degree of commitment from Government and well-coordinated efforts from various components under the leadership of Ministry of Finance, coupled with continued high-quality technical assistance from the task team continuously during project implementation (through missions and other means) were instrumental in the success of the project. Several knowledge products (eg: PEFA, PIM, SAI PMF, ROSC etc) provided the analytical underpinnings for fine-tuning the implementation of the project. 2. The project design and development objectives were in line with the country’s priorities as espoused in the 6th NDP and the PFM Strategy for the period 2013 to 2015. Therefore, the project supported Government’s aspirations that for any meaningful social and economic development to take place, transparency and prudent management of financial resources was key. 3. Following the closure of the PFM Phase I, the Government has continued supporting PFM reforms through budgetary allocations as evidenced in the 2019 National budget. Several activities being undertaken by Government with own resources in 2019 (eg: PIMS sensitization workshops, IFMIS enhancements and interfaces, Data Centre cooling system and the E-GP enhancements etc), indicates the continued commitment and guarantees the sustainability of the reforms. 4. The project achieved its objectives satisfactorily as is well established through the ICR. In addition, we would like to mention yet another key outcome of improved public financial management. The reduction in the values of financial mismanagement as reflected in the analysis of the findings of the Auditor General’s report as shown below: YEARS 2017 K 2016 K 2015 K 2014 K TOTAL 193,298,383 538,247,120 938,684,072 549,935,692 Confidential Page 63 6/27/2019 Project Closure Report 5. We believe that the project marked a significant scaling up of effectiveness in implementation of PFM reforms in the country. The following are some of the lessons learnt from the project: a. Close collaboration between component team, PFM Reform unit, World Bank task team and MDTF partners helped the project take timely decisions and corrections to make progress towards objectives. b. Mainstreaming of the PMU into existing Ministry of Finance Structure and blending it with external consultants in the areas of Procurement, Monitoring and Evaluation had a positive impact on the pace of implementation. c. Engage key project staff at an early stage in the project implementation d. Provide for position of a Change and Communication Specialist to manage change and publicity aspect of the PFM reform agenda; e. Programme information be periodically disseminated to the wider public; f. Programme documents be well branded for visibility at all times; g. Early strengthening of contract management for all the components helps accelerate project from the beginning h. Risk Management at component level needs to be dealt with from the beginning i. A well-structured system to incentivize the components teams to improve effective implementation of planned activities impacts program progress positively. Comments received from KfW: PFMRP laid a solid basis for future reforms specially in the fields of budget preparation, budget execution and budget control. We recommend following up on IFMIS specifically in commitment control and reporting. Furthermore, TSA is a major achievement, but it is strongly advised to strengthen use and wider scope. Concerning Mineral Value Chain extension is advised to more minerals. Essential PFM achievements were done by the project, but its sustainability can only be guaranteed by a strong political will and commitment. Confidential Page 64 6/27/2019 Project Closure Report ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) 1. Project Appraisal Document, Report No. PAD873, dated April 30, 2014. 2. Program Grant Agreement, Number TF017118. 3. Project Restructuring Paper, Report No. RES28701. 4. Project Restructuring Paper, Report No. RES31211. 5. Memorandum Closing Date Extension, Ref. No.: PFMPR/101/1/7. 6. Implementation Status and Results Reports: 1 through 8 (January 2015 through September 2018). 7. Mid-Term Review Report, dated May 24-31, 2016. 8. Aide-Memories: (i) December 3-12, 2014 (ii) October 26-30, 2015 (iii) November 11-23, 2015 (iv) April 18-22, 2016 (v) May 24-31, 2016 (vi) November 21-30, 2016 (vii) April 25-May 5, 2017 (viii) October 9-13, 2017 (ix) October 31-November 8, 2018 9. Financing Agreement 10. Memos regarding amendments to the Grant Agreements and Restructuring Papers. 11. Borrower’s Implementation Completion Report (Closure Report). Confidential Page 65 6/27/2019