The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) REPORT NO.: RES42148 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT APPROVED ON SEPTEMBER 20, 2017 TO KINGDOM OF BHUTAN GOVERNANCE SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Mercy Miyang Tembon Global Director: Edward Olowo-Okere Practice Manager/Manager: George Addo Larbi Task Team Leader(s): Savinay Grover The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) ABBREVIATIONS AND ACRONYMS BAS Bhutan Accounting Standard DRC Department of Revenue and Customs e-GP Electronic Government Procurement GoI Government of India GNHC Gross National Happiness Commission GST Goods and Services Tax IMF International Monetary Fund IFMIS Integrated Financial Management Information System IPSAS International Public-Sector Accounting Standards MDF Multi-Donor Fund NCB National Competitive Bidding PEFA Public Expenditure and Financial Accountability PEMS Public Expenditure Management System PFM Public Financial Management PFM-MDF Public Financial Management-Multi-Donor Fund PIM Public investment management RGoB Royal Government of Bhutan The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P162196 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 20-Sep-2017 31-Jan-2021 Organizations Borrower Responsible Agency KINGDOM OF BHUTAN Ministry of Finance, Department of Public Accounts Financing (in USD Million) FIN_SUMM_PUB_TBL SUMMARY Total Project Cost 0 Total Financing 0 Financing Gap 0 DETAILS -NewFin3 The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Project Development Objective (PDO) Original PDO The overall development objective of the project is to contribute to the improvement of the efficiency, accountability and transparency of PFM systems in Bhutan. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net TF Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A5549 20-Sep-2017 21-Sep-2017 21-Sep-2017 31-Jan-2021 4.00 2.52 1.48 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No Note to Task Teams: End of system generated content, document is editable from here. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status Bhutan continues to exhibit strong commitment to implementation of reforms for strengthening public financial management (PFM). The PFM Reform Strategy and Action Plan 2017, that was developed based on the findings of the Public Expenditure and Financial Accountability Assessment (PEFA) Report continues to be the roadmap for PFM reforms and Public Financial Management – Multi-Donor Fund (PFM-MDF) is its main vehicle for implementation. The key reforms on Goods and Services Tax (GST) implementation, procurement strengthening, improvement of budget report, International Public-Sector Accounting Standards (IPSAS), strengthening of Integrated Financial Management Information System (IFMIS) and internal audit largely remain on track. The PDO rating for the project as evaluated during the recent mission is Satisfactory. B. Rationale for Restructuring During the preparation of the PFM-MDF financed Strengthening Public Financial Management Project (P162196), US$ 800,000 was kept as unallocated for following reasons: - a) Allocating the funds to those components where there is an expected shortfall. b) Allocating the funds to new activities which are prioritized by RGoB subsequently. Hence, during the mid-term supervision mission of the above project, it was agreed that the RGoB will identify the component/sub-components where funds need to be allocated. Priority is given to the existing components so that they are completed satisfactorily. Accordingly, US$ 500,000 was allocated to the existing sub-components and US$300,000 was allocated The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) to two new sub-components identified. These components are: (1) Public Investment Management and (2) Clustering of Financial Services for decentralized levels of government (Dzongkhags and Gewogs). II. DESCRIPTION OF PROPOSED CHANGES A. Description of proposed changes In line with RGoB’s request and as mentioned above, following two new sub-components are proposed to be added to the Project: - a) Public Investment Management (Sub-component 1b – Part II), (US$ 150,000): Public investment management (PIM) relates to the ways through which governments manage their investment expenditure, i.e. how they select, construct and maintain their public assets. PIM is one of the key areas of reforms in public financial management domain. Public investment can be an important catalyst for economic growth, but the benefits of additional investment depend crucially on how it is managed. The public investments make a substantial part of budget for any government and is also the reason for which the debt is undertaken. Given its importance and development impact on the economies, several countries are putting in place programmes of reform that specifically target improvements in institutions for managing public investment. Similarly, PEFA in its latest framework (2016) included a new indicator on PIM, PI-11. During the recent PEFA assessment of Bhutan, one of the indicators where Bhutan scored low was the indicator on PIM. Therefore, based on the PEFA assessment and the guidance available internationally, it is important that Bhutan undertakes PIM reforms starting with a PIM assessment and preparation of a road-map, implementing reforms on policies, procedures and capacity building related to PIM. This sub-component will support: (a) Assessment of the current PIM policies and procedures in the RGoB, development of a road map for strengthening PIM (b) Development of guidelines for the economic appraisal of the investment Projects and capacity building of the RGoB officials. b) Clustering of Financial Services for decentralized levels of government (Dzongkhags and Gewogs) (Sub-component 2b – Part Ia), (US$ 150,000.00) Ever since the formal establishment of Ministry of Finance (MoF) in 1968, the finance/accounts personnel functioned as a section/unit in any government organizations. With the increase in developmental activities, the manpower requirement for finance/accounts professional has also increased over the years. There are currently over 760 finance/accounts personnel spread across the country as regular civil servants. The government accounting system has also changed over the years. The tedious manual form of accounting has been replaced with the current real time online system - Multi Year Rolling Budget (MYRB) and electronic Public Expenditure Management System (e-PEMS). With this evolution, the roles and mandates of National Finance Services (NFS) personnel has also changed over time. The Department of Public Accounts (DPA) has also recently embarked on e-Payment initiative, which has replaced the existing manual cheque system with the digital and electronic payment system. This sub-component will be added to the IFMIS component. The 12th five year plan provides for significant amount of allocations for Dzongkhags and Gewogs. This requires that the fiduciary controls and systems at the decentralized levels be strengthened. The new digital initiatives on one hand and shortfall of officials on the other hand provides an opportunity to MoF to leverage the digital technology to bring efficiency, economy within MoF and at the same time strengthen the internal control systems. For this objective, MoF proposes clustering of the services through regional offices. The regional offices will help meet the following objectives: The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) i. There will be more diverse pool of human resources with mixed of knowledge and experiences in different fields. It will have potential to enhance the performance by transfer and exchange of knowledge and skills among the pool of officials. ii. Will have uniform and same service standards in all agencies and will ultimately lead to efficient and effective service delivery to agencies and general public. iii. Shortage of manpower will be addressed with the usage of pool services within the cluster group. iv. With the online MYRB, e-PEMS, the digital and electronic payment system will be implemented and services can be provided from anywhere. v. With proper check and control, minimize the risk of misuse and embezzlement of fund. The activities under this sub-component will include preparation of a blue-print for a typical cluster office and the approval of the same, office and network equipment and training required for the officials. B. Results Framework for the new component Public Investment Management Cumulative Target Values Indicator Name Baseline YR1 YR2 YR3 YR4 End Target PI-11.1 dimension PI-11.1 dimension PI-11.1 dimension Economic analysis of score is C score improved to score improved to B investment proposals B Clustering of Financial Services for decentralized levels of government (Dzongkhags and Gewogs) Cumulative Target Values Indicator Name Baseline YR1 YR2 YR3 YR4 End Target Country wide Clustering of Financial No accounting cluster Country wide accounting accounting cluster Services - country offices at decentralized cluster offices established at offices established at wide level decentralized levels. decentralized levels. The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Implementing Agency ✔ Project's Development Objectives ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Additional Financing Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK Project Development Objective Indicators PDO_IND_TABLE Enhanced controls in budget execution and disclosure of key fiscal information Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Enhanced controls in budget execution and 2016 PEFA Assessment disclosure of key fiscal (refer Annex 4 on Value information as No Change Summary of PEFA evidenced by Report 2016) improvement in PEFA scores Date 01-Sep-2017 31-Jan-2021 Reduced procurement cycle time through increase in percentage of contracts/bids invited through e-GP using national competitive bidding (NCB) , in selected MoE, MoF and MoWHS Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action 75% of bids invited 0% of bids invited through e-GP using through e-GP using NCB NCB and Value No Change Procurement cycle time: Procurement cycle 60 days time reduced by at least 5 days Date 01-Sep-2017 31-Jan-2021 Intermediate Indicators IO_IND_TABLE Enhanced contents in Budget Report consistent with international good practices including gender and climate change aspects Unit of Measure: Text Indicator Type: Custom The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Baseline Actual (Current) End Target Action Budget Report, consistent with Value N/A revised template No Change published on MoF website Date 01-Sep-2017 31-Jan-2021 Increased number of companies in compliance with BAS Phase I and II Unit of Measure: Number Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 49.00 No Change Date 01-Sep-2017 31-Jan-2021 Setting the legal and operational environment for GST implementation Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Cabinet approved concept note GST introduced in Value No GST legislation No Change (framework) on GST Bhutan introduction Date 01-Sep-2017 31-Jan-2021 Improvement in quality assurance process within internal audit function based on methodology of the IIA Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Repeat self- Baseline to be assessment indicates Value No Change established in year 1 improvement over baseline Date 01-Sep-2017 31-Jan-2021 Increased number of systems/thematic (performance or value for money) audits undertaken by Internal Audit - number of audits undertaken annually Unit of Measure: Text Indicator Type: Custom The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Baseline Actual (Current) End Target Action Value 1 5 No Change Date 01-Sep-2017 31-Jan-2021 Improved efficiency of internal audit function - number of internal audit engagements annually Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Value 109 200 No Change Date 01-Sep-2017 31-Jan-2021 Improved presentation of National annual financial statements consistent with international standards Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action National annual National annual financial statements financial statements Value presented not in presented as per No Change accordance with Cash-IPSAS based international standards Bhutan standards Date 01-Sep-2017 31-Jan-2021 Public Procurement Bill approved by the Cabinet Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Public Procurement Value No Bill Bill approved by the No Change Cabinet Date 01-Sep-2017 30-Jan-2021 Strengthening of PEMS Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Value Gaps in Payroll and PEMS strengthened No Change bank reconciliation with Payroll control, functionalities. bank reconciliation and commitment The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Commitment control control not present. functionalities. Date 01-Sep-2017 31-Jan-2021 PFM information systems integrated Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action PFM information Integration of PFM Value systems with minimum No Change information systems integration Date 01-Sep-2017 30-Jan-2021 Economic analysis of investment proposals Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action PI-11.1 dimension PI-11.1 dimension Value score improved to B New score is C Date 30-Jun-2020 31-Jan-2021 Clustering of Financial Services - country wide Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Country wide No accounting cluster accounting cluster Value offices at decentralized New offices established at level decentralized levels. Date 30-Jun-2020 31-Jan-2021 OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Strengthening PFM Legal and Strengthening PFM Legal and 1.00 Revised 1.15 Institutional Framework Institutional Framework The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Strengthening Budget Strengthening Budget Execution 2.20 Revised Execution and Oversight 2.85 and Oversight Capacities Capacities Marked for Contingencies and unallocated 0.80 Contingencies and unallocated 0.80 Deletion TOTAL 4.00 4.80 Note to Task Teams: End of system generated content, document is editable from here.