Report No. PIC774 Project Name Jamaica-Public Sector Modernization Project (+) Region Latin America and Caribbean Sector Public Sector Management/Adjustment Project ID JMPA7490 Borrower Jamaica Beneficiary Central Government Ministries, Departments, Agencies and Statutory Bodies. Implementing Agency Cabinet Secretariat, Office of the Prime Minister in coordination with the Ministry of Finance and Planning, Ministry of Environment and Housing, Ministry of Local Government and Works, National Investment Bank of Jamaica, the Contractor General, the Auditor General and targeted government agencies. Financing Plan IBRD: US$ 28.4 million Government of Jamaica: US$ 25.5 million UK ODA US$ 3.0 million Total Project Cost US$ 56.9 million Appraisal Date October , 1995 Date of Board Presentation July 29, 1996 Date of Effectiveness April 7, 1997 Date of PID April 16, 1997 Background. 1. Macro-Economic Environment: Jamaica is an island country in the Caribbean, with a total area of approximately 11,000 square kilometers and a strong natural resource base. The economy is highly sensitive to international price and demand changes, primarily due to the nature of its productive base and its dependence on imported oil for commercial energy consumption. Jamaica's principal economic activities are tourism, manufacturing, bauxite/alumina mining and, in employment terms, agriculture. It has a population of about 2.5 million people, with about 55t living in urban areas. The labor force is reasonably well-educated and skilled. 1994 per capita income of US$ 1,420 places Jamaica in the group of lower-middle income countries. 2. In the decade following independence in 1962, Jamaica enjoyed strong GDP growth, averaging about 5t per annum. However, from 1973 through the mid-1980s, the economy experienced sustained contraction as a result of external shocks and domestic policies. Increase in oil prices; the impact of recession in the industrialized countries on the price of sugar and alumina, the country's major exports; and high international interest rates had a negative impact on the economy. At the same time, the government started a process of expansion of the role of the state in national life. This process resulted in a bloated and inefficient public sector. The overall result was a systematic erosion of private sector confidence, a reduction in investment, and a continuous outflow of capital and human resources. 3. In the second half of the 1980s, an effort to stem the decline resulted in stabilization programs and a progressive adoption of market-oriented policy reforms. These efforts yielded some positive results, with average GDP growth being 3.9% per annum for the period 1986-91. In the 1990s, and particularly in the past two years, the Government accelerated the implementation of the reform agenda. The main objectives were to lower inflation, enhance international competitiveness, improve public finances, maintain adequate level of international reserves and increase per capita income. The reform program has been supported by multi-lateral institutions, including the IBRD, and the Paris Club. By mid-1995, the government had achieved significant results. A budget surplus was maintained for four consecutive years and Bank of Jamaica losses were reduced. The foreign exchange regime was liberalized. Inflation declined to 1% per month. Import tariffs were brought with in a range of 5-35% and most trade monopolies and quantitative restrictions were eliminated. Reforms in tax policy and administration were initiated. The privatization program was stepped up. The external current account balance moved from a deficit of 5% of GDP at the end of 1992 to a near balance by end- 1994. Private transfers and capital inflows more than tripled during the last two years and now amount to 10% of GDP. While external debt remains high at 115% of GDP, debt rescheduling reduced debt service to more manageable levels. 4. Despite these positive achievements, the macro-economic environment continues to be fragile, as events since July 1995 indicate. High inflation has returned, international reserves have been drawn down to stabilize the depreciating Jamaican Dollar, large wage awards to public servants and support to troubled financial firms have caused the budget surplus to dwindle and external imbalances have widened due a jump in consumer imports, high interest rates and a weak financial sector. GDP growth in the period 1991-95 has remained low at 1% per annum. 5. Structure of the Public Sector: The Government of Jamaica (GOJ) is constituted on the basis of a written Constitution, adopted in 1962. Its structure closely follows the Westminster model. The Queen is the Sovereign, represented by the Governor General. The Legislative Branch consists of the Senate and the House of Representatives. The Judicial Branch consists of the Privy Council, the Court of Appeals, the Supreme Court, the Resident Magistrate Courts, the Family Court and the Revenue Court. The Executive Branch is led by the Prime Minister who is elected by the majority party in the House of Representatives. The Prime Minister appoints Cabinet Ministers, who head ministries dealing with specific portfolios. In some ministries, Ministers of State are also appointed to assist the Cabinet Ministers. At the central level in each ministry are various divisions responsible for policy -2 - formulation, monitoring of implementation, establishment of standards and norms, and performance of corporate functions. Each ministry has a number of operational Departments and Agencies that implement sectoral policies. In addition, it may have Statutory Bodies and Public Companies associated with it.. In the thirty three years since independence, the scope and size of the Executive Branch has grown substantially. At present, besides the Office of the Prime Minister, there are 12 ministries, 31 departments and agencies and more than 300 statutory bodies and public companies. Under the Constitution, certain autonomous bodies have also been created, notably the Auditor General and the Office of the Services Commission. 6. Composition of the Public Service: The public service has about 78,000 posts on the central government establishment. The regular civil service consists of about 38,000 employees. In addition, 21,700 teachers, 6,800 health services workers and 11,200 security personnel, policemen and fire fighters, though not belonging to the civil service, are a part of the central establishment. There are an estimated 35,000 to 40,000 posts in statutory bodies and public companies. In general, employees of these entities are paid more than employees on the central establishment, but enjoy lesser security of tenure. The public sector accounted for 14t of jobs in the 1980s and, even after subsequent downsizing, it represents 7t of jobs in the economy. Expenditure on personnel is the government's largest single recurrent cost item after interest payments. In absolute terms it amounted to J$3.406 billion in 1994/95 (see 1/) , or 54t of non-interest expenditures (see 2/) 7. Current Performance of the Public Sector: In spite of its numerous agencies and employees, the performance of the public sector is inadequate in many critical areas. The general level of efficiency and effectiveness of public entities is very low. The quality of service to the public is poor and is characterized by cumbersome procedures, long delays and indifference to public convenience. Public enterprises engaged in commercial ventures are, with a few exceptions, unprofitable, badly managed and uncompetitive. They are also a recurrent fiscal burden on the exchequer. The important factors affecting public sector performance are the following: -- Scope of the public sector: Starting with the 1970's, the scope of the public sector expanded to encompass a number of economic and commercial activities in which it had no comparative advantage, on the one hand, and lacked the requisite skills and incentives, on the other. This has led to low efficiency and productivity.. Although, significant privatization has taken place, since the 1980's, public sector involvement in productive activities still continues in many areas. -- Size of the Pubic Sector: For a small population of 2.5 million, there are too many public entities. This has led to weakening of monitoring and accountability, duplication of functions, overlapping authority and difficulties in inter-ministerial and inter-agency coordination. -- Bureaucratic Culture: The public sector displays typical -3 - bureaucratic characteristics. Public entities are governed by rigid rules of business, which take precedence over achievement of organizational objectives. This reduces responsiveness to emerging situations and discourages innovation. Decision-making is hierarchical. Superiors are, generally, reluctant to delegate authority, while juniors hesitate to use even the limited powers they enjoy for fear of being penalized for mistakes. Most decisions, therefore, get pushed upwards causing delays. Although a beginning has been made to shift organizational emphasis from inputs to outputs and outcomes through Corporate Planning and Program Budgeting, as yet, managements of public entities are not strictly held responsible for achieving pre-determined performance targets. The security of tenure enjoyed by civil servants shields them from the worst consequences of poor performance. It also limits managers' ability to enforce high productivity standards. Most bureaucrats regard themselves as policy makers, controllers or regulators, rather than facilitators. Public service orientation in day to day functioning is minimal. -- Human Resource Deficiencies: The overall quality of human resources in the public sector is inadequate. There is a wide gap between wages in the public and the private, especially, at managerial and technical levels. This makes it extremely difficult for GOJ to recruit and retain well qualified employees. Barring a few high caliber people who remain in the public sector, either due to a personal affinity for public service, or promising career prospects based upon their individual circumstances, for the most part the public service is made up of persons who are content to settle down in a rut - following rules, producing a little above the minimum expected and, generally, staying out of trouble. There is a dearth of inspiring leaders and creative problem-solvers. Inadequate remuneration has also resulted in a large number of vacant posts, especially, at the key and critical level.. Consequently, tasks either do not get done at all, or they are done by unqualified or over-burdened individuals who cannot do justice to them. GOJ has been attempting to bridge the skill gap in the public sector through its training institutions, such as the Management Institute of National Development (MIND). These institutions, however, face severe constraints. Curricula of many courses are old and inappropriate for the situations being faced by public servants in the field. Teaching faculty is limited and not fully trained. Training facilities are inadequate. The deficiencies in human resources adversely impact on the organizational performance of almost all public entities. -- Antiquated Business Processes: Most of the current business processes were established decades ago and continue unchanged, in spite of major changes in the external environment and the role of the public sector. Many of these that could be conveniently completed in one step or location are fragmented between different organizations and between different sections in a given organization. This requires multiple hand-offs, from one official or organization to another, which serve to introduce major delays without adding much value. Also, many processes involve duplicate or infructuous work and avoidable references to higher authorities. Operations in most departments are still pre-dominantly manual and create an environment where officials have the discretion and - 4 - ability to delay and, therefore, to extract rents. In effect, prevailing business processes increase administrative costs for the public sector and transactions costs for the private sector. In addition, they lead to avoidable harassment of the public. -- Inadequate Physical Infrastructure: The physical infrastructure in many public sector entities fails to provide a motivating work environment. Many buildings are old and congested and lack facilities for employees. In agencies which are custodians of important records, record-keeping facilities are rudimentary. This affects the security of documents as well as their retrieval. In many departments their is a dearth of operational equipment, such as communication systems for customs agents at the airport or vehicles for agencies involved in field work. Physical resource deficiencies lower the overall level of public sector performance. -- Weak Procurement and Contracting Systems: Government procurement and contracting sufffer from various deficiencies. There is no central body designated to coordinate policies and regulations regarding procurement of goods, services and works and to monitor their implementation. Although the Ministry of Finance has some constitutional responsibility with regard to the procurement of goods, it does not have requiste professional resources for the purpose. Also it lacks a mandate to intervene in contracting for works and services. Most entities have failed to establish procurement units and "Procurement Committees" staffed by qualified professionals. Current procurement and contracting policies and procedures are outdated, confusing and, frequently, misunderstood. This leads to inconsistency in interpretation and application. Financial thresholds for decision-making at operational levels are very low. This results in delays due to multi-layered reviews and approvals. It also encourages frequent contract fragmentation designed to avoid competitive bidding and reviews by higher authorities. Many public entities lack expertise in preparing bidding documents, developing accurate specifications, conducting bid evaluations and contract negotiations. There is no central database of performance of different contractors and suppliers. Consequently, in awarding contracts, due weightage is not given to their past performance. There are also serious deficiencies in contract management as a result of which a large number of projects face cost-overruns and execution delays, inviting public criticism. Inventory storage and management also suffer from major deficiencies. On account of these shortcomings government does not get the best value for the huge expenditures incurred annually on procurement of goods and services and on civil works. -- Weak Control Systems: Weaknesses in procurement and contracting are accentuated by inadequate internal controls systems. The internal audit function in different entities is also, generally, weak. Consequently, internal auditors are unable to flag errors, omissions or malpractices in an effective and timely manner. Deficiencies in internal control systems lead to low accountability and, in some instances, corruption. External auditing is the constitutional responsibility of the Auditor General. However, even though various entities are progressively moving towards computerized accounts, the office of the Auditor General lacks the expertise to audit such accounts. -5- 8. GOJ's Policy For Public Sector Modernization: The government recognizes that the continuing weaknesses of the public sector will offset the benefits of economic reforms. Also, public sector inefficiencies will hinder the development of the private sector, which is necessary for enhancing growth prospects. For it to play an effective role in the new environment, the nature and orientation of the public sector needs to change significantly. It needs to focus on its core competencies and become more performance oriented, cost-effective and accountable. The essential elements of GOJ's policy for public sector modernization are: (a) improving quality of service provided by essential government agencies to internal and external clients; (b) enhancing the efficiency and effectiveness of central government ministries; (c) rationalizing the size and scope of the public sector by privatizing entities and contracting out services; (d) enhancing transparency and accountability in government procurement, contracting and financial management; (f) improving tax administration; (e) creating an effective regulatory environment that would encourage orderly private sector development; and (g) strengthening local government. 9. Project Objectives. The project aims to support GOJ's efforts to (i) improve quality of service provided by public agencies; (ii) improve the ability of ministries to (a) formulate sound sector policies, technical standards and operational norms, (b) effectively monitor and evaluate downstream agencies to ensure that desired policy objectives are achieved, and (c) efficiently perform corporate management functions; (iii) continue the rationalization of the public sector through (a) privatization of water supply and sewerage and (b) privatization or contracting out of facilities and services; (iv) improve efficiency, value for money and transparency in government procurement and contracting; (v) enhance public sector accountability by strengthening internal and external controls; (vi) improve the quality of financial and personnel management in the public sector through computerized information systems. Reforms in tax administration are being supported by a separate project. Those in the regulatory framework and local government will be addressed by separate IBRD projects namely Regulatory Reform and Private Investment Finance Facility and Parish Infrastructure Project. 10. Project Description. The project will consist of five components. (i) The Modernization of Pubic Sector Entities component will assist in (a) converting eleven to thirteen operational entities into 'Executive Agencies'; and (b) modernizing the central divisions, dealing with policy formulation; establishment of technical standards; monitoring; coordination; and corporate management, of two to three ministries. These entities will be granted greater autonomy in return for strict accountability for pre-determined performance targets. They will also be provided with resources to modernize their operations. (ii) The Privatization component will finance engagements of consultants for (a) determination of different options available for private sector participation in the water and sewerage sector and the implementation of the selected option; (b) technical assistance for the privatization/contracting out of 30-35 facilities and services; - 6- and (c) institutional strengthening of the National Investment Bank of Jamaica (NIBJ), the lead agency for privatization. (iii) The Government Procurement, Contracting, Internal Control and Auditing component will provide assistance to the Procurement Policy Implementation Unit, MOFP; Office of the Contractor General; Procurement/Contracting Units and Committees in different ministries; the Internal Audit Directorate, MOFP; and the Office of the Auditor General. (iv) The Management Information Systems component will complement the ongoing Financial and Program Management Improvement Project by providing additional funding for software development, acquisition of hardware and training for the Financial Management Information System (FMIS) and Human Resource Management Information System (HRMIS). (v) Project Implementation, Communication Campaign and Development of Stage II component will provide consultant services, goods and training for project implementation; carrying out of an effective communication campaign to facilitate project execution; and development of the next stage of the public sector modernization process. 11. Project Cost and Financing. A PHRD Grant for Yen 61.5 million is being used for project preparation. The total cost of the project is estimated at US$ 56.9 million. This would include an IBRD loan of US$ 28.4 million, repayable over seventeen years, including a five year grace period, at the Bank's standard variable interest rate. Parallel financing of UK Pounds 2.0 million (about US $3.0 million) will be provided by the UK ODA. The European Union is also expected to provide parallel grant financing of US$ 3-5 million. However, the exact nature and amount of its assistance is yet to be finalized. As such, potential EU financing has been included in GOJ's share of project costs which amounts to US$ 25.5 million. Retroactive financing of US$ 2.0 million will be provided to meet expenditures incurred between January 1, 1996 and project effectiveness. 12. Project Implementation. The Cabinet Secretary, Office of the Prime Minister, will be the executing agency for this project. The Inter-Ministerial Committee for Administrative Reform (IMCAR) (see 3/) chaired by the Prime Minister, will provide high level support and policy direction. A Management Committee (see 4/) , headed by the Cabinet Secretary, will oversee project implementation at the operational level. Since the Project involves a number of GOJ agencies, extensive inter-institutional coordination will be needed. This would be achieved through the Project Coordination Unit (PCU), reporting to the Cabinet Secretary, which has already been established. Besides the Project Director, the PCU staff will include an International Coordinator and four Agency coordinators to facilitate the modernization of the selected entities; specialists in privatization, procurement, information technology and communications; a Finance and Accounting Manager and support staff. The Privatization component will be executed through the NIBJ and the Management Information Systems component through the Government Administrative Reforms Program which is implementing the FPMIP. For effective project implementation, modernization of pilot entities and privatization of facilities and services will be staggered. This will keep the implementation burden within limits -7 - and allow learning from experience. Key project activities and performance indicators have been defined and an implementation schedule specified. An Annual Action Plan will be prepared by the PCU for effective management of the project. Progress will be monitored through semi-annual progress reports, at least two Bank supervision missions per year, joint annual reviews and a mid-term review. An Operational Manual containing guidelines on various facets of project management has been prepared for use by the PCU. 13. Project Sustainability. The modernization of operational agencies and central divisions of ministries will be based on an integrated approach that will seek to address inter-related organizational deficiencies in a comprehensive manner. It is expected that the project would bring about lasting changes in the way these entities do business. In the long-run, by modernizing the management practices and working environments of the targeted entities, the project will help create a motivated group of public servants who will have a vested interest in preserving and building on the improvements made through the project. Also, the enhancement in quality of public service will create an external demand for maintaining and increasing efficiency levels, besides consolidating political support for the reforms. The project will not impose a major recurrent fiscal burden as enhancement in compensation levels will, essentially, be self-financed by the targeted entities through savings resulting from rightsizing and improved performance. Privatization will help rid the public sector of activities that it cannot perform efficiently. It will also reduce the fiscal drain caused by inefficient enterprises and enable government to support continuing reforms in the smaller public sector. The strengthening of procurement, contracting, internal control and auditing will bring about long-term improvements in transparency and accountability. The extension of the FMIS and HRMIS will lead to durable improvements in financial and personnel management by providing up-to-date information in these areas to public sector managers. The phased approach to public sector modernization being adopted by the project will keep change within the absorptive limits of the public sector, thus, facilitating its acceptance and internalization. 14. Project Benefits. Conversion of public entities into performance oriented executive agencies, operating with greater autonomy and a modern resource base, will significantly improve quality of services provided to the public and internal clients. Strengthening the central divisions in ministries will improve the quality of public policies and enhance government control over their implementations. The experience gained in the pilot agencies targeted by the project, will set the stage for modernizing the rest of the public sector. Privatization of activities that can be better performed by the private sector will increase competition and benefit consumers, enable the public sector to focus on its core functions and reduce the fiscal cost of financing losses of inefficient public enterprises. Strengthening of procurement and contracting will ensure that government receives value for money for the huge annual outlays on goods, works and services. Improving internal control and auditing will enhance accountability and - 8 - transparency in public financial management and ensure that delegated financial powers are exercised properly. Finally, the extension of the FMIS and HRMIS will improve efficiency in financial and personnel management in the public sector as a whole. 15. Project Risks. Major risks are: waning of political commitment to the project; the unwillingness of the government to grant adequate autonomy to the executive agencies, the lack of dynamic and inspiring leaders in the targeted agencies, and the mismanagement of the complex organizational change process. The project is being designed to achieve observable improvements in some of the targeted public services within a short time period. Such early successes would demonstrate the feasibility and benefits of the strategy adopted by the project, thus, firming up government commitment. External factors, such as the growing public demand for improved public services and the need for an efficient public sector to facilitate private sector growth, would also keep the government committed to public sector modernization. Discussions with GOJ have indicated that the government is keen on creating executive agencies and would be willing to bring in effective leaders and grant them the requisite autonomy to produce results. To further reduce the related risk, disbursements for the executive agencies and ministries would be linked to the execution of Framework Documents that will, inter alia, specify the performance expectations from the targeted agencies as well as the extent of autonomy to be granted to them. Appropriate remedies will also be incorporated in the Loan Agreement to guard against unwarranted withdrawal of autonomy granted to the entities covered by the project. A strong PCU, working closely with the agencies involved in the project, will ensure that the organizational changes in the ministries and executive agencies are managed effectively. 16. Environmental Assessment. This project has been classified as category "B" in recognition of potential environmental effects of privatization activities. For the facilities and services already identified for privatization, a preliminary environmental evaluation has already been carried out. One facility, Food Storage Infestation (FSI), located at Kingston and Montego Bay airports and used for quarantine of food for export, has been identified as being possibly associated with some environmental issues. An environmental audit of the FSI will be conducted prior to its privatization and suitable remedial actions will be taken to mitigate adverse environmental impacts, if any. Environmental Audit Guidelines have been developed. These specify the required environmental actions to be followed, during project implementation, for additional facilities that might be selected for privatization under this project. 17. Project Objective Categories. Public Sector Modernization (PB). 18. Poverty Category. The project does not have a direct poverty reduction objective. 1/ Source: Project Preparation Unit, Cabinet Secretariat, GOJ - 9- 2/ Source: Jamaica Public Expenditure Review, Vol. 1, page 7. June 1995 3/ The members of the IMCAR are: the Prime Minister (Chairman), Minster of Finance, Minster of State - Ministry of Finance, Minister of Health, Minister Without Portfolio (Office of the Prime Minister); Cabinet Secretary, Financial Secretary, Permanent Secretary- OPM, Director General, ERD and Project Director, PSMP. 4/ The Management Committee consists of the Cabinet Secretary; Financial Secretary/Representative MOFP; Director General, ERD: Executive Director, ARP; Finance and computerization specialists from the FPMIP; Project Director, Senior Project Officer and Finance and Accounting Manager, PSMP: and a representative of the private sector. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 25, 1997. - 10 - Annex ENVIRONMENT This project has been classified as category "B" in recognition of potential environmental effects of privatization activities. For the facilities and services already identified, a preliminary environmental evaluation has been carried out. One facility, Food Storage Infestation (FSI), located at Kingston and Montego Bay airports and used for quarantine of food for export, has been identified as being possibly associated with some environmental issues. An environmental audit of the FSI will be conducted prior to its privatization and suitable remedial actions will be taken to mitigate adverse environmental impacts. Environmental Audit Guidelines have been developed and included in the Operational Manual of the project. These will be followed during project implementation for additional entities selected for privatization, whose activities, in the opinion of the Bank, may have a negative environmental impact.