Document of The World Bank Report No: 19854-LSO PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF 4.9 MILLION SDR (US$ 6.5 MILLION EQUIVALENT) TO THE KINGDOM OF LESOTHO FOR A HEALTH SECTOR REFORM PROJECT May 11, 2000 Human Development I Country Department I Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2000) Currency Unit = Lesotho Maloti 6.243 M = US$ 1 US$ 1.32717 = I SDR FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS AFDB African Development Bank APL Adaptable Program Loan ATF AIDS Task Force CAS Country Assistance Strategy CBO Community-based Organizations CHAL Christian Health Association of Lesotho CORPS Community Owned Resource Persons CPR Contraception Prevalence Rate DRA Drug Regulatory Agency EC European Community EDL Essential Drugs List EPI Expanded Program on Immunization ESW Economic and Sector Work FMIS Financial Management and Information System FMIS-TAT Financial Management and Information System Technical Assistance Team GDP Gross Domestic Product GNP Gross National Product GOL Government of Lesotho GOLFIS Government of Lesotho Financial Information System GPN General Procurement Notice HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome HMIS Health Management Informations Systems HNP Health, Nutrition and Population HPSU Health Planning Support Unit HR Human Resources HRSP Health Sector Reform Program HSA Health Services Area ICB Intemational Competitive Bidding ICR Implementation Completion Report IDA International Development Association Vice President: Callisto Madavo Country Manager/Director: Pamela Cox Sector Manager/Director: Dzingai Mutumbuka Task Team Leader/Task Manager: Julie McLaughlin IEC Information, Education, Communication IMCI Intergrated Management of Childhood Illness IMR Infant Mortality Rate LACI Loan Administration Change Initiative LHWP Lesotho Highlands Water Project LNACP Lesotho National AIDS Control Program LPC Lesotho Pharmaceutical Corporation LUMHC Lesotho Universal of Medicinal Men and Herbalists Council MCH Maternal and Child Health M&E Monitoring and Evaluation MOF Ministry of Finance MCH Maternal and Child Health MOHSW Ministry of Health and Social Welfare MOU Memo of Understanding MTEF Medium Term Expenditure Framework NAC National AIDS Committee NCB National Competitive Bidding NDSO National Drug Service Organization NGO Nongovernmental Organization NHTC National Health Training Center NTC National Therapeutic Committee OED Operations Evaluations Department ORS Oral Rehydration Salts PAU Project Accounting Unit PHC Primary Health Care PLHNII Population, Health and Nutrition II PHRD Policy and Human Resources Development PIU Project Implementation Unit PMR Project Management Report PPF Project Preparation Facility QCBS Quality and Cost Based Selection RSA DRA Republic of South Africa Drug Regulatory Agency QEII Queen Elizabeth II RFP Request for Proposals SACU Southern Africa Customs Union SASP Structural Adjustment Support Program SIP Sector Investment Program SOE Statement of Expenditure SSA Sub-Saharan Africa STD Sexually Transmitted Disease TA Technical Assistance TB Tuberculosis TOR Terms of Reference UNFPA United Nations Fund for Population UNICEF United Nations Children's Fund USAID United States Agency for International Development WBI World Bank Institute WHO World Health Organization I LESOTHO HEALTH SECTOR REFORM PROJECT CONTENTS A. Program Purpose and Project Development Objective Page 1. Program purpose and program phasing 3 2. Project development objective 4 3. Key performance indicators 4 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 5 2. Main sector issues and Government strategy 6 3. Sector issues to be addressed by the project and strategic choices 11 4. Program description and performance triggers for subsequent loans 14 C. Program and Project Description Summary 1. Project components 18 2. Key policy and institutional reforms supported by the project 19 3. Benefits and target population 20 4. Institutional and implementation arrangements 21 D. Project Rationale 1. Project alternatives considered and reasons for rejection 24 2. Major related projects financed by the Bank and other development agencies 25 3. Lessons learned and reflected in proposed project design 26 4. Indications of borrower commitment and ownership 27 5. Value added of Bank support in this project 28 E. Summary Project Analysis 1. Economic 28 2. Financial 30 3. Technical 31 4. Institutional 32 5. Social 33 6. Environment 33 7. Participatory Approach 33 F. Sustainability and Risks 1. Sustainability 34 2. Critical risks 36 3. Possible controversial aspects 37 G. Main Conditions 1. Effectiveness Condition 38 2. Other 38 H. Readiness for Implementation 39 I. Compliance with Bank Policies 40 Annexes Annex 1: Project Design Summary 41 Annex 2: Project Description 50 Annex 3: Estimated Project Costs 57 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 58 Annex 5: Financial Summary for Revenue-Eaming Project Entities, or Financial Summary 71 Annex 6: Procurement and Disbursement Arrangements 72 Annex 7: Project Processing Schedule 82 Annex 8: Documents in the Project File 83 Annex 9: Statement of Loans and Credits 84 Annex 10: Country at a Glance 86 MAP(S) IBRD Reference Number 30879 LESOTHO Health Sector Reform Project Project Appraisal Document Africa Regional Office AFTHI Date: May 11, 2000 Team Leader: Julie Mclaughlin Country Manager/Director: Pamela Cox Sector Manager/Director: Dzingai B. Mutumbuka Project ID: P053200 Sector(s): HY - Other Population, Health & Nutrition Lending Instrument: Adaptable Program Loan (APL) Theme(s): HealthtNutrition/Population Poverty Targeted Intervention: N Program Financing Data Estimated APL Indicative Financing Plan Implementation Period Borrower ________ _______________ ~~~ ~~(B3ank FY) IDA Others Total Commitment Closing US$ m % US$ m US$ m Date Dare APLo1 6.50 31.9 13.90 20.40 08/08/2000 03/31/2:004 Government of Lesotho Loan/ Credit _ _ _ _ _ _ _ _ _ _ _ _ _ _ APIL2 5.00 09/01/2003 06/30/2006 Government of Lesotho Loan/ Credit slOthers: API-3 7.00 03/31/2006 06/30/2009 Government of Lesotho Loan/ Credit Standard Credit API-4 Loan/ Credit, Total 18.50 13.90 20.40 10 Years to maturity: 4 Project Financing Data D Loan M Credit I] Grant D Guarantee D~ Othier (Specify') For LoansICreditslOthers: Amount (US$m): 6.5 Proposed Terms: Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: Up to 0.5% Service charge: 0.75% PFnanicing Ptan: Source Loot_ ForeId Tot GOVERNMENT 3.52 0.00 3.52 IDA 2.00 4.50 6.50 AFRICAN DEVELOPMENT BANK 0.66 2.74 3.40 EUROPEAN COMMISSION 0.05 0.31 0.36 GOVERNMENT OF IRELAND 0.72 0.58 1.30 U.N. CHILDREN'S FUND 1.27 0.32 1.59 WORLD HEALTH ORGANIZATION 2.98 0.75 3.73 Total: 11.20 9.20 20.40 Borrower: GOVERNMENT OF LESOTHO Responsible agency: MINISTRY OF HEALTH & SOCIAL WELFARE Address: Ministry of Health & Social Welfare, Box 514, Maseru, Lesotho Contact Person: Dr. M. Mosotho, Principal Secretary Tel: (266) 314404 Fax: (266) 310279 Email: Other Agency(ies): Lesotho National AIDS Control Program Address: Prime Minister's Office, Prime Minister's Office, P.O. Box 527, Maseru, Lesotho Contact Person: Rt. Honorable P. B. Mosisili Tel: (266) 311-130/316-570 Fax: (266) 310-102/310-518 Email: Estimated disbursements ( Bank FYIUS$M): Annual 1.5 2.5 2.5 Cumulative 1.5 4.0 6.5 Project implementation period: September, 2000-October, 2003 Expected effectiveness date: 09/30/2000 Expected closing date: 03/31/2004 CS AVL PAD Fo-, V. -2- A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: The Health Sector Reform Program is being undertaken by the Ministry of Flealth and Social Welfare, together with its development partners. The Reform Program Purpose is to achieve a sustainable increase in access to quality preventive, curative and rehabilitative health care services in Lesotho. This Program purpose serves the overall sectoral goals of "(i) universal coverage, so that every citizen will have access to essential health care and social welfare services; (ii) social justice, so that those in greatest need will receive particular attention; and (iii) equity, so that every person no matter what their social standing in society, will receive the same treatment, the only determining factor being their need for health and social welfare services" (GOL, MOHSW Health Sector Round Table Discussion: Building Partnership for the Lesotho Health Sector Reform, March 1996). As achievement of these goals relies upon concurrent cross-sectoral efforts to prevent and respond to the spread of HIV/AIDS, the Program will also support efforts to expand the national response to HIV/AIDS. The Program has been defined in three phases, with the first phase comprisiing the proposed Project. The objectives of Phase I: Strengthening Institutional Capacity (2000-2003) are twofold. The first objective is to establish the institutional capacity required to enable the Minist of Health and Social Welfare to develop implement and monitor a comprehensive Sector Reform Program. I'he second objective is to expand the capacity of the public sector to respond to HIV/AIDS. By the end of the first phase, the MOHSW should be able to collect and analyze information, formulate and assess sectoral strategies for improving equity, quality and access, meet international standards for financial management, monitor progress against a stated workplan towards measurable targets, evaluate strategies, and attract and retain qualified staff. The Government of Lesotho should have established partnerships with non-governmental organizations undertaking activities to prevent the transmission of HIV and mitigate the impact of AIDS. Throughout the first phase, the Ministry and its core partners will endeavor to define common systems, procedures and standards which will support the longer-term objective of disbursing donor and Bank support as time-slice financing against a single budget. The objective of Phase 11: Policy and Institutional Reform (2003 - 2006) is to pilot or test, critically assess and revise proposed reform strategies. Strategies include financing and financial management reforms, including the reallocation of public expenditures, exploration of prc-poor mechanisms to improve the efficiency and sustainability of sector financing, out-sourcing to improve the efficiency and sustainability of sector financing and staffing; performance management systems; revised protocols for more effective delivery of essential health services at district level; new approaches to pharmaceutical purchasing and distribution; and replacing/relocating the national referral hospital. Phase II will demonstrate the ability of the Ministry of Health and Social Welfare (MOHSW) to monitor and evaluate strategies (capacities which will have been developed during Phase 1). There will be strong emphasis on evidence-based planning, and continual assessment of implementation capacity in order to determine the reforms to be scaled-up nationally. Recognizing that reform will be an ongoing process, the capacity to continually diagnose needs, design and implement solutions, and evaluate their effectiveness is critical to ensuring the sustainability and responsiveness of the health sector in the evolving economic and political environment in Lesotho. -3 - Phase IH: Nationwide and Sector-Wide Implementation (2006-2009) will-support the process of bringing to scale strategies for which there is established evidence of effectiveness at improving financial sustainbility and the ability of the system to reach the poor, stakeholder commitment, and implementation capacity. The purpose of this phase is to realize nation-wide and sector-wide implementation of development strategies, and measurable achievements in the stated reform program objectives. This phase will contain the substantive investment in the program, as implied by the roll-out of pilots, training and re-training of staff, and additional construction. The duration of each phase is indicative, as it is the achievement of defined targets/milestones which will trigger the commencement of the subsequent phase. IDA support is sought for a share of the overall program, which will be co-financed by the Government of Lesotho and its core health sector development partners. The longer-term aim is that disbursements be against the annually-defined budget and implementation plan. This will enable the flexibility required to respond to lessons learned through implementation. The phasing of the program, and intermittently stipulating targets to be reached before additional financing is released ensures that progress will be closely monitored, and approaches constantly reassessed. 2. Project development objective: (see Annex 1) The objective of the Sector Reform Program is a sustainable increase in access to quality preventive, curative and rehabilitative health care services. The objectives of the Project (Phase I), are to (i) strengthen the institutional capacity of the MOHSW to refine, implement and evaluate the comprehensive Sector Reform Program, and (ii) expand the capacity of the public sector to respond to HIV/AIDS. 3. Key performance indicators: (see Annex 1) Progress against stated indicators will be reported on annually by the Health Planning and Statistics Unit to Government and all Partners. The proposed indicators of to be employed to assess achievement of the objectives of the Sector Reform Program are: > Increased percent of children under 5 fully immunized > Increased TB treatment success rate > Increase in anti-natal clinic attendance ) Increase in percent of deliveries assisted by trained provider > Increase in Contraception Prevalence Rate (CPR) > Reduced prevalence of Sexually-Transmitted Diseases (STDs) > Increased percent of the population within 2 hours walking distance of a health facility meeting national standards for service delivery > Increased percent of recurrent costs recovered through fees and risk pooling schemes > Increased percent of GOL and CHAL health facilities staffed with standard number and type of qualified staff for level of facility > Reduced variance in per capita weighted allocations to districts Accomplishment of the objectives for Phase I will be evidenced by achievement of the following: > Allocation of MOHSW Budget for 3-yr period defined based on stated priorities (Medium-Term Expenditure Review - MTEF) > Financial Management and Information System in place > Revised interim and final financial statements produced monthly for six months - 4 - > Defined and functional procedures/systems for disbursement, procurement, accounting and reporting > Quarterly Monitoring and Evaluation (M&E) Reports Produced for the past six months > Documented partnership agreement between all CHAL partners and GOL > 80% of personnel vacancies of six weeks duration of longer were filled within 3 months > 70% of budget committed > A long-term plan for health infrastructure development produced > Estates Management Unit established > Documented guidelines, policies, protocols & procedures for Tuberculosis, Integrated Management of Childhood Illnesses (IMCI) and HIV/AIDS > Completed impact evaluation of Phase I > Completed Evaluation of AIDS prevention interventions > Increased participation of the private sector and Non-governmental Organizations (NGOs) in HIV/AIDS prevention and control B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17751- LSO Date of latest CAS discussion: 06/04/98 The focus of Bank assistance is "to support the Government's strategy of poverty reduction and its efforts to sustain macroeconomic performance through greater integration into the sub-regional economy". The CAS goal relates to the Project aims to invest in human resource development: improving health service delivery to reduce the burden of ill-health on the poor and make the work-force more productive Increased equity and "social justice" are stated aims of GOL for its health sector, however insufficient information exists on access, coverage and utilization of services by the poor. The Project firstly aims to help the MOHSW better monitor equity of coverage and expenditures through improved financial and health information systems, and to design and pilot strategies for imnproving coverage, equity and social justice. The Sector Reform components recognize the importance of greater integration into the sub-region and has defined areas for increased collaboration with South Africa in the areas of in training, referral care, pharmaceutical regulation, research and disease surveillance. In addition to the human impact of HIV/AIDS, the Project also recognizes the potential impact of AIDS on Lesotho's economic development. Sustained macroeconoimic performance assumes an effective response to HIV/AIDS. Lessons Leamed through implementation of the prior (1996) CAS have been captured as follows: "the Bank should continue to be selective in its choice of sectors to focus, based on its comparative advantage, thereby facilitating closer collaboration with other donors such as for the agriculture and health SIPs; capacity building and institutional strengthening must still underpin the Bank's development assistance to Lesotho. However, in this area, the Bank should facilitate participative dialogue mainly by bringing the experience of other countries and sectors, but it should not set the pace of reform; and while portfolio management performance has been generally satisfactory, project implementation and associated structural reforms can be facilitated if reform programs are packaged, with institutional capacity concerns adequately dealt with". -5 - The Health Sector Reform Program aims to coordinate all donor support to the sector around a common workplan and budget (the Sector Investment Program (SIP) model). The Project emphasizes the long-term capacity requirements of the sector, and places capacity-building within the context of achieving reforms of the health sector. The CAS recognizes implementation capacity constraints as one of the key impediments to growth in Lesotho: "A critical factor in the past which impeded structural reforms in Lesotho has been the weaknesses of institutional capacity, especially in the government sector. There is, therefore, the need to improve capacity in the public sector by dealing with its goals, staffing requirements and incentive structure, and the prospects for decentralizing the budget to permit the incorporation of decision-making inputs at the sub-national level". The Project aims to focus attention primarily upon capacity building prior to expanding efforts to define policy reform initiatives which will aim to improve service delivery. This approach is being taken to better ensure the sustainability of policy reform, and responds to experience in two prior sector operations. The efforts which will be taken in the health sector are dependent upon broader public sector management reform, and thus a critical complement to the aims of the Health Sector Reform program are the efforts being undertaken under the proposed Public Sector Improvement and Reform Project. 2. Main sector issues and Government strategy: PUBLIC HEALTH AND HEALTH SERVICES Per the MOHSW June 1999 Health Sector Reform Draft Plan, in the 20 years since its adoption of Primary Health Care (PHC), Lesotho has made impressive gains in the improvement of the health status. Immunization coverage increased over the past 10 years from 49% to 71%, and the widespread availability of Oral Rehydration Salts (ORS) resulted in a decrease in the case-fatality from diarrhea. "The major problem encountered thus far with the implementation of PHC has been on how to assure its sustainability". Health status indicators suggest that the system is not responding to rising health needs: the infant mortality rate has remained constant since 1986; malnutrition among children under five and maternal mortality appear to be on the increase; tuberculosis, the most common cause of death among Basotho adults, has been rising fueled in part by the increasing the number of HIV/AIDS cases; and immunization coverage has more recently fallen. Although health information is limited (Lesotho has never completed a Demographic & Health Survey nor a National Health Survey, and the last Planning and Statistics Unit report was in 1993), within the Environmental Assessment of the Lesotho Highlands Development Authority, population-based health surveys in three of Lesotho's ten districts have supported impressions formed from facility-based reports: leading causes of care seeking are injuries and violence, tuberculosis (TB), HIV/AIDS and other STDs, respiratory disease, diarrheal disease and malnutrition. STDs account for 13% of outpatient visits, and an estimated 8.4% of Basotho are living with HIV/AIDS. With an estimate of annual TB incidence of 407 new cases per 100,000, tuberculosis patients occupy 50% of all hospital beds. For a population of 2 million, there are currently three tertiary institutions (national referral hospital, mental hospital and leprosy hospital), 17 district hospitals (8 CHAL and 9 MOHSW), 4 Urban Filter Clinics, 161 Health Centers, and 17 Health Posts. The condition of the various health facilities varies widely. Most government facilities have recently been upgraded, renovated, and/or rehabilitated, but the rehabilitation of CHAL (Christian Health Association of Lesotho) hospitals and the specialty hospitals is outstanding. Consumers of government health services report that the system has deteriorated in quality, while costs to them have increased. An estimated 30% of the population do not have access to basic services, and fees (particularly in CHAL facilities which account for up to 48% of health services) have - 6 - -reduced access to services for other segments of the population. Drugs and dressings comprise nearly 15 percent of health expenditures. On a lper capita basis, Government spent close to US$2 per capita on drugs in 1998. CHAL procurement and private purchase of pharmaceuticals expand this figure. The National Drug Service Organization (NDSO is the parastatal wholesaler and distributor of pharmaceuticals to government and NGOs in the health sector) does succeed at ensuring essential drugs are widely available, but the historical relationship between the Lesotho Pharmaceutical Corporation (LPC) and NDSO -- whereby NDSO has been required to purchase from LPC, to share facilities and staff and collectively set prices -- has resulted in gross inefficiencies. The government's decision to privatize LPC and the need to "de-link" the two institutions has provided an impetus to improving the efficiency and responsiveness of pharmaceutical procurement and distribution. Critical staff shortages exist in pharmacists and pharmacy technicians (current population ratios are 1/90,000 and 1/33,300 respectively). Health Service Areas (HSAs) were established to enhance delivery of PHC. Districts have a political and administrative rationale, but the physical boundaries of HSAs are not consistent with Districts. Although there has been partial delegation of administrative powers to Health Service Areas (HSAs) and government hospitals, functions such as financial management, supplies procurement, management of human resources, maintenance, and a substantial portion of operational decision-making, remain centralized. Lesotho Sub-Saharan Africa Averages GNP per Capita 770 490 Life Expectancy at Birth 61 6 7 IMR (per 1000 live births) 93 92! Child Mortality (perlOO0 live births) 137 1_57 Total Fertility Rate (#births/woman 4.8 5.7 15-45)__ _ _ _ _ _ _ _ _ _ _ _ _ Expenditure per Capita US$20 US$10 INSTITUTIONAL CONSTRAINTS The Health Sector Expenditure Review as well as the Institutional Capacity Assessment for the proposed Sector Reform Program, cite institutional capacity as the leading constraint to improving the performance of the health system. Constraints encompass the quantity, allocation and accotntability of staff, the systems and procedures for decision making, planning, budgeting and implementing, and the allocation and use of resources. In addition, the impact of HIV/AIDS is expected to further constrain capacity. The sector is plagued by poor absorptive capacity, and inefficiencies, yet inefficiencies are not fully appreciated due to the under utilization of financial resources. Financing Strategy and Financial Management Including allocations to the Christian Health Association of Lesotho (CHAL), 3.2% of GDP is allocated to health. The sector is heavily dependent upon public financing. The Government of Lesotho's annual budget for health, approximately US$26 million, accounts for 9% of the government budget. With declining SACU receipts expected in the near future, health expenditures are expected to be increasingly constrained, yet the current budget for health is regularly underspent (3%-20% over the period 1991-7). Under expenditures are partly attributable to a lack of financial information which would better inform decision making at every level in the sector, and to unrealistic estimations of implementation capacity. The national referral hospital, Queen Elizabeth II (QEII) provides primary and secondary care to the majority of Maseru (14% of the population resides within the capital), rather than focusing upon referral - 7 - care. To reduce the demand upon QEII for basic care, the Second Population, Health and Nutrition (PHNII) Project constructed filter clinics which are still not fully operating due to staff shortages. Allocative inefficiencies, technical inefficiencies, and human resource constraints impede the efiectiveness of sectoral expenditures. Inefficiencies also result from the lack of coordination across donor-financed activities. Consequently, the allocations to the sector are not commensurate with health sector outputs and outcomes as evidenced in the table above. The MOHSW has implemented a cost-recovery program since 1989, and an average of 7% of recurrent expenditures are recovered. Districts recover 14% of their costs, while Queen Elizabeth II (QEII) recovers 7-8%. Although costs are higher at QEII, poor revenue generation at QEII partly is attributed to leakage and inefficiencies of collection. Currently, all revenues collected are remitted to the center, which reduces incentives to collect fees, and increases the transaction costs of collection. Procedures for the collection of fees sometimes run counter to sectoral objectives, as some facilities are unable to fully operate due to lack of qualified staff to collect or transport fees. Per capita government expenditure is inconsistent with stated sectoral objectives of equity and access. Even controlling for the presence of non-governmental health providers (CHAL), and for costs of QEIl, Maseru District receives more then twice tlhe allocation per capita as the poorer districts of Thaba Tseka and Mohale's Hoek. The presence of CHAL facilities and the recently increased subventions to CHAL improve equity, still do not fully rectify the picture. Prior to the analysis conducted and presented under the FY99 Economic and Sector Work (ESW) on marketing Health Sector Reform, the leadership was unaware of the scale of disparities between allocations to districts, reinforcing the need for increased information to decision makers. There is no financial infonnation routinely reported on expenditures by level of the system or bv ullit, so there is little appreciation for cost implications of decisions which are made (e.g., referral of cases to South Africa), of the real costs of service (e.g., outpatient primary care delivered from QEII), or who benefits from government subsidies (benefit incidence). The responsibility for budgeting for capital and recurrent expenditures is divided between the Financial Controller's office and the Planning Unit, the second holding responsibility for all donor-financed activities. This impedes efforts to rationalize investment and to assess the implications of investments on the operational budget. Monitoring and Planning Currently, facilities are required to complete numerous reports with little appreciation of their role, as information does not appear to be employed for decision making, nor is data analyzed and information compiled for management and staff. A lack of accountability within the system is described within the Institutional Capacity Assessment. The lack of health information, sectoral targets, monitoring and reporting procedures make it difficult to hold units or staff accountable for their performance (although individual priority health programs which have close relationships with WHO, UNICEF or UNFPA do set their own targets and report on progress). The Health Planning and Statistics Unit is well-staffed with economic planners and statisticians, but it does not employ any epidemiologists, health planners or physical planners. A recent EU consultancy assisted in producing terms of reference for the unit and staff, which remain to be implemented. The lack of planning and management procedures is accompanied by an absence of supportive systems: staff do not have ready access to communications as well as information. Computers, fax machines and even working telephones are infrequent. Very few of the public sector staff have access to electronic mail or the Internet. Human Resources The MOHSW employs 2250 staff, and finances the salaries of an additional 575 medical staff employed by - 8 - the Christian Health Association of Lesotho. There are 114 physicians registered in Lesotho (I per almost 18,000 Basotho), half of whom are foreign nationals, and 40% of whom work in the private sector. Loss of professionals to the Republic of South Africa (where conditions of service are higher) is a persistent problem, and even more so since the end of the Apartheid government, but the MOHSW also loses staff to other government agencies (suggesting personnel management within the MOHSW contributes to the attrition rate). Fifteen percent of the staff positions within the MOHSW are unfilled; the greatest shortages are of nurses, lab technicians and pharmacists. At the same time, existing staff are not effectively deployed, for example, qualified nurses are employed in administrative and management positions. Under-budgeting for recurrent costs (i.e., not anticipating the implications of investment into staff training) contributes to the problem, as staff posts are not upgraded, and staff sent for specialized training complain that they return to the same positions they left. The situation is further compounded by the fact that the leadership within the sector has little direct authority over critical staff; the Planning and Finance staff report to their respective Ministries. In addition, the civil service administration makes many hiring and deployment decisions, and many management positions are formally, or informally, political appointments. Despite the unfilled posts, salaries still absorb the largest share of health expenclitures, comprising 50% of the health budget in 1998. Seventy-seven percent of the total wage bill supports government health workers. The MOHSWs 1995/6-1999/00 Sector Plan states that the "single most critical factor in the health care system in Lesotho during the next five years is undoubtedly the attraction, development and retention of qualified professional and technical personnel, on whose efforts and expertise the achievements of health for all is first and foremost going to depend". Salary scales of health staff (civil service scales) are well above many other countries in Sub-Saharan Africa (SSA), and staff report that if conditions (delayed promotion and appointment, frustration with procedures, and poor management of staff) were improved, they would prefer to remain within Lesotho. Although not presently quantified, the impact of HIV/AIDS can be expected to further impact upon staff attrition. Partnerships The Christian Health Association of Lesotho (CHAL) is the largest non-public actor, covering between 30 and 40% of the population with primary and first referral care. Facilities receive limited donations from abroad, and are staffed predominantly by non-civil servants, who are employed under different conditions of service from civil servants. CHAL facilities rely heavily upon GOL subventions and user fees. In 1997, CHAL hospitals recovered around 35 percent of their costs through fees (which are administered on different scales from those at the MOHSW facilities). The recent rise in fees, mandated to offset decreased external resources, impedes the role that CHAL facilities play in serving the poorer segments of the population. While the CHAL subvention was increased in 1996/7, the formnula for subventions is still insufficient for most CHAL facilities. In 1998, there were nearly 600 CHAL health workers who received subsidies totaling more than 11 percent of GOL recurrent health expenditure, yet the different standards for staff results in leakage of staff to GOL facilities. Although in 1995, the MOHSW developed a Memorandum of Understanding with CHAL, the agreement is not being implemented as it does not appear to meet the expectations of either the MOHSW or CHAL. Due to its geography, Lesotho has a special relationship with the Republic of South Africa. The relationship affects imports due to the common monetary union (e.g., pharmaceuticals and equipment), the loss of health professionals into the Republic of South Africa (RSA), and specialized health care sought in South Africa. Collaboration has been formally sought in the past in the areas of disease surveillance, training and research. Until the early 1990s, there existed a Lesotho-RSA Health Committee. In 1994, WHO/Lesotho produced "Health Services in Lesotho: A study of new possibilities for cooperation with South Africa". -9- Donor financing has been the main source of funding for infrastructure development in the sector, as well as for PHC programs such as Reproductive Health and Nutrition, Child Survival programs, HIV/AIDS Prevention and Control, Environmental Health and Disease Control (STDs and TB in particular). Sixteen percent of the MOHSW budget is financed by donors, although this does not account for UNICEF vaccines; UNICEF and WHO technical assistance; and some of the EU support under its structural adjustment support program (SASP). The Ministry of Health and Social Welfare has been working closely with WHO and UNICEF as the two development agencies who have technical staff within Lesotho. Irish Aid, and the European Commission have provided targeted support to the sector as well as technical assistance. Financing from IDA and the African Development Bank has been employed to expand or improve infrastructure, finance training, and develop programs in priority health areas. The array of projects supported by the various partners are defined separate from the Ministry's other activities and minimal collaboration has traditionally occurred across donor-supported projects. Combined with the separation of capital and recurrent budgets, this makes it difficult for government to assess the sustainability of investment. Each agency retains its own procedures for monitoring, reporting, disbursement and accounting, conducts separate evaluations of "its" activities, and communicates directly with the respective implementing units within the Ministry, rather than through the Health Planning and Statistics Unit (HPSU) which is charged with donor coordination and sector planning. GOVERNMENT STRATEGY Health Reform To address these issues the Ministry has described a program of reforms which aim to "increase access to quality preventive, curative and rehabilitative health care & management services in a sustainable manner". Explicit in this aim is the intent to improve the efficiency and effectiveness of the health care system through the strengthening of planning and management functions (1996 Sector Round Table Consultations: Building Partnership for the Lesotho Health Sector Reform). Eight areas have been identified as priorities for long-term policy and institutional reform: health financing, human resources, district health services; decentralization, health infrastructure, pharmaceutical management, social welfare, and coordination/collaboration with development partners and South Africa. The components of the Health Sector Program include the following: > Sector Financing and Financial Management to improve allocative efficiency, equity, and better ensure sustainable financing for the sector, and better inform decision makers at all levels with appropriate financial information > Human Resource Reforms to ensure effective and rational utilization and deployment of human resources within the sector > Development of a District Package of health services which defines cost-effective protocols and procedures to improve standards of care > Decentralization to improve efficiency and enhance local accountability > Pharmaceutical Management to improve the efficiency of procurement and distribution, quality control, availability, and use of pharmaceuticals > Sustainable standards for investment, and maintenance strategies for public health infrastructure > Strengthened social welfare functions within the MOHSW > Increased Coordination and Collaboration with the private sector (esp. CHAL) and South Africa > Improved coordination and use of external resources through a sector-wide approach -10- Health Reform Working Groups have been formed to define objectives, strategies and work plans for component of the reforms. Their work has resulted in a Health Sector Reform Strategy which encompasses both longer-term aims and immediate-term strategies. A detailed implementation plan and budget have been defined for the first phase of the Program. Even given reports that the sector is not fuilly responding to needs, there is not vocal widespread dissatisfaction with the health care system. There have not been demands for reform from civil society, nor have health reforms been an explicit issue in some of the current political debates. The publication, Strengthening Lesotho 's Health Care System, was produced under Bank ESW to market the reforms. HIV/AIDS Over the past 6 months there has been an increase in political commitment to the prevention and control of AIDS. A broad consultative process was undertaken that led to the drafting of aL Policy on HIV/AIDS and STD Prevention and Control. A National AIDS Committee has been formed that will appoint an AIDS Task Force, which will be based in the office of the Prime Minister. The Lesotho National AIDS Program will serve as the secretariat to both the National AIDS Committee and the AID:S Task Force. An HIV/AIDS Strategic Plan and Policy have been developed in late 1999. DFID is working to develop a 5 million Pounds Sterling Regional HIV/AIDS/STD Control program over 5 years, commencing November 1999. The program also encompasses Botswana, Namibia, South Africa, and Swaziland and will cover: inter-country condom social marketing; a coordinated mechanism for condom procurement; cross-border activities for access to condoms and HIV/AIDS information and education; dissemination of good practices in HIV/AIDS prevention and care; and institutional strengthening SADC and selected NGOs. 3. Sector issues to be addressed by the project and strategic choices: STRATEGIC CHOICES The longer-term strategies are defined in the Program Description below, however, priority is being given during the first phase of the reform program to those activities which will establish the institutional capacity required to enable the Ministry of Health and Social Welfare to develop, implement and monitor the evolving reform program. The GOL recognizes within its 1996 Sectoral Round Table Consultation Document, and within the Health and Social Welfare Sector Plan (1995/6-1999/0), that the performance of the health sector is constrained by limited planning capacity, internal inefficiency, and the challenge of attracting and retaining skilled staff. The Sector Plan, Round Table Document and Health Sector Reform Plan identify the need to improve poor resource absorption through strengthenirig managerial capacity, addressing manpower constraints, decentralizing decision making, and institutional strengthening (i.e., improving systems, procedures and accountability). The Project will support this first phase. Phase I focuses on resolving the main systemic constraints to achieving the objective of a sustainable increase in access to quality health care services, while taking full cognizance of the escalating AIDS epidemic. The strategy proposed recognizes (a) that none of the reform ambitions can be effectively developed and implemented by the MOHSW unless institutional capacity constraints are fully addressed, (b) that any reform strategy needs to be accompanied by a coherent AIDS strategy, and (c) that developing parallel systems and islands of capacity for the administration of donor financing will not result in a system which is capable of sustaining developments. The phased strategy also will enable the gradual realization of increased client discretion over the allocation and management of external resources. Phase I will build institutional capacityt to budget, allocate and - 11 - account for sectoral expenditures, Phase II will allow for the GOL to establish a track record as it undertakes scaled-up implementation of the reforms. By Phase III, the MOHSW should have established the credibility required to facilitate disbursement against the sectoral budget. During the initial phases, external support will be allocated to specific inputs and activities. The emphasis on institutional strengthening during Phase I does not undermine attention to priority health services. Throughout the implementation of Phase I, the MOHSW will continue to perform its core functions, namely to deliver public health and curative services to its clients. Over the longer-term Program, stronger institutions will translate into improved quality, responsiveness and sustainability. Previous efforts in Lesotho supported by IDA and by other development partners have focused on improving specific subsectoral programs (infectious disease, nutrition, population and reproductive health), and/or on specific inputs, such as staff training, facilities and equipment. WHO, UNICEF, Irish Aid and IDA have all provided technical assistance, training and financing for priority health programs (STDs, HIV/AIDS, TB, nutrition, population and maternal and child health (MCH)). The MOHSW has had extensive exposure to international recommendations on service delivery standards and public health approaches. Advances have been made in the technical standards of specific programs, and in the quality of physical facilities. The strategic approach recognizes that the benefits of the specific inputs cannot be fully realized in the absence of institutional strengthening. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT (See Annex 2 for complete project description) Phase I, the Project, thus focuses attention upon resolving key institutional constraints: (i) financial planning and management, (ii) planning and monitoring, (iii) human resources, (iv) partnership, and (v) HIV/AIDS. It will also support activities required to prepare for Phase II of the Program. By the end of the first phase, the MOHSW should be able to collect and analyze information, formulate and assess sectoral strategies for improving quality and access, meet international standards for financial management, implement against a stated workplan, monitor progress towards measurable targets, and evaluate strategies. It should also be able to better attract and retain qualified staff. Throughout the first phase, the Ministry and its core partners will endeavor to define common systems, procedures and standards which will support the longer-term objective of disbursing donor and Bank support as time-slice financing against a single budget. Financial Planning and Management Improved Financial Management and Information Systems aim to improve the knowledge of costs and expenditures for decision-makers at each level of the system. Acquiring an improved understanding of the costs of, and expenditures upon health care by service, by type of facility and by population group (e.g., rural/urban or by socio-economic indicators) will provide information on who benefits from public sector services and on the increased care attributable to HIV/AIDS. Currently, the Health Planning and Statistics Unit (which reports to Ministry of Planning) holds responsibility for donor and capital budgets, whereas the Finance Unit (which reports to Ministry of Finance) retains responsibility for recurrent budgets and disbursement of government funds. The integration of capital and recurrent budgets is required to fully appreciate the recurrent cost implications of investment decisions, and thus better ensure the sustainability of sector development activities. Towards the vision of a sector-wide approach, the MOHSW seeks to capture all sources of financing to MOHSW and CHAL health activities. The project will support the capacity of the HPSU and Finance Unit to produce integrated budgets, and will support the analytical, consultative and consensus process required to produce a sectoral medium-term expenditure framework (MTEF). The MTEF will help to establish budget discipline, and better link policy choices to budget decisions. - 12- Planning and Monitoring Much of the capacity building will address the functions of the HPSU and how it supports the operational units of the MOHSW. Previous efforts to build capacity in this Unit have not been closely tied to specific functions and expectations. The demands which the MOHSW has accepted in undertaking a reform initiative, and in committing to an annual planning and review process is expected to increase commitment and demand for systems capacity and skills development. Monitoring and evaluation will be strongly emphasized, both the capacity of individuals and systems, as well as the investment in technology and training required to establish effective systems. These will comprise health information and management as well as surveillance systems. Community-based surveys will support the need for primary data which is lacking. Defining service standards for each level of the health care system will respond to the need to address technical efficiency and effectiveness. It will ensure that priority interventions are informed by information on incidence and cost. It also responds to the objective of improving quality by setting national standards in a setting where many practicing clinical staff are non-nationals. The project will support a long-termn development plan for health facilities in Lesotho, and the establishment of an Estates Management Unit charged with oversight of new investment, aiding the long-term physical planning for the sector (including the economic analysis of options), and proposing a maintenance strategy for the MOHSW. The development of a simple geograp]nic information system will also facilitate physical planning. Human Resource Management Although the long-term needs for government employees in the sector will be determined by evolving decisions on contracting out, and expanded partnerships with the private sector, Lesotho does need to immediately address the loss of staff, vacancies, and staff performance. Prior to any new investment into health facilities the MOHSW has agreed to first ensure that all existing facilities are fully staffed. The filter clinics, for example, constructed under the former IDA-financed operation in the sector, still do not fully function, and thus it is impossible to assess the real needs for referral services. One of the first efforts under this component will be to better track staff deployment and skills, and to address training outputs, recruitment and retention, incentives, the need for specialist services and expatriate recruitment. Partnerships Towards the aim of a Sector Approach, the project will support efforts to develop the implementation procedures, systems and capacities which will meet the requirements of the GOL and of their external partners. Establishing the credibility to plan, implement and evaluate a comprehensive Sector Program will support the long-term aim of budgetary support to the sector. IDA, the African Development Bank, the European Commission and Irish Aid (all of the major external financiers to the sector) support this aim. All partners have been advised that the MOHSW does not intend to finance activities outside of the Sector Reform Plan, and that the Plan should serve as the basis for all government and donor support to the health sector. To initiate increased partnerships with South Africa, and to explore the opportunities identified within the 1994 study on cooperation, the RSA/Lesotho Health Committee will need to be reconstituted. One of the specific areas to explore collaboration in the first phase is the pharmaceutical regulations. The role of the proposed Drug Regulatory Agency for Lesotho should be defined in collaboration with the RSA DRA. - 13 - WHV/AIDS Prevention and Control Almost all government efforts towards HIV/AIDS to date have been led by the health sector, and focus upon prevention of HIV transmission. The most notable efforts have been the expansion of Sexually Transmitted Infections and TB control programs, but the capacity of the public sector is limited. To expand this capacity, and thus to expand the national response to HlV/AIDS, the Project will support both prevention, mitigation and care activities, and will foster the role of the non-governmental entities in performing such activities. The Lesotho National AIDS Program and the multisectoral AIDS Task Force will oversee a component on HIV/AIDS which supports partnering with NGOs, businesses, churches, the private sector and community based organizations to conduct initiatives aimed to preventing the transmission of WIV and mitigating the impact of AIDS. 4. Program description and performance triggers for subsequent loans: PERFORMANCE TRIGGERS TO MOVE FROM PHASE I TO IT: > Allocation of MOHSW Budget for 3-yr period defined based on stated priorities (MTEF) > Financial Management and Information System in place > Revised interim and final financial statements produced monthly for six months > Defined and functional procedures/systems for disbursement, procurement, accounting and reporting > Quarterly M&E Reports Produced for the past six months 9 Documented partnership agreement between all CHAL partners and GOL > 80% of vacancies of six weeks duration of longer were filled within 3 months > 70% of budg,et committed > A long-term plan for health infrastructure development produced > Estates Management Unit established > Documented guidelines, policies, protocols & procedures for Tuberculosis, IMCI and HIV/AIDS ) Completed impact evaluation of Phase I > Completed Evaluation of AIDS prevention interventions > Increased participation of the private sector and NGOs in HIV/AIDS prevention and control PROGRAM DESCRIPTION FOR PHASES 1I AND III: The detailed workplan for each phase will be developed based upon experience and findings during the previous phase. A detailed Implementation Plan and budget will be presented by the MOHSW, and agreed upon annually together with the core development partners. Annual joint reviews informed by the Annual Report will support development of each subsequent year's implementation plan, and of the evolving definition of the subsequent phases. The Sector Reform Program comprises the following components for the Program: Sector Financing The definition of a Medium-Term Expenditure Framework will provide a framework for financial support to the sector during the subsequent phases. The establishment of the FMIS during the first phase will support assessment of financing strategies, assessment of resource allocation, and program-based budgeting which is desired for the sector. During the second phase, a Health Sector Financing Policy will be developed which addresses the role of public sector financing; revised resource allocations, and mechanisms for determining allocations which respond to the stated priorities for the sector (e.g., equity, access to the District Package); the strategies for ensuring sustainable sectoral financing; and-the medium-term expenditure framework. - 14 - Financial information and management will be addressed to initially ensure that the use of existing resources can be better understood, so that the allocation of resources may be informned by actual expenditure and cost information, and so as to facilitate responsive reallocation throughout the financial year. To improve the financial sustainability of the system, the Reforms Program will seek proposals from the private sector to pilot insurance schemes, will assess potential cost savings from contracting out non-clinical services, and will assess expansion of the Bamako Initiative (conimunity-based financing schemes) beyond the initial 10 districts in which it currently operates. A household health expenditure and income level survey have recently been completed. This information, together with some of the outputs from the FMIS, will inform Phase II strategies to address sustainable financing. Firstly, the current user fee structures will be revised (i.e., determining where the burden of cost to individuals should lie) based upon information on referrals to South Africa, the household expenditure survey, and increased knowledge of the cost of collection of fees. Proposals solicited during the first stage for innovations in risk pooling (insurance) options will be piloted or tested during the second phase, and successful activities expanded during the final phase of the program. Human Resources Innovative approaches will be required to address the severe constraints in human resources previously described. The role of a MOHSW human resource strategy will be affected by consideration of options to increase partnerships with the private sector, out-sourcing and the definition of service delivery standards in the District Package. However, in the interim, the Ministry is committed to improving the recruitment, retention, performance and accountability of MOHSW staff through establishing defined qualification and performance standards for staff at all levels, procedures for evaluating staff performance and tying performance to promotions and training opportunities. The first phase of this work partly aims to improve the use of critical skills within the health sector - e.g., the use of clinically trained staff as clinicians rather than as managers. Strategies to address retention of staff will be informed by decisions on skill requirements for MOHSW civil service staff, versus contracted staff and staff of CHAL institutions. Rather than endeavor to acquire and/or retain certain skills within the public sector, during the second phase, the MOHSW will test out scenarios for contracting out management and staff of the referral hospital, and/or contracting non-clinical functions such as facility maintenance, hospital laundry and catering, procurement and financial management. The role of training institutions will also be assessed in light of the skill requirements, and attrition projections. In support of the Human Resource Plan produced during Phase I, during the second phase, the government will determine the long-term role of the National Health Training College, the cost-effectiveness of proposals to develop a Health College within the National University of Lesotho, and the role of the government and CHAL-run nursing schools. District Health Services The decision to focus upon a package of services for district level delivery reflects the appreciation that the burden of disease in Lesotho can be more cost-effectively addressed by the preventive, primary and secondary health services (services most efficiently delivered by local public health agencies, district hospitals, health centers and health posts), and the belief that the poor will be better served through a package of district services. The definition of the District Package will set priorities for service delivery, for health education, and for public health interventions, and will guide decisions on allocations, staffing, training and investment. The emphasis of the reform process is on improving the coverage and quality of health care provision in the country. The District Health Package will identify the priorities for reform on a sector-wide basis. Experience in the Region has demonstrated that the explicit process of priority-setting - 15 - entailed in defining the package will foster additional demands for quality information (on incidence, behavior and costs), and should help the government to appreciate and anticipate the implications of emerging health problems. In particular, the implications of HIV/AIDS in the additional costs to the system, increased demand in particular service areas, the need to increase prevention activities and the anticipated impact on already high levels of attrition, will focus attention on defining affordable and explicit strategies for coping with HIV/AIDS relative to other demands on the health system. During Phase II, the dissemination of service standards aims to ensure that standardized essential services will be available to all (considering financial, geographic and social deterninant of access), and which will guide both public and private sector provision of care. Legislation (the Public Health Law) will be revised to reflect the commitment to the District Package. The services included in the package wili guide priorities for investment, operations research, supervision and training. Therefore, efforts required to define the package are being prioritized for the first phase. Supportive information systems, improved supervisory systems and operations research are considered key components in support of the district package. Social mobilization activities also fall within this component, and their impact will be tested during the second phase. Community Owned Resource Persons (CORPS already have been successfully engaged in reproductive health and youth counseling) will be further engaged in public health activities geared towards awareness creation, knowledge increase, demand generation (i.e., with respect to health services), attitude change, and community participation and involvement in health issues. The strategy being defined with the health education unit encompasses various modes and avenues of communication including burial societies, trade unions, cooperative movements, church organizations, and public meetings. Decentralization Given that the district will ultimately be the focal administrative point in all the Ministries once the plan for Local Government is implemented, the current catchment populations defined by the system of Health Service Areas will be revised in accordance with the government's aims of strengthening local government (districts). Health Management Teams at district level will be re-established, and a long-term phased development program undertaken to establish the skills and capacities required to coordinate a district-wide health development program. Although the extent of the GOL's decentralization program continues to be defined (and will be supported under the Public Sector Management Project), the Health Management Teams will be the focus for financial management capacity building under the Program, for defining and managing the District health Package, and for much of the monitoring and information systems development. During the second phase, new roles and functions will be piloted in select districts, and rolled out during the final phase. Pharmaceuticals Consistent with the aims of decentralization, certain pharmaceutical logistics functions will be decentralized during the second phase. Responsibilities which benefit from standard infrastructure and economies of scale including policy development, drug registration and standards for quality control will remain with central government. - 16 - The anticipated endorsement of the National Drug Policy (which was developed under the former IDA-financed project, and awaits approval by Cabinet) will support efforts to monitor drug quality, and ensure that selection is based upon the Essential Drugs List. It will also support the formation of a Drug Regulatory Agency, although the specific role and function of a DRA within Lesotho (given its relationship to South Africa) will firstly be further assessed. The Program will consider pharmaceutical reforms within the regional context, in particular as regards patent regulations, relaxation of trade barriers and harmonization of pharmaceutical regulations which will impact on local production, regulation and pricing. There are two acts today governing the Phannaceutical Sector which will be updated. The Dangerous Medicines Act of 1973 and the Lesotho Medical, Dental and Pharmacy Order of 1970 have not included some intemational/regional conventions for which Lesotho is a signatory. The National Therapeutic Committee (NTC) -- responsible for developing and monitoring adherence to prescription protocols and updating the Essential Drugs List (EDL) -- will be revived, and the EDL and National Drug Formulary will be updated. The conclusions on the protocols developed within the District Package will inform revisions of the Essential Drug List and the planned revisions of prescription protocols over Phase 11. The role of the EDL and NDF are important in establishing and maintaining common standards of service delivery. This a particular need in light of the prevalence of foreign-trained providers operating within the country. Assessments conducted of the implications of the privatization of Lesotho Pharmaceutical Corporation (LPC) and the de-linking of NDSO state client-orientation as the main challenge for an NDSO whose primary function is no longer to support LPC, but service providers. The inefficiencies in the function of NDSO will be addressed through improving systems for stock management, procurement procedures, pricing, and distribution. Expanded distribution infrastructure has been proposed in the construction of drug depots, has been proposed for the third phase of the program. Infrastructure During the first phase, a long-term plan for facility development will be produced, and maintenance capacity will be established. The facility development plan will build upon the mapping of facilities and catchment populations in Lesotho to assess how the aims for geographic access can be achieved. Some additional construction of facilities may be implied by the evolving facility plan as informed by redistribution of staff, and of govemment financing to increase access. Under the second phase, the rehabilitation of MOHSW infrastructure (specifically, hospitals), National Health Training Center, and CHAL hospitals will be undertaken. This work will not commence until standards for service delivery from each type of facility are defined, and physical planning and maintenance capacity is established. Rehabilitation/expansion of CHAL nursing schools may also imply investment during the second phase. The construction of staff housing, to improve incentives for staff posted to needy areas, will also be supported in the second phase of the Program. Assuming it is the conclusion of the Phase I assessment, in the second phase, phased construction on the new referral hospital will commence to be completed during the third stage. Lastly, standards for equipment procurement will be defined during the second phase, and procurement of additional medical equipment and vehicles will be undertaken (luring the final phase consistent with defined standards and in response to updated inventory information. Partnerships The experience during Program preparation with consultative forums for a wicle range of stakeholders has been positive. The MOHSW will continue to provide these opportunities aimed at developing and, and in some cases, formalizing the collaboration with NGOs. The CHAL/govemment agreement sought during Phase I is expected to set precedence for other NGO agreements (e.g., the Lesotho Planned Parenthood Association and Red Cross). During the second phase, a survey will be undertaken to establish a list of - 17 - traditional practitioners through out the country, including those not registered. As a follow up a dossier will be compiled on services rendered by the traditional practitioners towards establishing collaboration mechanisms between the Ministry and the Lesotho Universal of Medicinal Men and Herbalists Council (LUMHC). The Reforms Program aims to expand collaboration with South Africa, with the initial step being the reconstitution of the RSA/Lesotho Health Committee. During the second phase, specific agreements will be defined including the referral system between QEII and Pelonomi Hospital in Bloemfontein, training issues, study pernits, funding for health personnel, and arrangements for Lesotho health personnel attachments in facilities in RSA. The Program aims to establish the systems, experience and credibility required to receive budget support to the health sector, and to employ common implementation procedures for the management of government and donor resources. During the second phase, the MOHSW will be able to demonstrate its capacity to employ the planning, management, monitoring and evaluation systems developed during the first phase. During the first and second phase, criteria for moving to budgetary support will be made explicit by each external partner and government. Performance triggers for the end of Phase II will encompass these criteria, and thus facilitate a change in disbursement and implementation procedures during the third phase. C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): 1. Health Sector Reform. The Reform Project components will be jointly supported by the GOL and its partners, including IDA. A. Financial Planning and Management: The Project will support the development and installation of Financial Management and Information Systems which will support health sector information and management requirements, integrated budgeting procedures and the development of a Medium-Term Expenditure Program. B. Planning and Monitoring: The Project will support capacity building for Program Implementation and Management; Monitoring and Evaluation systems and capacity; Health Management & Information Systems, including surveillance systems; and the development of Annual Reports. It will support the identification and prioritization of the health interventions which will comprise the District Health Package, and development of national standards for delivery of these essential health services. It will also support the establishment of Physical Planning and Maintenance systems and capacity (including basic Geographic Information Systems for tracking health facilities and catchment populations). C. Human Resources Management: The Project will support the development and implementation of Human Resource Information System; development, production and agreement upon a Human Resource Development and Strategic Plan; in-service training; and incentives for staff, including training and staff housing. D. Partnerships: The Project will support the analysis, development and consensus upon the Agreement between Government and the Christian Health Association of Lesotho (including rehabilitation of CHAL facilities); reconvening of the Lesotho/South Africa Health Committee; preparation for and implementation of Annual Joint - 18 - Reviews, and development with external financiers of Common Implementation Systems. E. Preparation for Phase II of Reforms: The Project will also support activities required to prepare Phase II of the Program. These include further informing strategy development through meetings, special studies and training; developing proposals for piloting new sector financing initiatives (revised user fees and risk pooling options); and producing tender documents for civil works to be undertaken in Phase II. It will also support the Functional, Financial and Economic Analyses required to define the future function and requirements for referral, in particular for Queen Elizabeth II Hospital. II. HIV/AIDS Prevention and Control: The Project will channel resources to the Lesotho National AIDS Program in support of the government's efforts to respond to HIV/AIDS. To expand government capacity, these resources will support activities to reduce the transmission of HIV and mitigate the impact of HIV/AIDS implemented by (i) multiple sectors of government and (ii) non-government entities, including the private sector, NGOs, and CBOs. Indicative Bank- % O - Ompon nt -Setor sfiaing d nk- ___________________________ i -J$$m) Total tsw$M i financing I(A) Financial Planning and Other Population, 1.13 5.5 0.73 11.2 Management Health & Nutrition I(B) Planning and Monitoring Other Population, 8.43 41.3 2.59 39.8 Health & Nutrition I(C) Human Resource Management Other Population, 3.42 16.8 0.94 14.5 Health & Nutrition I(D) Partnerships Other Population, 1.10 5.4 0.05 0.8 Health & Nutrition I(E) Preparation for Phase II Other Population, 3.67 18.0 0.19 2.9 Health & Nutrition II. HIV/AIDS AIDS, STDs 2.00 9.8 2.00 30.8 Contingencies 0.65 3.2 0.00 0.0 Total Project Costs 20.40 _ 100.0 6.50 100.0 Total Financing Required 20.40 100.0 6.50 100.0 2. Key policy and institutional reforms supported by the project: The Health Sector Reform Program supports the following policy and institutional reforms. Some of these areas of reform will be more directly addressed during Phase II: Policy and Institutional Reform which will pilot or test, critically assess and revise proposed reform strategies, and brought to scale during Phase III: Nationwide Implementation. Phase I: Strengthening Institutional Capacity will address the information requirements, planning and management capacity and monitoring an evaluation systems required to refine, implement and evaluate reform strategies. - 19 - Reforming the Role of the Public Sector: Formalizing an Agreement with the- lead private sector actor, Christian Health Association of Lesotho -The Project supports the development of a formal agreement with CHAL. The priority accorded this agreement recognizes that the non-governmental sector is a critical partner in achieving sectoral aims, and recognizes the lead role of the mission facilities. Reducing the direct role of government in service delivery: The Program will support looking at options for outsourcing non-clinical services and contracting out hospital management as a way to expand limited public sector capacity. Financial Reforms: Reallocation of public expenditure to improve equity - Under the Project, population-based surveys and improved financial information will provide the foundation required for government to reconsider how its budget and expenditure patterns can be made more consistent with stated aims of equity and coverage. One aim of the financial reforms is to redefine allocation mechanisms. Through the work on financial information and health information, the Program aims for gradual reallocations of public expenditure. The Medium-Term Expenditure Program, which is a requirement for moving into Phase II, will be the indicator of the commitment to reallocate. New Approaches to Sector Financing- The Program will support efforts to explore and test approaches to improve sustainable financing, including risk pooling mechanisms, and the expansion of community-based financing schemes. The Sector Financing Strategy produced in Phase 11 will further support the explicit understanding of the role of government financing. Prioritizing Essential Health Services: The Project will support the process of prioritizing a package of health care interventions for delivery at district level (district hospital and below). This prioritization process implies that government will define explicit criteria for prioritization. Although the MOHSW has indicated this will be burden of disease, cost-effectiveness analysis, community demand and the impact upon vulnerable groups, political considerations may demand that other criteria be included. The prioritized services will guide investments in infrastructure, equipment and training, the setting of national drug policies, and human resource requirements for the sector. The Ministry has indicated the District Package, and achieving increased coverage with these services, will be what drives the reforms. 3. Benefits and target population: The Project responds to repeated assessments pointing to the poor capacity of the system to perforn cost-effectively, and to the recognized need to ensure that the institutions which will guide health systems development in Lesotho are able to design and undertake strategies which will enable the system to anticipate and cope with the increasing demands upon it. The Program will serve the entire population of Lesotho (2 million), as it aims to strengthen and ensure the sustainability of access to health services for all Basotho. The achievement of Program aims should, however, preferentially respond to those individuals who are currently underserved, as it aims to rectify imbalances in budget allocations and to increase client satisfaction in rural more than in urban areas. It will also improve access to the defined District Health Services, reallocating subsidies away from referral care which typically benefits the higher socio-economic groups. Criteria for inclusion in the package include how well the services respond to the needs of the underserved, including the poor, women and children (25% of households in Lesotho are headed by single women, and an additional 30% by women whose husband works away from the home, usually in South Africa). Findings from the FYOO/01 ESW on the Impact of HIV/AIDS in Lesotho, Botswana and Namibia may have additional implications for the targeting of public subsidies and of health services. - 20 - Per the 1996 Pathway out of Poverty Report, 90% of the poor live in rural areas, 54% of rural households are poor, and 80% of the population live in rural areas. Rural residence as an indicator of poverty would capture most of the poor (sensitivity is 90%), but would also serve many non-poor (specificity is only 27%). The Report concludes that there are no easily measurable indicators of poverty with acceptable levels of error which might be employed in targeted assistance programs. Districts with the highest incidence of severe poverty receive among the lowest per capita allocations frcom the MOHSW. The inequitable distribution of government resources for health is a factor not only of the distribution of staff and infrastructure in remote areas, but also utilization patterns in rural areas. *The aimed for revisions in allocation therefore cannot be effectively achieved through supply driven, but will be dependent upon increased care seeking in rural areas. The Program component on the District Package includes interventions to address care seeking behavior among the underserved populations. The experiences of other countries have demonstrated the unequivocal impact of HIV/AIDS on poverty at the household level. Through the AIDS component the Program aims to address both the health and poverty consequences of the HIV pandemic. The prevention and community-based care and support interventions will in a complementary manner aim to prevent and, where HIV infection already exists, aim to reduce the burden of AIDS on households. Specific communities that are affected are retLrning mineworkers and their families, and these will be targeted through the AIDS component. However, given the stage of the pandemic in Lesotho, the need also exists to scale up the response across all sectors and geographic locations. 4. Institutional and implementation arrangements: Financial Management, Procurement and Disbursements: Technical Assistance and Capacity Building: During Phase I, the ongoing reform of GOL procedures and institutional structures for financial management and procurement, as well as program management, monitoring and evaluation, will be supported by external expertise. The launch will mark a significant increase in the workload of the Ministry, as a large number of activities are planned to be implemented within a short time-frame. Moreover, since most of these activities are direct,ed toward the building of MOHSW capacity, it is clear that the Ministry will not initially have the capacity to implement these activities without technical assistance. Within the framework of the restructured Ministry and consistent with the aims of the Sector Program. Project Management will be integrated within the structures of the MOHSW. This constitutes a departure from the past practice of implementing through Project Implementation Units (PIUs). The units responsible for planning, implementation, and monitoring functions will be assisted by focused, external TA at various management levels. The TA will work with and build the capacity of the same management structure and staff who will be in charge of implementing the reforms and investments envisaged in the Phase II of the Program. The relevant departments and offices will be strengthened through transfer of staff, recruitment, and TA. This will reaffirm MOHSW functions and organizational structure. Key to the sustainabilitv and transfer out of TA will be the prompt designation of staff to the unit. Financial Management: As part of the project's objective of establishing the capacity required to cnable the MOHSW to develop, implement and monitor a comprehensive Sector Program to achieve the stated sectoral objectives, reforms in financial management and the Ministry's Financial Management and Information System (FMIS) will be introduced. A project-financed FMIS Technical Assistance Team will be recruited to design the management systems and their roll-out during the first 24 months of the project. Pending the completion of the FMIS consultancy, a transitional arrangement will be implemented in the - 21 - interim to facilitate timely accounting for the IDA credit, counterpart funds, and other donor partners, with the additional purpose of beginning to consolidate the previously externally operating arrangements by donors and IDA. Under the supervision of the Financial Controller of the MOHSW, a new Project Accounting Unit (PAU) is proposed to be established at the Ministry to be responsible for financial management and reporting arrangements under the reformed FMIS procedures as well as the interim arrangements. A Financial Management Action Plan has been defined with the MOHSW as the basis for the transitional arrangements toward the reformed FMIS. Key aspects of this plan include: (i) A New Financial Management Structure for the Ministry of Health and Social Welfare, to include: (i) the merging of individual projects' financial units into one financial management unit (PAU) responsible for ensuring that financial management and reporting arrangements will be acceptable to IDA and other cooperating partners; (ii) the appointment of a Financial Management Committee (FMC) responsible for monitoring the work of the PAU and its technical assistance (TA), for providing support and guidance, and for ensuring that the recommendations made are given timely consideration by the relevant authorities (see Financial Management Action Plan in the project files for Terms of Reference for both PAU TA and FMC); (iii) appointment of a qualified Chief Accountant (see Financial Management Action Plan in project files for Terms of Reference) and additional accounting staff to the PAU; and (iv) the appointment of qualified and experienced accounting, administrative/procurement and support staff to the PAU with a substantial investment in staff training in key identified areas. (ii) The Development of an Internal Controls/Financial Procedures Manual (see Financial Management Action Plan for indicative outline). (iii) Information Technology, to include (i) a determnination of hardware, software, and training requirements by the FMIS consultants and financial management TA in consultation with the - Accountant General and FMC to enable MOHSW to satisfy IDA and the Program's financial management information requirements; and (ii) the introduction of a transitional arrangement to facilitate timely accounting in the interim of funds from the IDA credit, cooperating partners, and GOL counterpart funds. (iv) The availability of Counterpart Funds will be assured by opening a current account in Maloti with a three-month float, to be thereafter replenished monthly by the Treasury. (v) Annual Independent Audits. Procurement under the Project will be managed by the new Procurement Unit to be staffed by a Procurement Advisor and support staff at the outset of the Project. The Procurement Advisor will work with the Health Planning and Statistics Unit (HPSU) to develop Annual Procurement Plans. The PAU and Procurement Unit will also work closely together. This integration of functions will facilitate the increasingly interrelated nature of these functions under the Bank's new LACI disbursement system, in which quarterly disbursements are made against Project Management Reports (PMRs). Thus, the MOHSW will need to be staffed with sufficient capacity to execute procurements under the World Bank's procurement guidelines. To reflect the inter-relationship between financial management and procurement, procurement procedures will be documented in the Financial Procedures Manual. Disbursements will follow existing IDA disbursement procedures (i.e. Direct Payment, Reimbursement, and Special Commitment) during the first 18 months after credit effectiveness, after which time a transition to quarterly PMR-based disbursements under LACI is anticipated. The PAU will maintain bank accounts as follows: (i) a Current Account in Maloti in a commercial bank to which drawdowns from the Special Account will be credited for project financing and administrative expenses; (ii) a Special Account managed - 22 - by the Central Bank held in a commercial Bank in US Dollars; and (iii) a Project Account into which the counterpart funds will be deposited. The inter-relationship among these accounts is detailed in the Financial Management Action Plan. Monitoring & Evaluation: Monitoring and Evaluation of the Health Sector Reform Program will be coordinated by the newly established M&E Unit within the HPSU. The MOHSW has employed a Logical Framework to help them consider how sub-sectoral outcome objectives (e.g., for infrastructure, human resources, financing, etc.) will contribute towards the impact objectives of the Program, and how Project activities will contribute towards sub-sectoral outcome objectives. It has also helped them to develop indicators of achievement and/or for monitoring progress towards sub-sectoral objectives. This logframe, and the performance indicators contained therein, along with a list of "core indicators" have been agreed among all partners as the shared basis on which the Program's progress will be assessed. Donor missions will be coordinated around Joint Annual Reviews each October to reduce the burden on government to report to multiple agencies, and also to support efforts to maintain a comprehensive perspective on the sector. The Annual Review will comprise both a retrospective function and a prospective function. The MOHSW will present its objectives and workplans for the coming year, and the accompanying budgets which describe sources of funds and expenditures. It will also present an Annual Report on the progress in the Sector Reform Program covering the prior year. The Annual Report will include the status of core indicators, as well as on progress against plans within each unit of the MOHSW, and by Health Service Areas or Districts. The format for the report will aim to respond to the requirements of all external partners, so that the MOHSW will not need to produce separate reports for each agency. This will include an agreed format for reporting expenditures against budgets of donor and GOL resources. A baseline survey has been supported under preparation and the results should be available prior to Effectiveness. A similar survey will be commissioned at the end of Phase I, and a Joint Evaluation will be conducted at the end of Phase I to determine whether the Program is ready to commence Phase II and to informn the detailed plan of Phase 11. Involvement of NGOs and CBOs in implementation of HIV/AIDS Component: In order to facilitate and expedite the implementation of the HIV/AIDS Component, an Implementing Agency will be contracted by the Lesotho National AIDS Control Program (LNACP) to perform manage, monitoring and evaluate AIDS activities supported by the Project. The LNACP will be responsible for management oversight of the Agency, and the contractual relationship will be evaluated annually. The vehicle for implementation of most of the AIDS interventions will be NGOs/CBOs. The activities undertaken by NGOs/CBOs will be within the framework set out by the National AIDS Strategy (drafted by the LNACP), and Annual Implementation Plans (prepared by the contracted Implementing Agency). The Agency will employ criteria established by the LNACP for what activities will be supported, will produce iRequests for Proposals, review proposals, propose awards of grants to the LNACP, issue grants, monitor the work of the grantee NGOs/community-based organizations (CBOs), and will assess impact of the work undertaken. The PAU and MOHSW Procurement Unit will support this component and disburse against expenditures incurred by the Implementing Agency. -23 - D. Project Rationale 1. Project alternatives considered and reasons for rejection: A short-term Capacitv Building Project or Technical Assistance Project may have been designed as a stand-alone project to precede support to the longer-term Sector Program. The MOHSW has worked intermittently to develop the Sector Reform Program since 1996 with the anticipation of joint donor support; a further postponement in evidence of IDA commitment to the program would discourage staff, and potentially undermine the commitment to the Program. The main sector partners agree that the general aims for sector reform and development are valid, and it is only with continued engagement that a quality program for implementation will continue to evolve. Awaiting the completion of perfect designs would not recognize the political and social realities of reform. Although the capacity to manage and implement a Sector Program is today insufficient, a capacity building effort cannot be effectively conducted without appreciation for the longer-term sectoral aims which provide the standard against which to measure capacity. Current capacity constraints have been addressed by reducing the ambitions for the Project, and by spacing Program activities more reasonable over time. Capacity will also be fostered by the incentives inherent in the APL to reach stated objectives and demonstrated achievements. A disease program focused approach may have been taken to target specific health problems. The previous two IDA-financed HNP projects in Lesotho have emphasized short-term, program output oriented aims rather than long-term sustainable sectoral outcomes, and have employed a more "traditional" project approach addressing specific health programs: tuberculosis, sexually transmitted diseases, family planning, and nutrition. These efforts have resulted in improvements in priority program design and strategies, and some reported gains in coverage, but these gains have proven unsustainable, and have not improved the capacity of the country to continually adapt the health sector to respond to evolving health needs. The proposed Program and Project recognize that sufficient institutional capacity is required to absorb and utilize information on international best practice, and strengthen strategies for addressed priority health concems. A Specific Investment Credit or Sector Investment and Maintenance Credit were both rejected in favor of an Adaptable Program Loan. The type of sustained system strengthening, which is integral to realizing the development objective, demands careful monitoring and adaptation of the project as it evolves. The timeframe required to realize sustainable institutional change, combined with the opportunity to tie allocations to achievements, is strongly supported by the APL. The poor track record on disbursements suggests that a phased approach with objectively verifiable triggers for moving into the next phase and next tranche would set better incentives then either a short-term program (with limited opportunity to assess progress), or longer-term horizon combined with limited recourse if initial expectations prove too ambitious. - 24 - 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supeorvision Sector Issue : Project (PSR) Ratings ._____ _____ ____ ________ ________ ______j (Bank-financed projects only) llmplementation Development Bank-financed Progress (IP) Objective (Do) Rural & Urban health services, Family Second Population Health and U U Planning, Disease Control, and Nutrition Project - closed Institutional Development March '98 (ratings from OED) Community-based approach to use of Community Development social fund, poverty monitoring Support Project. Approved 12/20/1999 Public sector financial management, Public Sector Improvement employment and legal frameworks. Project. In preparation. Expected Board date 7/18/2000 Other development agencies TB Control, cytology, medical Irish Aid laboratory strengthening STD/HIV/AIDS WHO & EU Family Health UNFPA Safe Motherhood, EPI, Childhood UNICEF & WHO Communicable Diseases and ARI Nursing Training Kellogg Foundation Rural Sanitation EU, DflD & Irish Aid TA in Financial management and European Commission Health Planning Rural Health Services (clinic African Development Bank construction and training of staff) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) -25 - 3. Lessons learned and reflected in the project design: Attention to the foundations which will inform, facilitate and support reform objectives is required to ensure that effective strategies are designed, that they are assessed and that the capacity exists to carry out the strategies for reform. The stepwise process builds upon experiences in Lesotho's Health Sector and elsewhere in the region. Where ambitious reform programs have been defined underlying weaknesses in manpower policies, planning expertise and procedures and monitoring systems have been revealed. Although many countries in the region have defined a goal of coordinating all sources of public sector financing around a single budget, success to date has been limited as existing financial information does not readily support such aims. Although human resource constraints in the public health service cannot generally be fully resolved outside of broader civil service reform, there are improvements which the sector can undertake in the interim to ensure motivated and competent staff, who are critical to the success of reform strategies. Where gaps in technical expertise have been identified, additional investments into training have produced poor returns: 30% of staff trained under the IDA-financed Second Population, Health and Nutrition Credit and 30% of WHO scholarship students have left the country. Efforts to improve planning, monitoring, and accounting have met with even less success, as cited above in the MOHSW concerns and within the Implementation Completion Report for the Second Population Health and Nutrition Project (2059-LSO). "Organizational and managerial constraints" and "human resource constraints" are cited repeatedly within the Ministry's own reports. The government describes immunization, acute respiratory illness (ARI) and control of diarrheal disease (CDD) objectives as "set back" with the withdrawal of United States Agency for International Development (USAID) support, yet the MOHSW underspends its own budget, so the financial resources provided was apparently not the variable which undermined these programs. The Bank-supported efforts in tuberculosis and HlV/AIDS remain dependent upon foreign TA. Other donor agencies cite institutional capacity and staff turnover as the main constraints to achieving stated objectives within their programs of support - this includes WHO and UNICEF whose institutional mandates do not usually result in such attention to institutional strengthening over targeted health interventions. Experiences by all agencies confirtn the key constraints of human resources, financial managemcnt and monitoring. The implementation completion report (ICR) for the Second Population Health and Nutrition Project identifies the component on institutional development as the least successful. The challenges of addressing institutional constraints were given less attention over the more readily achievable gains in sub-sector programs, yet these achievements -- without greater institutional capacity -- are temporary at best. Efforts in family planning, disease control, nutrition and infrastructure development were judged more successful, although their sustainability is questioned, as many of the staff trained under the project have left the country, as facilities which were constructed are not fully operational and as no maintenance plans exist. The main lessons for future operations cited within the ICR emphasize (i) the need for ensuring sufficient ownership and commitment to the program; (ii) sufficiently appraising institutional capacity and tailoring the project to borrower's capacity; (iii) focusing on institutional strengthening to ensure sustainability of objectives; (iv) the importance of sufficient supervision; (v) the need to include a broader range of expertise in Task Teams; and (vi) the importance of monitoring systems for assessing project impact. - 26 - The proposed program for IDA support responds to these lessons. The selection of an APL and a phased approach is intended to facilitate ownership and commitment, and the ESW, which supported the development of the booklet on reforms, has aimed to ensure widespread ownership outside of the central Ministry. An Institutional Capacity Assessment has been undertaken, and has helped to inform revisions in the Project Implementation Plan. The program focuses throughout all phases on institutional strengthening, but in particular in Phase I, addresses requisite capacity to plan, implement and monitor. The Bank Team Task involved in preparation has included not only health expertise, but also health economics, human resource development, capacity building and financial management. 4. Indications of borrower commitment and ownership: Since 1996, the MOHSW has been developing plans and building consensus around a program of reforms which aims at improving "equity", "social justice" and "coverage". They have involved stakeholders throughout the system as well as external partners in the drafting of detailed objectives and strategy for reforms. Over the past year, multi-disciplinary, and widely representative Working Groups have been developing the objectives, strategies and detailed workplans for the various components of the described system reforms. Each of the seven components of the Program (human resources, infrastructure, financing, decentralization, district health services, pharmaceuticals and partnership) has had input from a wide range of stakeholders. The production of the 1996 Sectoral Round Table Consultation Document and the Health and Social Welfare Sector Plan (1995/6-1999/0), the marketing booklet Strengthening Lesotho's Health Care System, together with the commitment of the Working Groups and production of the draft Implementation Plan for Reforms evidences commitment and ownership. The draft Health Sector Reform Plan, a product of the Working Groups, was revised following regional consensus meetings. The Pre-Appraisal mission was conducted with multiple donors and other stakeholders (CHAL, district staff, NGOs, training institutions, Ministry of Works). Joint GOL/Donor Missions, and Annual Joint Reviews will help to support the GOL's desire to remain in the driver's seat. Since 1996, the MOHSW has stated its intent to develop a single, comprehensive Sector Program into which government and all partner agencies would contribute. The proposed Phased approach and capacity-building emphasis responds to the government's longer-term aim of budgetary support to a government-defined and managed program. Since October 1999 the GOL has undertaken its own process of developing a policy regarding HIV/AIDS and has proposed management and coordinating structures for its implementation. The GOL has formally recognized HIV/AIDS as a development problem, and King Letsie III has declared HIV/AIDS "'a disaster of national proportion deserving national priority status " (GOL Policy on HI V/AIDS and STD Prevention and Control). The AIDS Component of this Program is the vehicle for translating the policy into action at every level. The ownership by the GOL of this process to date and its appreciation of the magnitude of the HIV/AIDS problem augurs well for future commitment. - 27 - 5. Value added of Bank support in this project: There are few development agencies active in the health sector in Lesotho. WHO and UNICEF are present, but do not have large operations (reilecting both Lesotho's relatively favorable level of development, and its size). They are also not financing agencies. The European Union has provided significant support for health in the past, but currently is only in a position to provide technical assistance. If the GOL can produce a credible Sector Program and Medium-Tenn Expenditure Framework, and demonstrate its capacity to implement the program and manage external resources, the EU is prepared to provide budgetary support in the future. Although AfDB potential financing is significant, neither they nor the EU have sufficient technical capacity to monitor support to a Sector Reforms Program, and relies heavily upon Bank assessments and supervision. The Bank's proposed mode of support (i.e., a sector-wide program supported through an APL) has fostered a sector-wide perspective, the ownership required to sustain progress, and a demand for the information required to plan, monitor and react effectively to sectoral needs. The Bank initiative has encouraged other agencies to consider how each can best coordinate support which will tap into its specific comparative advantage. The Project emphasis on monitoring and evaluation reflects the strong input of the Bank Task Team in sharing global experience in reform. Many of the institutional constraints cut across the sectors, and some of the capacity and authority required to resolve these constraints lie outside of the Ministry of Health. The Bank Country Team is addressing similar institutional constraints in Agriculture and Education, and thus able to share experiences and coordinate activities across the sectors. Similarly, the Bank is in a position to collectively influence some of the changes which must be instituted in central Ministries such as through the HIV/AIDS Impact ESW, financial management reforms, and the Public Sector Improvement and Reform Project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): Cost benefit NPV=US$ million; ERR = % (see Annex 4) Throughout the 1990s, the recurrent and development budgetary allocations have been under-utilized and under-spent; > QE II Hospital receives more than 30 percent of all recurrent health expenditures. At the same time, cost recovery rates are significantly lower in QE II than in district health facilities: > Per capita allocations in Maseru District (after tertiary expenditures are excluded) are more than twice the allocation in six of the nine districts. Thaba Tseka and Mohale's Hoek -- among the poorest districts -- receive the lowest allocations. - 28 - A more general finding of the working group, but one that contributes to some of the characteristics above, is that financial information is not available in a timely or sufficiently disaggregated format to the managers and policy makers who most need it. This is discussed further in Financial Management. A Medium Term Expenditure Framework will be established over Phase I to correct some of the highlighted inequalities and inefficiencies. Under the MTEF, budget procedures and appropriations requirements will be assessed in order to move budgeting towards an outcome budget where allocations correspond to priorities. Development of an MTEF is opportune as a similar exercise is underway in the education sector and it is expected that the financial infornation would be more readily available following the improvements in financial management desc-ibed below. In addition to reviewing public health expenditures, economic analysis has been, and continues to be, utilized to assess various proposals put forth to rationalize and improve health service delivery. One of the most important of these concerns the future financing and governance of mission health facilities which provide nearly half of all health service delivery, often in the poorest and most remote areas. Over the past decade, mission facilities have faced declining levels of support from abroad and have been forced to charge user fees two to three times the levels found in government facilities. Despite higher fees and subventions from government, mission facilities continue to face severe financial challenges. A study is currently underway to develop a financing agreement that will take advantage of the strengths of the autonomous mission structure while providing assurances that government funds are utilized appropriately. The other effort towards rationalizing public health services is embraced within the commitment to defining a package of essential health services (the District Package) which will prioritize health service delivery through the publicly financed system based on cost effectiveness, and responsiveness to the needs of the most vulnerable groups in society. The impact of HIV/AIDS on the costs of health care are already significant, and will certainly increase over the life of the Program. Initial projections were made during project preparation and suggest that HIV prevalence could grow from 10 percent of the adult population in 1999 to as high as 18.5 percent in 2003. AIDS cases could grow from 1.3 percent of the adult population to 2.3 percent by 2003. The impact on health care costs vary depending on coverage rates and the unit cost of care provided. However, even in a low cost scenario, the cost of in-patient care could be as high as US$ 4.5 million per year by 2003, while a high cost scenario could be as high as US$ 18 million per year. These projected costs, while tentative, stimulate debate around the issue of HIV/AIDS prevention and treatment strategies. The economic impact of AIDS is highly complex, and is likely to be felt through a variety of channels: (1) Impact on labor markets: lower productivity due to increased absenteeism and reduced work performance; increased turnover rates and lower returns to investments in formal training; reduced supply of skilled labor; (2) Fiscal Impact: increased social sectoral expenditure on care and social support;, possible decrease in tax revenue base; and (3) Household impact: shifts in household consumption expenditure towards health care; decreased saving and investment; increased poverty and inequality. AIDS is also likely to have a negative impact the ability of government departments to perform its functions and to deliver services, especially in sectors that use highly skilled or specialized labor inputs. The most important economic impact of HIV/AIDS is likely to be the impact on the miners, given the magnitude of their contribution to the economy of Lesotho. The high prevalence rates being reported on South African mines suggests that workers' remittances can drop by as much as 50% in the near future. Another important economic impact will be the impact on the Lesotho Highlands Water Project (LHWP). Given how central LHWP is to present and future economic growth the impact of the epidemic on the LHWP workforce needs special attention. Lastly, is the impact of HIV/AIDS on Lesotho's export - 29 - processing zones. The development of textile exports was a relative success for Lesotho (presumably the main source of income earning in the manufacturing sector). Increase in labor costs could be devastating for this sector. 2. Financial (see Annex 5): NPV=US$ million: FRR = % (see Annex 4) Financial Management: The Ministry's financial management and information systems (FMIS) constitutes another focus of reforms under the program. The MOHSW does not currently have sufficient financial management capacity to inform decision-makers or to budget and allocate resources against sectoral objectives. Further, financial management -- particularly with regard to the cost sharing program -- is a weakness that has been highlighted in the Implementation Completion Reports of past IDA credits to the sector. Therefore, the project will heavily emphasize financial management and information systems. Under the Policy and Human Resources Development (PHRD) grant, the MOHSW has requested proposals and awarded a two-year contract to assess financial information and management needs, design appropriate systems, install systems, and train staff to utilize financial information and manage resources more effectively. The MOHSW will seek to improve their FMIS to complement efforts by Ministry of Finance to improve the government-wide accounting system and to develop a single, comprehensive, responsive FMIS integrated within the Government of Lesotho Financial Information System (GOLFIS). The principal objective of the reformed FMIS will be to support management in the deployment of limited resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes to serve to the needs of the people of Lesotho. This improved system will enable MOHSW to monitor and employ sufficient financial information so as to assure the GOL and external financiers that management and policy decisions are well-informed; account for the use of resources at each level of the system (in a potentially decentralizing system), employ common auditing procedures and enable the MOHSW to report in a single format to all its financiers (donors, IDA, and Government), and which can gradually facilitate the provision of budgetary support to the health sector from multiple donors. Project-financed Technical Assistance will be selected prior to Effectiveness and begin work immediately following effectiveness for a period of 24 months, following which the necessary financial management reforms are expected to be introduced. Within 18 months, the project is expected to complete the transition to quarterly Procurement Management Report (PMR)-based disbursements under the Banks Loan Administration Change Initiative (LACI). Fiscal Impact: The fiscal impact of the Project (Phase I of the Program) will be minimal. As noted above, the first phase focuses on revising and integrating health, financial, and human resource information systems and building the institutional capacity to undertake more efficient planning and monitoring functions. These types of activities do not generate significant recurrent cost implications. To the contrary, it is expected they will create significant efficiencies and cost savings in the medium and longer term. The current Project budget captures the "additional" activities that will be undertaken in the next few years-- that is, the additional consultancies, training, equipment, etc. that will be procured and financed to implement the envisaged reforms. Since a goal of the Program is to integrate systems, including the process for developing the recurrent and capital budgets, the role of developing the integrated budget and the MTEF scheduled under the Project is critical. Special efforts will be undertaken to review items and ensure that any changes in the way MOHSW operates as a result of the reforms (more staff located in rural areas, more responsibilities and funds controlled at the district level or provided to CHAL facilities, etc.) - 30 - are captured in these budgets and in the estimates of recurrent expenditures so as to provide a better understanding of the implications of Health Reform and the sustainability of continuing investment. 3. Technical: The health sector strategies have been, and will continue to be, reviewed by Bank staff and consultants comprising expertise in human resource development, physical planning, pharmaceuticals, public health, economic analysis, institutional capacity and HIV/AIDS. WHO, UNICEF, UNDP Irish Aid and AfDB are also engaged in reviewing technical validity and consistency with stated sectoral objectives. The Bank has assumed responsibility for assessing financing strategy, and infrastructure/physical planning. AfDB and Irish Aid have been reviewing human resource development strategies. WHO and UNICEF will continue to review disease control, family health, nutrition and service delivery components, and WHO will address pharmaceutical issues. Technical reviews during Joint Pre-Appraisal and Appraisal missions were charged with assessing the technical viability of each component of the Sector Reform Program. Feedback from specialized external staff was provided to each Working Group, and the Program Plan reflects modifications based upon this interaction. The current draft of the Program is much better targeted, justified and prioritized. Although the joint preparation team has comprised three different external experts on human resource development, the challenges in Lesotho demand more innovation. The pharmaceutical sector in Lesotho (unlike elsewhere in the SSA Region) is not a key constraint to service delivery. The main concerns are around efficiency, rather than effectiveness. During Phase I staff will participate in regional training courses on pharmaceutical management which are intended to give them more exposure to approaches undertaken in other countries outside South Africa. Also, the composition of the District Health Package will be defined during Phase I. This effort demands significant attention and support, and sufficient specialized support to this exercise during Supervision will critical. Collaboration with WHO and other technical agencies has been established to support this effort. HIV/AIDS is acknowledged to be a severe problem for the Basotho, and the MOHSW HIV/AIDS program has received significant external support (from IDA, EU and WHO), however, the implications of AIDS on sectoral ambitions are still not sufficiently appreciated. This is a regional issue, and one with which the Bank and WHO are increasingly being presented. The Task Team acquired support from UNAIDS' unit on IV and Health Reforms to assist the GOL in considering how HIV/AIDS objectives can best be served by system strengthening and capacity building, and to help to incorporate strategies to mitigate the impact of HIV/AIDS on the health sector's capacity to respond to other health needs. -31 - 4. Institutional: a. Executing agencies: OED has recently pointed out that the development effectiveness of HNP Operations is impeded by insufficient attention to addressing institutional capacity. The lessons learned within prior Bank operations in Lesotho's health sector suggest that this issue will not receive necessary attention if simply a token project component. Nor can these constraints be sustainably addressed through the use of a Project Management Unit. The project will focus during the first phase almost exclusively on institutional capacity, and has defined triggers related to improvements in capacity, as described within Section A Program Purpose and Project Development Objective. An Institutional Capacity Assessment has been conducted by staff from the Africa Region Capacity Building Unit. Findings reinforce the appreciation and understanding of capacity constraints described in Section 2B: Main Sector Issues and Government Strategy. The work has been appreciated by the client, and has helped the MOHSW to think through the capacity required to implement and monitor the program they have developed. The scope of the Program and Project have been continually modified over the preparation period to ensure that it would be implementable given current and anticipated capacity. The longer-term expansion of sectoral capacity might be partly achieved through building stronger linkages with South Africa, and through increased recognition of the potential role of the private sector. Possibilities which will be explored include pharmaceutical regulation, training, specialized health services, contracting out non-clinical service, and contracting out health service delivery. The Reforms strategy includes the soliciting of proposals to pilot, evaluate and/or analyze such approaches. b. Project management: The project will be implemented by the Ministry of Health and Social Welfare (MOHSW). Overall Project and Program decision making will be vested within the Principal Secretary and his Senior Management Team. In order to avoid parallel systems, increase capacity, and integrate the management of the project into the Ministry, the Project will not establish a Project Implementation Unit (PIU). Instead, specific roles and functions for project management will be supported through technical assistance placed within the units which will hold ultimate responsibility for the respective roles and functions of Project Management. Existing capacity - meaning individual skills, systems and procedures are insufficient and the additional technical inputs are essential. However, by placing these functions directly within MOHSW structures, it is believed that additional leaning, on-the-job training and appreciation of the level of skills and procedures will be institutionalized. Overall Project Management will be supported by an Operations Manager who will report directly to the Principal Secretary. This individual will be hired for the duration of Phase I and is intended to bring the skills, tools and techniques of management from the business sector into the Ministry of Health. A main function will be on-the-job training, the transfer of management tools, and the development of systems and procedures. - 32 - 5. Social: Little evidence exists on equity, social justice and coverage, thus assessing the potential of the MOHSW to impact upon these sectoral goals is today an uninformed exercise. The efforts to procure baseline information and install useful monitoring systems -- combined with the Core Welfare Indicators Questionnaire under the IDA-financed Conmmunity Development Support Project -- will help to inform public sector strategy on poverty alleviation. The little analysis to date which addresses public expenditure and a survey on household expenditure which has recently been undertaken, together with the Project activities on monitoring and evaluation, should provide additional information on utilization and access. These are areas that will be explored within the Baseline Survey . As described within Section C3: Benefits and Target Population, the District Health Package seeks to prioritize specific health needs of vulnerable and under-served populations. These include the poor, rural and the large number of households headed by single mothers, although additional high-risk groups and strategies may be further identified under the HIV/AIDS component. Although the Basotho people are a common ethnic group, a very specific challenge is the "politicization" of the civil service. Decision making, staffing and collaboration among and between staff is affected by political/familial affiliations which can divide staff over technical and implementation issues. The ICR and institutional Capacity Assessment both refer to this challenge. The problem came to a head with the 1998 August/September civil unrest in the country. Since this time, political sensitivities have increased. The constraint is not limited to the MOHSW, and is recognized by the Country Team who have supported small-scale analyses which aim to help explain the cultural background to these schisms. A consultant, Team Technologies, was contracted under the preparation process specifically to address team building within the MOHSW and help address these challenges. The rational was that staff need to be convinced that within the sector they have common aims. Progress has been made on this front. The Country Team has also begun to define a Public Sector Improvement Project which could contribute to professionalizing the civil service. 6. Environmental assessment: Environment Category: C (Not Required) The construction of health facilities is the only identified area of possible risk within the Program, however under Phase I (the Project), construction is limited to minor works. Construction associated with rehabilitation under the Program will continue to be supervised by Bank consultant who has been involved in health infrastructure throughout the region. He will continue to ensure sufficient attention to medical waste, and that decisions on water and power are appropriate for the site. Within the drafting of the long-term facility development plan, the Task Team will flag attention to the environmental assessment requirements if new construction is implied. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: Following the Pre-Appraisal, the MOHSW, including Senior Management Staff, participated in a series of Regional Consensus Meetings. The feedback from the Consensus Meetings affected revisions to plans, strategies and priorities for action. The booklet, Strengthening Lesotho's Health Care System developed to help market the Health Sector Reform Program has been employed by staff in these various venues. - 33 - Preparation Implementation Operation Beneficiaries/community groups CON CON Intermediary NGOs CON Academic institutions COL COL Local government COL COL CON Other donors (AfDB, EU, Irish Aid, COL COL COL WHO, UNICEF) (CON = consultation, COL=collaboration) b. Other key stakeholders: The Sector Program deserves recognition for the involvement of a range of a wide range of stakeholders. To mitigate against changes resulting from the possible political changes, the coordinators have invited representatives of the shadow government to participate within planning workshops. Staff from the following agencies have participated within the Health Reform Working Groups charged with developing proposals for reform: CHAL, NHTC (National Health Training College), National University of Lesotho, Lesotho Highlands Development Authority (which operates health programs in concert with the Highlands Water Project), Local Government, National Drug and Supply Organization NDSO), Lesotho Pharmaceutical Company (LPC), local and international NGOs, Ministry of Finance and the Ministry of Economic Planning. Although in many cases, participants have had no expertise in the subject and their inclusion has consumed significantly more time and resources, the ownership and commitment to the Sector Plan has been significantly strengthened through the process. Efforts to market the aims of reforms outside of Maseru, to enlist support and to prepare staff and beneficiaries for changes have improved. F. Sustainability and Risks 1. Sustainability: The overall Project design has responded to lessons learned about sustainability of achievements within previous sector operations. Phase I of the Program aims to strengthen institutional capacity, and ensure that the government institution charged with assessing health needs and designing cost-effective and affordable responses has the capacity to do so. The justification for this approach is to increase the ability of the Program to reach the stated objective of a sustainable increase in access to quality preventive, curative and rehabilitative health care services. The previous efforts of development assistance in the health sector in Lesotho has focused on achieving improvements in priority health programs, but not in improving the ability in local institutions to continually evolve and respond to local health needs. The government's desire to reduce separate donor-supported projects and develop a single Program Plan and Budget should reduce the fragmentation of financing provided to the sector, improve technical and allocative efficiency of public expenditure, and ensure that investments are sustainable. Perhaps more importantly in Lesotho, the development of common implementation procedures will ensure that donors have a vested interest in building the institutional capacity of government to make allocation and - 34 - disbursement decisions, implement strategies, and evaluate impact, rather than establishing individual Project Management and Implementation Units which rely upon temporary capacity and systems. The Project emphasis on monitoring and evaluation and supportive information systems aims to improve the ability of the government to design and assess strategies. The setting of a Medium-term Expenditure Program as a trigger for the second phase ensures a long-term view, and explicit government commitment to the use of public financing. Reformns in program planning and budgeting should improve the understanding of how resources are being employed throughout the sector, and how existing resources are responding, and could better respond, to sectoral needs. The development of an integrated comprehensive budget is intended to better enable the government to assess the recurrent cost implications of investment made into the sector. Currently, the Health Planning and Statistics Unit can make decisions to program government investment or to accept donor investments which are not consistent with recurrent expenditures and a knowledge of human resource limitations. The experience of filter clinics constructed and equipped under the IDA-financed Second Population, Health and Nutrition Project exemplifies this problem. None of the facilities are currently fully function (and thus not achieving the objective of reducing demand upon the national referral hospital) due to a lack of staff, supplies and operating budget. The commitment to prioritizing a package of district health services recognizes the need to make explicit decisions based upon transparent criteria for what health services the government aims to ensure are available to the entire population. The Package implies a process of explicit rationing of care, which will become more critical in light of anticipated increasing demands due to HIV/AIDS, and associated health needs, in particular tuberculosis. The Economic Analysis in Annex 4 further considers the potential impact of HIV/AIDS upon financial sustainability. The development of a long-term Facilities Plan for the health sector responds to the need to assess the long-term affordability of investment into infrastructure and medical equipment. Although significant infrastructure investment was initially envisioned under the Program, the Ministry has made a strong commitment to predicating new investment upon a thorough economic evaluation of alternatives. It has also precluded new investment until the establishment of maintenance capacity, and until existing facilities are fully staffed. The Ministry of Health has emphasized cost recovery through user fees, and has managed to recover an average of 7% of recurrent costs (which is extremely high for the region). Questions have been raised as to the appropriateness of the fee schedules (do fees create the right incentives for care seeking, and do they recognize the effects on demand for public health services); the efficiency in the collection of user fees, and the impact fees may have upon care seeking among the poor. Other revenue-generating strategies, such as insurance schemes which would target the higher socio-economic groups and community health funds, such as the Bamako Initiative will be tested under the Program. The cost and function of user fees will also be assessed. - 35 - The recruitment and retention of staff is essential to achieving and sustaining project objectives. However, Lesotho is unlikely to be in a position to compete effectively with South African salaries. Thus, innovative approaches are required to address the human resource constraints which the sector can expect to continue to face for the foreseeable future. The Program will test mechanisms for expanding public sector capacity, increased partnership with the non-governmental sector and South Africa, but it will also seek to improve the management of health personnel within the civil service. Providing staff housing and responding to security demands of staff in rural areas, tying performance to advancement, tying training opportunities to job functions, and improving procedures for appointments, promotions and deployment should reduce current rates of attrition. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective Government will sustain budget allocation M The MTEF process has been allowed the entire to sector, and MTEF will be employed by duration of the first Phase in order to ensure that GOL and donors as financing framework it is sufficiently participatory, that commitment can be retained, and that we are able to realistically assess directions in allocations to the sector. Setting the GOL commitment as a trigger will ensure that prior to Negotiations, government considers the implications. The core external financiers, IDA, AfDB and EU have already committed to the MTEF in principle. A similar exercise in the Education Sector further supports acceptance of the concept. HPSU staff will ensure that information M The use of the APL with defined triggers and and monitoring systems are employed to short phases is intended to create incentives and inform the further refinement and foster demand for information, and quality revisions of sectoral strategies monitoring systems. Joint Annual Reviews of each subsequent year's Implementation Plan will require that the HPSU is able to justify plans based on experience the previous year. Strategic Plan and HRIS will improve M Technical inputs from the Bank Team and capacity of MOHSW to plan and manage Partners will continue to include HR expertise its human resources who can help monitor this component, and ensure that the defined approaches really are serving the project objective. Coordinated donor support and reduced N Donor commitment to operating in the mode of a fragmentation will improve technical and Sector Program is long-standing. The phased allocative efficiency approach to developing common implementation procedures and setting of measurable targets is intended to establish MOHSW credibility before agencies are asked to consider budgetary support. - 36 - Government of Lesotho will increasingly N During Pre-Appraisal and during Appraisal, the recognize importance of collaboration Bank Team and other partners have continued to with South Africa question certain activities that might not be cost-effectively undertaken by Lesotho in isolation of RSA. The political commitment to HIVIAIDS N Prominence of HIV/AIDS in ongoing dialogue prevention and control will remain high with GOL by all Country Team members. across all sectors. From Components to Outputs MOF will continue to support FMIS N The Country Team has continued to encourage development within MOHSW MOF to allow each sector to move forward in developing systems which will respond to sectoral needs. MOF was involved in the development of the TORs and selection of consultants. The TORs emphasize the need to serve the needs/objectives of Finance/Treasury as well as MOHSW. Consultancies can be initiated on schedule S The hiring of a Procurement Advisor as well as an Operations Manager have been defined as conditions of Effectiveness. This additional support will be required to ensure timely selection and appointment of consultants. Sufficient expertise is employed in S The Bank Team will need to continue to provide developing the District Health Package. significant oversight of this component as it develops, and sufficient resources for Supervision will be required. GOL/CHAL Agreement can be defined M The CHAL Agreement has been defined as a and accepted Trigger for moving into Phase II. Much preparation work has focused on developing an effective agreement. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: The Project was revised following the 1998 August/September period of civil unrest in Lesotho. The Task Team and Ministry of Health staff agreed that the establishment of an Interim Government Authority and commitment to hold government elections again in May 2000 would affect the ability of government to undertake policy and institutional reform. The resulting Project design reflects the decision to suspend efforts to achieve desired reforms until after the elections. These include affecting significant reallocations of sectoral expenditures, instituting new financing mechanisms and further decentralization. However, the CHAL/GOL Agreement continues to be sought within the early stages of the Project, as the current situation where the existing MOU is effectively suspended cannot continue. Also, there does appear to be widespread, nonpartisan support for reaching a common understanding of the relationship and the obligations of both parties. The political situation may make reach agreement upon the specifics of the agreement more difficult. Consultants have been hired whose scope of work includes defining and analyzing the various options, and making transparent and participative the analysis of how each might - 37 - serve the aims of the separate parties. G. Main Loan Conditions 1. Effectiveness Conditions I. Prior to Effectiveness, the Borrower will have prepared and furnished to IDA: (a) the Project Implementation Plan and a budget relating thereto; (b) a chart of Project accounts; and (c) an interim financial procedures manual for the Project. II. The Borrower will have installed an interim accounting system in form and substance satisfactory to IDA. III. The Borrower will have opened the Special Account, and a Project Account for counterpart funds, and paid into the Project Account an initial deposit equivalent to US$150,000. The Borrower will have advised the Bank of authorized cheque signatories for the accounts, including the provision of specimen signatures. IV. The Ministry of Health and Social Welfare will have appointed staff/consultants acceptable to IDA to the following positions: (a) Operations Manager to reside within the office of the Principal Secretary (b) Chief Accountant to reside within the Project Accounting Unit under the Financial Controller (c) Procurement Advisor 2. Other [classify according to covenant types used in the Legal Agreements.] Disbursements Prior to any disbursements against the HIV/AIDS component, the Government of Lesotho will contract the services of an Implementing Agency on Terms of Reference acceptable to IDA. Program Implementation I. The Ministry of Health shall prepare and submit to IDA, and all its partners, an Annual Health Sector Report which describes the status of core indicators, progress made in implementation, and proposes actions to be taken in response to lessons learned. II. Each October, the Ministry of Health and Social Welfare shall review with IDA and other Partners, the Annual Report, progress made in meeting the objectives of the Project, and the subsequent year's Implementation Plan and budget. III. Prior to the end of the Project (i.e., Phase I of the Program), the MOHSW will conduct an evaluation of progress towards stated triggers for moving into Phase II. Financial Covenants I. The Borrower shall maintain a financial management system, including records and accounts, and prepare financial statements in a format acceptable to IDA, adequate to reflect the operations, resources and expenditures related to the Project. II. The Borrower shall: (a) have these records, accounts and financial statements, and the records and accounts for the Special Account for each fiscal year audited, in accordance with auditing standards acceptable to IDA by - 38 - independent auditors acceptable to IDA; (b) furnish to IDA within six months after the end of each financial year: (i) certified copies of the financial statements audited, and (ii) the auditor's opinion on such statements, records and accounts and report of such audit; (c) For all expenditures with respect to which withdrawals from the Credit Account were made on the basis of Project Management Reports or statements of expenditure, the Borrower shall: (i) maintain or cause to be maintained, records and separate accounts reflecting such expenditures; (ii) retain, until at least one year after IDA has received the audit report for the fiscal year in which the last withdrawal from the Credit Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable IDA's representatives to examine such records; and (iv) ensure that such records and accounts are included in the annual audit, and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals. III. The Borrower shall carry out a time-bound action plan acceptable to IDA for the strengthening of its financial management system in order to enable the Borrower within 18 months to prepare quarterly Project Management Reports, (a) each of which: (i) describes sources and applications of funds for the Project both cumulatively and for the period covered, and projected sources and applications of funds for the Project for the subsequent six-month period; (ii) describes physical progress in Project implementation, both cumulatively and for the period covered by said report, and explains variances between the actual and previously forecast implementation targets; and (iii) sets forth the status of procurement under the Project and expenditures under contracts financed out of the proceeds of the Credit. (b) Upon the completion of the action plan, the Borrower shall prepare and submit to IDA a quarterly report, within 45 days of the end of each calendar quarter. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. X 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. gI 4. The following items are lacking and are discussed under loan conditions (Section G): - 39 - 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. D 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Julie VW hliA4 Dzingai B. Mutumbuka amela Cox Team Le, er Sector Manager/Director Country Manager/Director - 40 - Annex 1: Project Design Summary LESOTHO: Health Sector Reform Project Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Reduce poverty through > Infant Mortality Rate Demographic & Health Increased access and quality of investing in human reduced from 62 to 52/1000 Survey health services and the development: improve health > Maternal Mortality Ratio reduced impact of HIV/AIDS status reduced from 282 to Baseline Health Survey will contribute towards 141/100,000 alleviating poverty. > Reduced incidence of HIV, Health Information System TB, and STDs by 30% > Reduced prevalence of Sentinel surveillance malnutrition in children <5 from 34% to 20% > Total Fertility Rate reduced to x% > Reduced incidence of HIV by x%. -41 - Program Purpose: End-of-Program Indicators: Progr-am reports: (from Purpose to Goal) To achieve a sustainable > Increased percent of MOHSW Annual Report to be Increased access to quality increase in access to quality children under 5 fully presented to Annual Joint services increases appropriate preventive, curative, and immunized Review Meeting utilization of services rehabilitative health care > Increased TB treatment services success rate Demographic & Health Other key determinants of > Increase in anti-natal clinic Survey health status (women's attendance education, income) do not > Increase in percent of Baseline Health Survey deteriorate deliveries assisted by trained provider Routine Health Information > Increase in Contraception System Prevalence Rate (CPR) > Reduced prevalence of End of Phase Surveys STDs > Increased percent of the population within 2 hours Sentinel surveillance walking distance of a health facility meeting national standards for service delivery > Increased percent of recurrent costs recovered through fees and risk pooling schemes > Increased percent of GOL and CHAL health facilities staffed with standard number and type of qualified staff for level of facility > Reduced variance in per capita weighted allocations to districts > Demonstrated ability of private sector or NGO partnerships to prevent HIV transmission and mitigate AIDS > Reduced prevalence of STDs by 30%. -42 - H;rchy w _ L~jtIe tin4Icet i. -|:lb.1tibng & :auioiu G,1t1 | Project Development Outcome I Impact Project reports: (from Objective to Purpose) Objective: Indicators: To establish the institutional > Allocation of MOHSW MOHSW Annual Report to be Quality information systems capacity required to enable the Budget for 3-yr period defined presented to Annual Joint will inform decision making, MOHSW to develop, based on stated priorities Review Meeting and will improve ability of implement, and monitor a (MTEF) policy and management comprehensive Sector Reform > Financial Management and Report of FMIS systems audit decisions to affect access, Program Information System in place quality and sustainability > Revised interim and final MOHSW Financial financial statements produced Statements. Key stakeholders will employ monthly-for six months capacity developed during > Defined and functional Project Audit report Phase I to improve strategies procedures/systems for for achieving Program disbursement, procurement, Expenditure reports Purpose accounting and reporting > Quarterly M&E Reports Human Resources MIS Improved use of existing Produced for the past six Reports financing will result in months improved access, quality and > Documented partnership Draft Long-Term Plan for sustainability of health agreement between all CHAL Facilities Development services partners and GOL > 80% of vacancies of six Baseline Survey That information systems, weeks duration of longer were financial management and filled within 3 months End of Phase Survey planning skills will better > 70% of budget committed ensure sustainability of Project > A long-term plan for Evaluation Report for Phase I and Program achievements health infrastructure development produced That government and staff > Estates Management Unit commitment to the Program established objectives and sectoral goals > Documented guidelines, will be sustained throughout policies, protocols & the Project, and subsequent procedures for Tuberculosis, Phases IMCI and HIV/AIDS > Completed impact evaluation of Phase I To expand the capacity of the > Increased participation of Evaluation Report Expansion of efforts to prevent public sector to respond to the private sector and NGOs and control HIV/AIDS beyond HIV/AIDS in HIV/AIDS prevention and Audit Reports the health sector will reduce control transmission of HIV and > Completed Evaluation of Contracts with NGOs/Private mitigate the impact of AIDS. AIDS prevention interventions Sector -43 - Output from each Output Indicators: Project reports: (from Outputs to Objective) component: FINANCIAL PLANNING );+MIS defined > MOHSW Annual Report, to > Improved financial AND MANAGEMENT: > Staff trained in FMIS be presented at Annual Joint information and more > Financial Information ) FMIS reports Review responsive financial Systems provide timely 0 Integrated budget > Supervision Reports management systems will information to decision > MTEF > Financial Audit (annual) improve performance of making, enable improved > FMIS reports (quarterly) system monitoring of > Integrated budget will be costs/expenditures employed to assess > Financial Management affordability and sustainability Systems/Procedures establish > Fixed budget constraint credibility of MOHSW to will improve performance manage resources > Budget reflects all sources of financing and expenditure to better appreciate budget implications of decisions > Medium Term Expenditure Framework provide frame for govermment and donor support to the sector PLANNING AND > Baseline study Report > MOHSW Annual Report, > H{PSU will retain MONITORING: disseminated to be presented at Annual leadership role in the ? Increased capacity of > Annual Reviews conducted Joint Review development of health reform HPSU to plan and manage with participation of all > Supervision Reports strategies, and will be reform process partners > HMIS Reports motivated to assume > Improved monitoring & > HMIS developed > Survey Results/Reports responsibility evaluation of Project/Program Staff trained in HMIS > MOHSW Annual Report, > HMIS and Annual Review > Timely information on > HMIS reports to be presented at Annual Process will empower decision patterns of utilization, > Estates Management Unit Joint Review makers throughout the system provision of care, use of established > Supervision Reports > Information will be inputs, performance of health > Draft District Health > HMIS Reports employed to inform and justify programs and health facilities, Package described > Survey Results/Reports Program planning progress in implementation of > Guidelines for core > Minimal staff turnover in annual workplans services produced HPSU > Defined list of priority > District Package standards interventions to be delivered at will jbe recognized by GOL each level of the system and MOHSW as national > Established service priorities for expenditure and delivery standards for priority investment interventions > Projections for facility investment which are affordable and responsive S Improved maintenance of facilities and equipment -44 - HUMAN RESOURCE > Key posts filled > MOHSW Annual Report, > MOHSW will retain > Reduction in vacancies > HRMIS developed to be presented at Annual sufficient level of autonomy > Knowledge of staff > Draft HR Strategic Plan Joint Review from civil service placement and skills distributed > Supervision Reports administration > Explicit, informed strategy > Strategic Plan will improve for HR in Health Sector capacity of MOHSW to plan and manage its human resources > Increased satisfaction among health personnel will reduce loss of staff > Information systems will be employed by MOHSW to better deploy staff > Posts will be filled with competent staff PARTNERSHIPS: > Level of participation of > MOHSW Annual Report, > Streamlined procedures > Improved coordination of Partners in Annual Reviews to be presented at Annual will better employ limited donor financing > Percent of donor financing Joint Review capacity > Effective and explicit allocated within Sector > Supervision Reports > Coordinated donor support partnership between GOL and Program and reduced fragmentation CHAL > GOL/CHAL Partnership will improve technical and > Increased collaboration Agreement endorsed by all allocative efficiency with South Africa parties > Government of Lesotho > TOR and meetings of will increasingly appreciates Lesotho/RSA Health importance of collaboration Committee with South Africa > CHAL health services complement those of government and strengthen capacity of system PREPARATION FOR PHASE > Completion of studies and > MOHSW Annual Report, > MOHSW appreciates the II: training to be presented at Annual need to continue to develop > Better informed strategy > RFPs for financing pilots Joint Review and refine strategies for Phase development Alignment of HSA/district > Supervision Reports II throughout the Project > Procurement packages > Tender documents for civil > The process of completing prepared to eliminate delays in works procurement packages will pilots and civil works for build appreciation for and Phase II capacity in procurement planning HIV/AIDS PREVENTION > Endorsement of Plan by > Financial statements, > That NGOs can implement AND CONTROL: Cabinet. expenditure reports and audit effective strategies to reduce > National AIDS Committee, reports from LNAP and ATF. transmission of HIV and AIDS Task Force (ATF), and mitigate the impact of AIDS. Lesotho National AIDS Program (LNAP) guiding national HIV/AIDS efforts > NGOs and other > Annual implementation > Disbursement of funds to non-governmental sectors plan approved by Lesotho implementing agency. engaged in HIV/AIDS National AIDS Program and activities AIDS Task Force. - 45 - > Non-health sector > Awards of grants to > Allocation of funds by ministries undertaking NGOs/CBOs for implementing agency to HIV/AIDS activities which implementation of specific NGOs/CBOs for interventions. employ their comparative intervention activities such as advantage sentinel surveillance, condom distribution, IEC, etc. > Improved understanding of > Evaluation report on > Supervision reports role of non-governmental component submitted by Implementing actors Agency. -46 - Hierarchy ;f 0bjepdiws . 2. 2ULon1ti g & Evaluation Ctical. Assumptions Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) I(A) FINANCIAL US$ 1.13 MM > MOHSW Annual Report, > MOF will continue to PLANNING AND to be presented at Annual support implementation of MANAGEMENT Joint Review FMIS in MOHSW (a) Develop and install FMIS > Supervision Reports > Finance Unit appreciates (b) Produce Comprehensive > Financial Audit importance of integrated Integrated Budget > Quarterly FMIS reports budget as tool, not only as (c) Develop MTEF descriptive > Donors and GOL accept MTEF as acceptable Sector financing framework I(B) PLANNING AND US$ 8.43 MM > MOHSW Annual Report, > Approaches to capacity MONITORING to be presented at Annual building motivate and (a)Capacity building for Joint Review empower management and Planning and Implementing > Supervision Reports staff (b) Monitoring & Evaluation > HiMIS Reports > Donors and program Capacity & Procedures > Survey Results/Reports managers accept format for (c) Develop and install HMIS Annual Report (d) Development of Draft > Program managers vest in District Health Package common HMIS, rather than (e) Physical planning and separate monitoring maintenance functions and procedures systems > Consultancies can be initiated on schedule > Contractors with skills in Estates Management can be attracted to MOHSW > MOHSW appreciates costs of maintenance in budget > District Package is employed as criteria for prioritizing reform strategies I(C) HUMAN RESOURCE US$3.42 MM > MOHSW Annual Report, to > Civil service appointments MANAGEMENT be presented at Annual Joint can be made, or government (a) Develop and install HR Review permits posts to be filled by Information System > Supervision Reports contractual staff (b) Produce HR Strategic Plan > Choices of courses are (c) Design and implement right for staff development strategies for staff retention, > Turnover of staff in Unit is including training and limited housing > Consultancies can be contracted on schedule > IT equipment can be procured on schedule -47 - I(D) PARTNERSHIPS US$1.10 MM > MOHSW Annual Report, > Donors agree to schedule (a) Joint Donor Reviews to be presented at Annual missions in accordance with (b) Development, consensus Joint Review joint reviews and implementation of > Supervision Reports > There is a reasonable GOL/CHAL Agreement (incl. arrangement which will serve rehabilitation of facilities) both CHAL and GOL aims, (c) Lesotho/South Africa and both parties adhere to Health Committee Agreement Reconstituted and Areas for > Committee has correct Collaboration Explored composition and best represents parties who caln explore prime areas for collaboration I(E) PREPARATION FOR US$3.67 MM > MOHSW Annual Report, > The selected areas for PHASE II to be presented at Annual training will inspire (a) Courses/special studies and Joint Review innovative strategy drafting of RFPs on pilots > Supervision Reports development, and ensure that (b) Civil works surveys, Basotho strategies build on designs and tender documents global experience > Working Groups retain responsibility for continued preparation > Bank is able to provide sufficient expertise in supervision team to support preparation activities > Sufficient external expertise/experience in drafting an essential package is acquired > Consultancies for design of civil works commence as scheduled > Economic analysis of new investment is prioritized II. HIV/AIDS US$2.00 MM > Financial statements, > Sufficient consensus > Implementing agency hired expenditure reports and audit amongst stakeholders to to oversee the implementation reports from LNAP and ATF. enable speedy development of interventions by CBOs and and endorsement by Cabinet other contracted of National AIDS Strategic agencies/organization. Plan. > Contract signed with > Disbursement of funds to > Role definition between implementing agency (an implementing agency. the various structures formed NGO) (NAC, ATF, LNACP) is clear. > Grant making process can be conducted in a transparant fashion. > Finalization of National > Allocation of funds by AIDS Strategic Plan. implementing agency to NGOs/CBOs for interventions. -48 - > Fonnation of National > Supervision reports - AIDS Committee, AIDS Task submitted by Implementing Force (ATF), and Lesotho Agency. National AIDS Program (LNAP). > Drafting of the annual implementation plan by the Implementing Agency. > Allocation of contracts to NGOs/CBOs for implementation of interventions. -49 - Annex 2: Project Description LESOTHO: Health Sector Reform Project OVERVIEW The Project will support Phase I of the GOL's Sector Reform Program which commenced in March 2000, and is scheduled for 3 years. IDA financing will be complemented by financing from the African Development Bank, and specific inputs from the European Commission, Irish Aid, WHO, UNICEF and UNDP. Phase I addresses the core institutional issues within the Ministry of Health and Social Welfare of (a) financial planning and management, (b) planning and monitoring, (c) human resource management, and (d) partnerships. The Project will support the preparation of Phase II activities, and provide financing to support the Government of Lesotho's National HI V/AIDS Program. By the end of the Project, the MOHSW should be able to collect and analyze information, formulate and assess sectoral strategies for improving quality and access, meet intemational standards for financial management, implement against a stated workplan, monitor progress towards measurable targets, and evaluate strategies. It should also be able to better attract and retain qualified staff, as the institutional capacity demands a minimum standard of human capacity. Throughout the first phase, the Ministry and its core partners will endeavor to define joint systems, procedures and standards which will support the objective of disbursing donor and Bank support as time-slice financing against a single budget. The end of Phase I should also see the full-scale implementation of GOL's policy on HIV/AIDS and STDs, which includes improved surveillance, coordinated multisectoral information, education, communication (IEC) and other prevention strategies, and community-based care and support initiatives. By Component: Project Component I - US$1.13 million FINANCIAL PLANNING AND MANAGEMENT Financial Management and Information Systems: A consulting fimn has been selected to undertake a two-year assignment developing and expanding improved financial management and information systems throughout the MOHSW. The work aims to improve the knowledge of costs and expenditures for decision-makers at each level of the system, and will encompass changes in current cost centers, training in accounting procedures, formulation of reporting formats, procedures and schedules that will respond to the information requirements of Ministry of Finance, facility managers, program managers, the Health Planning and Statistics Unit and donor agencies. The work will commence prior to Effectiveness, and prioritizes establishing financial management procedures which will support the disbursement of IDA and AfDB funds. The financial accounting and disbursement functions for donor and IDA resources will be the responsibility of the Project Accounting Unit which will be established within the MOHSW Financial Unit. This component also includes training, staffing, and the procurement of supportive information technology. The results should improve the knowledge of the costs of tertiary and training facilities, the appreciation for allocations across types of services and across districts, and the types of expenditures on referrals to South Africa. It will support the information requirements for the economic analysis to be conducted during Phase I of alternatives to upgrading, expanding or replacing the national referral hospital, Queen Elizabeth II (QEII) and training institutions (e.g., proposals to create a College of Health Sciences in the National University, and establish a medical school in Lesotho). Information on cost of service and the impact which utilization has on costs, will inform the development of the District Health Package, and support longer-term efforts to contract out service delivery and pool risk through insurance options. Acquiring improved understanding of the costs of, and expenditures upon health care by service, by type of facility - 50 - and by population group (e.g., rural/urban or by socio-economic indicators) will also help to better appreciate the equity of public expenditures and the impact of increasing HIV/AIDS incidence and prevalence on the system. Much of the costs of AIDS today goes unrecognized, as the referrals to South Africa, the distribution of nursing care, and types of pharmaceutical expenditures are not collected and reported upon in a format which would enable decision makers to identify the real impact of demand. Similarly, the distribution of benefits of public financing to health services are not well appreciated. The FMIS will also address user fee management: reducing leakage from QEII and improving the efficiency of collection at peripheral levels. Comprehensive Integrated Budget: Currently the Health Planning and Statistics Unit (which reports to Ministry of Planning) holds responsibility for donor and capital budgets, whereas the Finance Unit (which reports to Ministry of Finance) retains responsibility for recurrent budgets and disbursement of government funds. The Ministry of Finance has mandated that in the future budgets should be integrated, that is, that capital and recurrent budgets should be consolidated, so as to better appreciate/anticipate the recurrent cost implications of investment decisions. Concurrently, to begin to realize the envisioned Sector-wide Approach, the MOHSW seeks to capture all sources of financing to MOHSW and CHAL health activities within a summary expenditure program. Thus, during the first year, the Project will support the Health Planning and Statistics Unit (HPSU) to work with the Finance Unit in producing a consolidated budget which captures all sources of internal and external financing. The budget for the Phase I Implementation Plan reflects the complete budget for defined Phase I activities, but does not yet cover all of the MOHSW regular operations, nor those of CHAL. This aim can only be effectively accomplished together with the revisions in the budget format which will arise out of the FMIS consultancy. Within this component, the HPSU and Finance Unit will participate in regional training in National Health Accounts to inform how they work with the Ministry of Finance to restructure the sectoral budget. Medium-Term Expenditure Framework (MTEF): Associated with efforts to develop a comprehensive budget is the production of a Medium Term Expenditure Plan. The MTEF should provide a longer-term view of government and other sources of expenditure for the health sector, and will provide a firm foundation to the vision of a Sector-wide Approach. Although the sectoral MTEF cannot be developed in isolation of a whole of government MTEF, it may provide an impetus for government to consider broader planning within the Public Sector Improvement and Reform Project, and it will begin to provide a foundation for a government framework. To the extent that the MTEF is effectively implemented it will make government's commitment to the sector more credible. As part of this process the relative role of public sector financing will be defined; the place of public subsidies determined; and a frame for soliciting additional external support for the sector created. It can better link resource allocations to stated policy choices and make sectoral priorities explicit, and can increase accountability and responsibility of the system by providing managers with a bard budget constraint within which they will hold increased autonomy for decision making to produce defined results. The Project Implementation Plan and budget have begun to introduce the concepts as Working Groups and responsible program managers have budgeted by outputs. The MTEF further supports the consolidation of investment and recurrent decision making. The project will support capacity building of the HPSU and Finance Unit to produce integrated budgets, and will support the analytical, consultative and consensus process required to produce a sectoral MTEF. Project Component 2 - US$8.43 million PLANNING AND MONITORING MOHSW Capacity Building for Planning and Monitoring: In addition to the development of financial management and information capacity which will be established within the Financial Controller's Office, - 51 - the credibility of MOHSW to coordinate the annual planning process, capture plans within updates Health Sector Reform Plans, justify strategies, manage and evaluate a process of implementation will determine IDA and donor willingness to allow for common implementation procedures, and move towards budgetary support. Previous efforts to build capacity have not been closely tied to specific functions and expectations, and have been placed outside the MOHSW. The Project proposes to vest in the building of capacity within appropriate MOHSW structures, and over the life of the Project to employ technical assistance to reside within these structures, providing capacity building to counterparts, on-the-job training, and help establish the systems and skills which will be required to enable MOHSW to implement the subsequent Phases of the Program without residential Technical Assistance. The demands which the MOHSW has accepted in undertaking a reform initiative, and in committing to an annual planning and review process is expected to increase commitment and demand for systems capacity and skills development. An annual planning process will be coordinated by the HPSU, whereby each Program Unit and Reform Working Groups will reflect upon evidence-based experience to date, and produce a composite workplan. The process of producing a comprehensive workplan will continue to ensure that priorities are explicit across the sector, and that capacity exists to undertake the entire workplan (causing all managers to recognize the dependencies that specific activities have upon one another for success, and the cumulative demands on the MOHSW). An "Operations Manager" will be contracted for Phase I who will report directly to the Principal Secretary, and will be charged with enabling managers throughout the MOHSW to assume responsibility and build skills, systems and tools for overall program operations management. Similarly, procedures, responsibilities and skills for procurement planning and implementation will be established within a new unit within the MOHSW. The Procurement Unit will work with the HPSU, all the Program Units and HSAs to develop annual procurement plans. Procurement capacity will be developed through on-the-job training conducted for designated procurement staff by a contracted Procurement Advisor. The role of the Procurement Advisor and participation in short courses will support the capacity building of the Pharmaceutical Unit within the MOHSW and the National Drug Service Organization (NDSO) to define new procedures for quantification of needs, procurement planning which will support bulk procurement, and for stock management. Monitoring and Evaluation: The role of M&E becomes more important given that the MOHSW and its partners must be able to verify that such targets have been achieved, before moving to the second phase of the program (and acquiring additional financing from IDA). The HPSU will be responsible for coordinating the annual workplans and budgets, presenting these to partners, developing the Program Plans for each phase and monitoring and evaluation. Capacity building through the input and guidance of the Operations Manager, through short-term TA and through training will address the M&E functions of this Unit, and how it supports the operational units of the MOHSW. The monitoring and evaluation activities aim to instill an appreciation for information and analysis in supporting program planning and decision making, and to ensure that the systems and procedures required to assess reform strategies will be in place. A draft Monitoring and Evaluation Plan has been produced which addresses functions, developmental strategies for M&E systems and capacity, core indicators, schedule/TORs for Joint Annual Reviews, and the targets or milestones for Phase 1. The final M&E Plan will describe how financial indicators (e.g., expenditures against budgets), programmatic indicators (e.g., activities accomplished, milestones reached) and impact indicators (e.g., capacity strengthened, coverage increased, sustainability improved, quality and equity increased) will be measured, compiled, employed in decision making, and reported upon. The HPSU M&E Plan will also need to define linkages between the wide range of M&E activities (FMIS, HMIS, surveys, operations - 52 - research). A comprehensive Health Sector Report will be produced annually which will summarize the financial and programmatic reports, as well as report on the core indicators (not all of which can be measured annually) and the management indicators which have been defined by the working groups for each component of the Reforms. A Baseline Survey has been contracted under the Project Preparation Facility (PPF) and is scheduled to commence prior to Effectiveness. A Demographic and Health Survey is scheduled for 2001. Community-based surveys which follow-up on the baseline survey will be contracted out prior to the end of each phase (End of Phase Surveys), and other non-routine data collection will be commissioned to consultants as scheduled in the Monitoring and Evaluation Plan. Health and Management Information Systems (HMIS): Part of developing monitoring and evaluation capacity will include addressing the supportive systems. HMIS which have received attention and support over the past few years, will be further developed under the Project, giving priority to the mechanisms, systems, procedures and schedules required to collect, analyze and report upon core indicators. This work will encompass the acceptance of the Terms of Reference for the HMIS Team within the Planning and Statistics Unit, the allocation of staff within the HPSU to specific areas of responsibility, a combination of on-the-job training and short courses for designated HPSU staff, development, production and dissemination of reporting formats from facilities and program managers, training for health staff in new functions and procedures, supervision and computerization (consistent with the FMIS computerization). This sub-component will also include the technical assistance, materials and equipment required to institutionalize effective disease surveillance systems. District Health Package: The services to be included within the District Health Package will be defined during Phase I. A criteria for assessing reform strategies developed for testing during Phase II will include how well they increase access to and quality of these services. The Package is intended to determine how to most efficiently employ limited human and financial resources towards addressing the major causes of morbidity and mortality in Lesotho. The development and consensus on the Package will require community-based information on incidence and utilization, cost information from the FMIS, modeling of cost-effectiveness, exposure to experiences of designing and costing essential packages of care elsewhere in the region, and extensive dialogue with health professionals at each level of the system. The component will also include the definition of service delivery standards for interventions included within the Package. These will include Integrated Management of Childhood Illness, TB treatment and HIV/AIDS care. Physical Planning and Maintenance: The Project will support the establishment of systems and capacity to conduct physical planning/facility planning and maintenance. A long-term Facilities Plan will be developed informed by the AfDB-financed study which is currently being conducted to acquire information on facilities, inventories, HMIS data, and the development of a basic Geographic Information System for tracking health facilities and catchment populations. The Ministry has committed to establishing an Estates Management Unit charged with oversight of new investment, aiding the long-term physical planning for the sector (including the economic analysis of options), and designing and implementing a maintenance strategy for the MOHSW. Project Component 3 - US$ 3.42 million HIUMAN RESOURCES DEVELOPMENT Human Resources Information Systems: A Human Resource Management Informnation System will be developed to achieve the following: (i) Track terms of promotions, filling of posts, preparation of short lists, structuring of benefits, postings, - 53 - vacancy assessments, and study leave. (ii) Assist in planning of training, that is, determine who is eligible, who is undergoing training (and in what), what training is projected, and how much is training/skills coverage (iii) Improve the staff data and statistics needed for HR planning (e.g., Total numbers of staff of various categories and their locations, remuneration costs information, and staffing needs assessments). Human Resource Development and Strategic Plan: By the end of the Project, the HRD Unit will produce a Strategic Plan which addresses: > Defined Outputs for Training of Health Workers. This definition will be with regard to: a) numbers and types of staff to be produced, b) methods and means by which to meet the level of production of staff required to meet policy objectives and, c) training strategies at Pre-service (basic), In-service, and Post-basic/Post-Graduate levels. This will all be in order that the system can produce and retain quality staff. > Recruitment and Retention of Health Workers Rationalized. This will be in terms of methods, options, and scenarios for the future. > Needs for Special and Specialist Services (clinical specialists, special and important programs such as HIV/AIDS and TB, and Hospital management) Addressed. This will include skills delegation and enhancement of existing cadres. > Strategies for the Rationalization of Deployment and Distribution of Staff Revised. This will be in terms of the various dimensions of work locations (i.e., urban, rural, mountains, lowlands, outreach versus static, etc.). In addition there will be consideration of the "mixes" of professionals and auxiliaries feasible for meeting the Lesotho Health Sector aims. v Issues of Incentives and Motivation of Health Workers and Managers Addressed in Detail. This will be with regard to methods, options, and scenarios as to the effectiveness of each strategy or mix of strategies proposed. > Human Resources in the Health Sector, as well as the Financial Implications thereof, Analyzed and Costed. This will include general advice on the implications of: a) salaries and benefits for health workers, b) staff accommodation, offices, and transport and, c) uniforms, work tools, etc. > Experience of Expatriate Recruitment (to date) Reviewed. This will be in light of its (anticipated) future role in fulfilling Lesotho's manpower needs. In-service training in human resource management procedures will be conducted for managers within health facilities, program managers, and for heads of HSAs/Districts. Training will also be provided for staff of the Human Resource Management Unit in performance appraisal systems, personnel management and training approaches. Staff Retention: Although the long-term needs for government employees in the sector will be determined by evolving decisions on contracting out, and expanded partnerships with the private sector, Lesotho does need to immediately address the loss of staff, vacancies, and staff performance. Some key staff shortages will be addressed within the first phase, and prior to any investment into health facilities, the MOHSW has agreed to first ensure that all existing facilities are fully staffed. This will be achieved by processing of re-deployments, completing new appointments, and where necessary, hiring contractual staff. Incentives to retain staff which will be employed include provision of staff housing, security and staff training. Project Component 4 - US$1.1 0 million PARTNERSHIPS Coordination of Donor Support: During the first phase, the MOHSW will acquire experience in producing annual workplans and comprehensive budgets, in conducting annual reviews with their development partners, and in employing information systems. They will develop a medium-term sectoral - 54 - expenditure program and will work to refine the Program Plan for the second -phase. They will also receive intensive support in developing the implementation procedures, systems and capacities which will meet the requirements of the GOL and of their external partners (see C.4. Institutional and Implementation Arrangements). Establishing the credibility to plan, implement and evaluate a comprehensive Sector Program will support the long-term aim of budgetary support to the sector. This component will also support the Joint Annual Reviews. Christian Health Association of Lesotho: A performance trigger for moving to Phase II is a documented partnership agreement between all CHAL partners and GOL. The Project will support this objective through a process of analyzing the various options for how government support to CHAL could better serve the objectives of access, equity and social justice, and how clear expectations and obligations of each party will best enable CHAL to contribute to sustainable improvements in coverage and quality. Consultants have already been identified to support the analysis, the process of building consensus around the partnership, and that of acquiring convincing commitment from the full range of institutions and congregations represented by CHAL. One input into strengthening partnership will be to rehabilitate CHAL hospital facilities. Collaboration with South Africa: To initiate increased partnerships with South Africa, and to explore the opportunities identified within the 1994 study on cooperation, the RSAlLesotho Health Committee will be reconstituted. One of the initial areas identified for exploration is the pharmaceutical regulations. The role of the proposed Drug Regulatory Agency (DRA) for Lesotho will be further developed within the context of the evolving legislation on regulation in South Africa and in consideration of opportunities to collaborate with the Republic of South Africa DRA. Project Component 5 - US$3.67 million PLANNING FOR PHASE Il ACTIVITIES Informing Strategy Development: The Implementation Plan for Phase I includes a number of preparatory and/or analytical activities required to produce the Phase II Implementation Plan. Activities intend to assist staff in defining and assessing strategic options. These include training (e.g., in the WBI Flagship course on Health Reform and Sustainable Financing -- some of which is offered in Cape Town, and pharmaceutical logistics management), and special studies. Preparation will include developing RFPs to solicit proposals for designing, implementing and evaluating alternative financing strategies: community financing schemes (i.e., Bamako Initiative), social insurance, competitive private insurance schemes, and contracting out the management of QEII. Planning for Civil Works: The Project will support the architectural consultancy and design stages, and development of procurement plans and tender documents for the civil works scheduled for Phase II, namely staff housing, rehabilitation of CHAL hospitals and rehabilitation of NHTC, Botsabelo Leprosy Hospital and Mohlomi Mental Hospital. It will also assess the structural and economic analysis, and consultation, required to reach agreement on whether QEII should be rehabilitated in situ, whether it should become a dedicated referral hospital or maintain outpatient and district hospital functions, and whether, when and how it should be relocated. - 55 - Project Component 6 - US$2.00 million HIV/AIDS The Project's HIV/AIDS Component will support the implementation of the GOL's policy on LV/AIDS Prevention and Control. This will entail supporting the Lesotho National AIDS Control Program (LNACP), the secretariat to the National AIDS Council (NAC) and the AIDS Task Force, and expanding the HIV/AIDS interventions across all sectors and geographic locations. The emphasis will be placed on encouraging the involvement of NGOs and Community-based Organizations and multisectoral interventions. The first step will be to finalize the National AIDS Strategic Plan and to obtain the endorsement of Cabinet. Simultaneously, the NAC and the Task Force will be appointed and the posts required for the LNACP will be created. The component will primarily support small grants to non-governmental entities (including NGOs, churches, industry, the private sector and CBOs). Grants will be awarded annually against explicit criteria, following a review of proposals submitted in response to Requests for Proposals. An Implementing Agency will be contracted to manage the grant making process, and to monitor and evaluate the HI-V/AIDS activities implemented under these grants. The Implementing Agency will also be responsible for technical oversight of, and implementation support to, the NGOs and CBOs undertaking various intervention activities. The LNACP will be responsible for oversight and management of the contracted agency. Activities undertaken by NGOs and CBOs will be prioritized for support based upon how well they respond to the framework set out by the National WV/AIDS Strategic Plan, which will be drafted by the LNACP. Annual implementation plans will be produced by the Implementing Agency, which will submit quarterly supervision reports to the LNACP. Activities to be supported may include surveillance; operations research; voluntary testing; IEC (Information, Education, Communication); counseling; condom distribution; patient care and support; and supportive social services to individuals, families and communities. The Agency will also assess what capacity and skill building initiatives are needed to strengthen the ability of NGOs and CBOs to expand implementation across the country, especially in under-served highland areas. The HIV/AIDS Component will also support the LNACP and the Task Force to coordinate donors, and thus ensure that all donor inputs are within the framework set out by the National HIV/AIDS Strategy. - 56 - Annex 3: Estimated Project Costs LESOTHO: Health Sector Reform Project Loia ro:i:gn Toa PrOW- CQ9t Ow C tolw US $Illion -U s$nlTIon US $milflon Financial Planning and Management 0.91 0.22 1.13 Planning and Monitoring 6.50 1.93 8.43 Human Resources Management 3.22 0.20 3.42 Partnership 0.70 0.40 1.10 Preparation for Phase II 2.67 1.00 3.67 HIV/AIDS 1.50 0.50 2.00 Total Baseline Cost 15.50 4.25 19.75 Physical Contingencies 0.30 0.00 0.30 Price Contingencies 0.35 0.00 0.35 Total Project Costs 16.15 4.25 20.40 Total Financing Required 16.15 4.25 20.40 ,,F . Iign T-stal Pioje4c 0Go CaftgPry, V$$Wo S $6*lUon US $mniflion Goods 0.60 1.05 1.65 Works 3.07 1.00 4.07 Consultant Services 5.95 1.10 7.05 Training/Workshops 2.20 0.10 2.30 Technical Services 1.16 0.00 1.16 Recurrent 1.87 0.00 1.87 Unallocated 1.30 1.00 2.30 Total Project Costs 16.15 4.25 20.40 Total Financing Required 16.15 4.25 20.40 - 57 - Annex 4 LESOTHO: Health Sector Reform Project INTRODUCTION This annex summarizes the economic analysis that was used in the identification, preparation and evaluation of the Health Sector Reform Program (HSRP). The HSRP covers a ten year program of policy and institutional reform aimed at increasing access to quality preventive, curative, and rehabilitative health care services in Lesotho. The program has been defined in three phases. The purpose of Phase I is to build the institutional capacity required to enable the Ministry of Health and Social Welfare to develop, implement and monitor a comprehensive and coordinated Sector Program. By the end of the first phase, the MOHSW will have the institutional capacity to collect and analyze sufficiently disaggregated and timely health and financial information, utilize this information to formulate cost-effective and sustainable sectoral strategies, target resources to attain these strategies, meet international standards for financial management, and monitor and evaluate the health intervention strategies employed. In the initial stages of identification and preparation of the HSRP, economic analysis was utilized to assist Government's development of the Health Strategy. A Financial Reforrms Working Group was identified and tasked with diagnosing the adequacy, efficiency, and equity of government and mission health expenditures. While some analysis was possible, the Working Group found that a lack of disaggregated and timely financial information was a major constraint to deeper assessment. Thus they also initiated analysis of the financial system, itself, to determine the type of financial information managers require in planning, monitoring and evaluating their work. At later stages of preparation and appraisal, economic analysis was expanded to include assisting other Working Groups in evaluating the cost-effectiveness and sustainability of their proposals. The Financial Reforms Working Group primarily interacted with those working to define strategies in the areas of district health package, decentralization and donor coordination to assess the rationale for public sector intervention and the institutional and financial requirements necessary to implement their proposals. MACROECONOMIC LINKAGES The Economic Situation: Lesotho has enjoyed strong economic performance since 1992, with real GDP growth rates averaging more than 7 percent between 1992 and 1997. The investment activities associated with the Lesotho Highlands Water Project (LHWP) played a large role in contributing to rapid growth and to the accompanying rise in SACU receipts and international reserves. However, the manufacturing sector also grew rapidly during this period, especially in the textile sector which now comprises the majority of Lesotho's export earnings. For most of the period, the growth rate in GNP was significantly lower than that of GDP, reflecting a slowdown in miners' remittances as a result of significant falls in the number of mineworkers since 1990 when they comprised nearly 30 percent of all formal employment. - 58 - Table 1: Selected Economic Indicators, 1994-1998 1994 1995 1996 1997 1998 Real GDP growth 12.9 9.1 12.7 3.6 -9.7 Real export growth 10.5 -0.8 19.2 13.5 Overall budget balance (% GDP) 1/ 5.9 4.4 4.6 3.0 0.3 Change in CPI 8.2 9.3 8.5 8.5 9.2 Intemational reserves 2/ 5.6 6.8 7.5 8.0 10.7 1/ Includes grants 2/ Months of imports (excluding LHWP imports) The political upheaval of 1998, with its accompanying destruction of businesses and economic infrastructure, reduced economic growth to minus 9.7 percent in 1998. Political tensions have since fallen, but momentum to tackle difficult policy choices with respect financial reform, civil service restructuring, or privatization have stalled and threaten sustained growth. Four key factors appear critical to Lesotho's growth prospects: * Worker's remittances. There has been a long-term general decline in employment opportunities in RSA and, as a result, lower worker's remittances flowing into Lesotho. The trend is likely to continue as the mining subsector moves towards a more capital-intensive production structure and as RSA's own employment situation worsens. * SACU revenues. SACU revenues are likely to decline because of the anticipated changes in the revenue-sharing formula and the decline in LHWP-related imports. * Export growth. Despite labor cost competitiveness that attracted export- manufacturing enterprises in the early 1990s, perceptions of Lesotho's investment climate have been damaged by the 1998 political disturbances and it is unknown how long or severe these poorer images will remain. Inefficiencies in the utilities sector and weaknesses in the financial sector may also hinder private sector investment. * The role of LHTWP. While the receipt of water royalties by the Government now constitutes a steady source of revenue, the expected downturn in LHWP construction and investment in the post-1998 period will have an adverse impact on economic growth and SACU receipts. Policy framework and link to the health sector: The outlook for the period 1999 to 2002 is for reduced annual growth of around 4 percent. In the area of government finance, the objective will be to maintain fiscal balance despite the expected drop in SACU revenues. Within this tight fiscal stance Government is committed to maintaining or increasing the share of total expenditures directed to the social sectors. To guide decisions with respect to social sector expenditures, a Medium Term Expenditure Framework (MTEF) will be established. Under the MTEF, budget procedures and appropriations requirements will be assessed in order to move the budgeting towards an outcome budget where allocations correspond to priorities. The government's overall policy of decentralization will be pursued in the health sector, giving more responsibility to district and local government in budget management. Mechanisms for retaining health fees at the point of collection will be explored. It is anticipated that greater financial autonomy will result in increased efficiency and resource mobilization at the local level. - 59 - THE COUNTRY ASSISTANCE STRATEGY The focus of Bank assistance is to support the Government's strategy of poverty reduction and its efforts to sustain macroeconomic performance through greater integration into the sub-regional economy. Human resource development is recognized as integral to achieving this aim, and investments that improve health service delivery, reduce the burden of ill-health on the poor, and make the work-force more productive are central elements in this strategy. The Government's policy in education and health are complimentary, reflecting the important linkage between girls' education, child health improvement and fertility reduction. Government is increasingly concerned with both slowing the spread of HIV/AIDS and caring for those already infected, and investments that promote public awareness and improve health service delivery are integral elements in the strategy to reduce the impact of AIDS. The CAS recognizes implementation capacity constraints as one of the key impediments to growth in Lesotho and emphasizes "the need to improve capacity in the public sector by dealing with its goals, staffing requirements and incentive structure, and the prospects for decentralizing the budget to permit the incorporation of decision-making inputs at the sub-national level." The HSRP aims to build capacity prior to expanding efforts to define policy reform initiatives which will aim to improve service delivery. This approach is being taken to better ensure the sustainability of policy reform, and responds to experience in two prior health sector operations. The efforts which will be taken in the health sector are dependent upon broader public sector management reform, and thus a critical complement to the aims of the Health Sector Reform Program are the efforts being undertaken under the proposed Public Sector Improvement Project. RATIONALE FOR PUBLIC INTERVENTION AND) FINANCE Three major concerns provide strong rationale for public involvement in the health sector: public goods; market failure; and equity. The bulk of health intervention, such as immunization and sanitation, not only benefit individuals who use these services but also the population at large. The externalities of this type of public good provide the rationale for public finance. Imperfect information, limited access and lack of knowledge by consumers in the health field create market failure. When markets cannot regulate resource allocation efficiently, there is a powerful rationale for public intervention. From an equity perspective, it is clear that the poor, particularly those living in deprived areas, have very limited access to health services and cannot afford to pay the costs for utilizing seivices. The Government therefore has a role to play in providing subsidies to the needy to improve the distribution of opportunities and benefits. In Lesotho, all of the above factors are relevant and suggest the Government will need to play a strong role in health service delivery. The private sector is underdeveloped, particularly in the health field. Recent attempts to develop private for-profit facilities in Maseru have faltered and it is unknown if sufficient disposable income exists to support them. While the for-profit sector is small, the mission sector is a very significant provider, providing nearly half of all health service delivery, often to Lesotho's poorer and more rural districts. However, over the past decade, church support from abroad has significantly decreased. To compensate, mission facilities have raised user fees to two to three times the levels found in comparable Government facilities and have sought greater subventions from Government. Despite these efforts, mission facilities remain under intense financial pressure. A sustainable governing and financing agreement between Government and CHAL (the umbrella organization that governs mission facilities) that recognizes the inherent strengths of the autonomous CHAL facilities could be one of the most activities that is undertaken in the first phase of the HSRP. For the reasons cited above, it is clear that the Government will need to continue to play a strong role in the health sector. Nonetheless, the HSRP recognizes the need to strengthen the role of the private sector. Over the next few years, the Reforms Program will thus seek to facilitate a sustainable financing agreement with CHAL, seek proposals from the private sector to pilot insurance schemes, assess potential cost savings - 60 - from contracting out non-clinical services and autonomously administering health facilities, and expand the Bamako Initiative (community-based financing schemes) beyond the initial 10 sites where it currently operates. Links to Sector Work Lesotho's health policy (Lesotho's Health Reform Program Plan, October, 1999) recommends that a sustainable increase in access to quality preventative, curative and rehabilitative health care services should be the main objective for the health sector. Holding widespread consultations throughout the country, the Ministry has worked in a collaborative manner to develop the strategies and implementation plans it believes will facilitate improvements in access and quality of health. The Bank and other donors (notably WHO, ADB, and the EU) have supported this process with training and significant financial and technical assistance. For example, FY99 ESW supported production and marketing of a user-friendly document ( Strengthening Lesotho 's Health Care Systems) explaining the rationale and objective of Health Reforms, a PHRD grant has financed the operating costs of the Health Reforms Coordination Office (HRCO) as it has facilitated the analysis and consensus processes, and PPF financing is being utilized to develop a baseline of health information on which HSRP progress can be monitored. Health Finance Govemment health expenditure in Lesotho currently stands at about US$ 18 per capital per annum, considerably more than the least developed countries' average of US$ 5.90 and well above the minimum US$ 9-12 per person needed for the provision of a minimum package of primary health care services as determined by the Africa Region policy paper, Better Health for Africa. Information on private health expenditure is scanty, but will soon be better informed by the 1999 household income and expenditure survey. Table 2: Lesotho Public Health Expenditures (in millions Maloti) 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Est. Total health 84.0 99.6 111.2 138.9 142.2 194.5 expenditures Recurrent health 52.3 63.8 78.4 91.6 112.0 144.6 expend. Capital health expend. 31.7 35.8 32.8 47.3 30.1 49.9 Total real health 52.3 54.8 64.9 69.9 64.9 77.4 expenditure \1 Real recurrent health 33.5 37.8 42.5 45.4 51.1 60.8 expenditure Real capital health 18.9 17.0 22.4 24.5 13.8 16.7 expenditure - 61 - Current health exp. per 43.2 47.5 59.9 68.4 67.4 84.8 capita (maloti) Real health exp. per 27.7 28.1 32.5 33.9 30.8 35.6 capita (maloti) \1 IMF projections of inflation are used to estimate real prices in 1990 Maloti. Source: Government Estimates of Recurrent and Development Expenditures Government's commitment to financing health care for the population is evident through looking at health expenditure trends. Total health expenditures, comprising nearly 4 percent of GDP and 8 percent of overall government expenditure, have grown about 25 percent in real terms between 1992/93 and 1996/97. Such growth has outpaced that of the population; as a result, real per capita health expenditures have grown 11 percent over the period. Utilization of health budget: Throughout the 1990s, recurrent and development budgetary allocations have been significantly larger than actual expenditures. Under-spending of the recurrent budget can be attributable to numerous factors. A significant number of posts that are budgeted at the beginning of the budget cycle remain vacant, and allocated funds for these posts go unspent throughout the year. In 1996, it was estimated that 15 percent of MOHSW posts were vacant, with vacancies most apparent amongst health workers in district hospitals and health centers Other factors include rigidities in program manager's ability to reallocate expenditures to respond to new priorities or exigencies within the fiscal year, and a centralized and under-staffed accounting system that cannot respond quickly to manager's requests. Intrasectoral distribution of recurrent expenditures: The recurrent health budget is separated into nine 6"programs," three of which constitute about 85 percent of all expenditures: administration, QEII Hospital, and district health expenditures. Table 3: Health Expenditure by Program ('000 Maloti) 1995/96 % of 1996/97 % of 1997/98 % of total total total Administration 14.4 15.7 21.7 16.5 22.9 15.8 QE II Hospital 31.7 34.7 39.4 30.0 45.7 31.6 District Health 32.6 35.6 49.3 37.6 52.7 36.5 Other 12.9 13.9 20.9 15.9 23.3 16.0 Total 91.6 100% 131.3 100% 144.6 100% The Administration Program covers central administration plus the annual grant to CHAL facilities. The QE II Program includes both the national referral hospital and the primary and secondary health services of Maseru District. QE II Hospital is supposed to function as both a referral hospital and as a district hospital for Maseru District. The District Program covers the district hospital and health center expenditures for the nine districts (excluding Maseru District) plus the budget for the Lesotho Flying Doctor Program that -62 - provides health care in inaccessible mountain areas. The smaller programs that comprise the remaining 15 percent of health expenditures include the mental health program which covers the psychiatric hospital, the National Health Training Center (NHTC) which trains paramedical personnel and whose control (and future budget) has recently been ceded to the Ministry of Education, and the public health program which covers health education, family health and disease control. Unfortunately, if one wants to know what is being allocated to a level of health care delivery, region or vertical program such as EPI, HIWV/AIDS, etc. the budget has to be analyzed specifically for that purpose. For example, it is very difficult to accurately determine the amount of expenditures directed to primary health care as districts do not separate expenditures incurred at health centers from those incurred at hospitals. As a result, the adequacy of expenditures at the primary level -- the stated priority in health sector documents -- is difficult to assess. Nevertheless, with more than 30 percent of health expenditures allocated to one urban hospital, QEII, and the vast majority of district expenditures allocated to district hospitals, there is real concern that expenditures are disproportionately targeted to curative hospital care. Recurrent e-xpenditure by budget category: Despite many unfilled posts, salaries still absorb the largest share of health expenditures, comprising over 50 percent in 1998. Most of the wage bill is directed to government health workers, however the salaries of Christian Health Association of Lesotho (CHAL) health workers are also paid by Government. In 1998, there were nearly 600 CHAL health workers who received subsidies totaling more than 11 percent of recurrent health expenditure. In recent years, dialogue between Government and CHAL has focused on paying CHAL workers with similar levels of education and experience as Government workers an equal or comparable level of pay. Nevertheless, parity has not been reached and attrition from CHAL to Government facilities occurs regularly as staff seek the greater benefits associated with Government. Estimates of the CHAL subsidy that would be needed to reach parity suggest the annual subsidy would need to increased from the M 16 million provided in 1998 to more than M 20 million. - 63 - Table 4: Economic Composition of 1998 Health Budget Share of total Salaries and allowances 50.2% Govermment (39.0%) CHAL subvention (11.2%) Travel 4.1% Operating costs 27.2% of which maintenance (6.7%) of which in-patient food (4.5%) Drugs and dressings 14.7% Other (incl. purchase of equipment) 3.8% Total Recurrent Health Expenditure 100.0% Operating costs comprise about 27 percent of health expenditures. These can be further disaggregated into maintenance, power, in-patient food, etc. Few attempts have been made to privatize any of these functions, such as privatizing maintenance or provision of hospital food or cleaning services. As QE II Hospital's operating costs absorb a large share of the overall sector's operating costs, efficiency gains that target QE II would go a long way towards reducing the Ministry's costs. Drugs and dressings comprise nearly 15 percent of health expenditures. On a per capita basis, Government spent close to US$ 2 on drugs in 1998. However, CHAL facilities' distribution of drugs and private purchase of drugs are not captured in this figure and Lesotho's per capita drug consumption could therefore be considerably higher. If so, Lesotho's per capita drug consumption would compare favorably to Sub Saharan African norms of about $2 per capita. District Composition of Recurrent Expenditure: Per capita allocations vary substantially between districts, with a high concentration of resources in Maseru (90 Maloti per capita) and very low resources in Mohale's Hoek and Thaba Tseka. (24 and 25 Maloti per capita). The per capita allocation in Maseru is more than twice the allocation in six of the nine districts. While the CHAL allocation corrects some of the under-funding (especially in Thaba Tseka), in most districts the CHAL grant represents less than 20 percent of government resources invested in health. To attain more equitable allocation of health spending, expenditures would need to be re-directed to rural areas. Higher allocations to CHAL facilities could correct some of the imbalance since these facilities are often located in more isolated and rural areas. - 64 - Table 5: 1996/97 Budget allocation (in Maloti) per capita by District Govt. CHAL Total Maseru 77 13 90 Mokhotlong 48 2 50 Thaba Tseka 7 18 25 Qacha's Nek 50 2 52 Quthing 30 0 30 Mohale's Hoek 22 2 24 Mafeteng 23 7 30 Berea 24 11 35 Leribe 26 6 32 Butha-Buthe 41 9 50 Source: 1996 HERA Report. Note: Estimates of QE II's tertiary expenditures have been removed from Maseru's allocation; CHAL allocations are based on the number of CHAL employees working in the respective district. Government-wide efforts to decentralize expenditures and responsibilities could be beneficial in reducing regional disparities. If the budgets are assigned in the traditional way, expenditure patterns are unlikely to change, i.e. remain highly inequitable and of poor quality. The health reforms facilitated under the HSRP present a unique opportunity to, subject to explicit rules regarding financial management and accountability, delegate greater responsibility for budgeting to districts. Output-oriented district financing and decentralized budget planning and management are likely to bring about greater equity across the districts, be more responsive to local needs, and increase quality of expenditure. Capital expenditures: Development expenditures have not grown as rapidly as recurrent expenditures in the 1990s. One of the reasons for slower growth is that donor financing has increased just modestly. Nevertheless, donor financing remains important, accounting for an average of 80 percent of development expenditure through the 1990s. In the 1997/98 budget year, donors were projected to fund 16 percent of total health expenditures and 73 percent of capital expenditures. Donor financing envisaged under the HSRP (and described more fully below) is not expected to significantly increase capital and externally-financed expenditures. Health Revenues and Cost Recovery: Government health facilities attempt to collect a portion of their operating costs through collecting user fees. Hospital patient fees in 1998 were MI 0 per consultation with an additional MI 0 charged per inpatient per day. Health centers charged M5 per adult outpatient and M2.5 per child outpatient. In the 1990s, between 6 and 9 percent of recurrent expenditures were recovered through the above user fees. Considerable variation occurs in the amount that is collected at different types -65 - of facilities. Since 1993/94, districts have recovered an average of 11.5 percent while Maseru/QEII hospital has recovered an average of 6.3 percent. Since all revenues go to the central treasury, one can conclude that the non-Maseru districts are implicitly subsidizing health care among relatively well off Maseru residents. Table 6: Health Revenues ('000 Maloti) 92/93 93/94 94/95 95/96 96/97 97/98 I~~ ~ ~~~ .._ __ _ _ Total Revenue Collected 3,853 5,621 5,234 5,522 6,803 10,638 Revenue/Recurrent Expenditure 7.4% 8.8% 6.7% 6.0% 6.1% 7.4% QEII revenue/QEII Recurrent Exp. ... 8.5% 5.3% 4.6% 6.2% 7.2% District revenue/District Exp. ... 14.2% 13.8% 11.6% 8.3% 9.7% Source: Govermnent estimates of recurrent expenditure Cost recovery in the CHAL system operates very differently. CHAL facilities are private and strive to balance their income and expenses. Fees are established freely by the CHAL institutions and are not transferred to the central treasury but are kept in order to be used for the financing of running costs. In 1997, CHAL hospitals recovered around 35 percent of their costs, primarily by charging higher fees than Govemment charged in its facilities. Such practice is believed to reduce accessibility to CHAL's health care and would be biased against those individuals living near CHAL hospitals. Cost Analvsis and Fiscal Impact of HSRP The fiscal impact of HSRP Phase One will be minimal. As noted above, the first phase focuses on revising and integrating health, financial, and human resource information systems and building the institutional capacity to undertake more efficient planning and monitoring functions. These types of activities do not generate significant recurrent cost implications. To the contrary, it is expected they will create significant efficiencies and cost savings in the medium and longer term. The initial HSRP budget submitted by Government suggests that the HSRP will require approximately US$ 7.7 million over four years. - 66 - Table 7: HSRP Budget ('US$) Year 1 Year 2 Year 3 Year 4 Total (1999100) (2000/01) (2001/02) (2002/03) (1999-03) Financial Planning and 118,812 35,457 1,144,169 ... 1,298,439. Management Planning and monitoring 1,409,448 241,520 902,935 139,093 2,692,995 Human resource 195,643 776,617 725,826 978,019 2,676,106 management Partnerships 105,000 185,000 140,000 95,000 525,000 Preparation for Phase II 73,315 407,834 11,016 ... 492,165 Total 1,902,218 1,646,427 2,923,947 1,212,113 7,684,705 The HSRP budget presented above captures the "additional" activities that will be undertaken in the next few years-- that is, the additional consultancies, training, equipment, etc. that will be procured and financed to implement the envisaged refonns. Since the goal of the HSRP is to integrate systems, including the process for developing the recurrent and capital budgets, the Bank will work with planners and accounting staff over the next few months to integrate HSRP activities and costs into the Ministry's ongoing recurrent and capital budgeting format. Special efforts will be undertaken to review items and ensure that any changes in the way MOHSW operates as a result of the reforms (more staff located in rural areas, more responsibilities and funds controlled at the district level or provided to CHAL facilities, etc.) are captured in the HSRP and in the estimates of recurrent expenditures so as to provide a better understanding of the implications of Health Refonn and the sustainability of what MOHSW wishes to achieve. Impact of AIDS on Health Sector Costs Given the stage of the AIDS epidemic in the Southern Africa region, it is impossible to estimate the costs of health care without considering the impact of AIDS. Although only the direct costs of caring for WV/AIDS patients are estimated below, these estimates will certainly be a lower bound of the actual impact. One key reason is because the indirect effect of displacing non-AIDS hospital beds have not been factored in. In delaying the care of non-AIDS patients, complications are more likely to set in that will require more costly medical treatment. Based on UNAIDS estimates it is projected that approximately 10 percent of the adult population is infected with HIV, as well as 8,240 infants and children. It is also estimated that there are 12,300 AIDS cases in Lesotho. The highest prevalence rates, based on antenatal clinic data, appears to be in Maseru and Qacha's Nek. This is not unexpected given the proximity of Qacha's Nek to KwaZulu-Natal, the province with the highest HIVIAIDS prevalence in South Africa, and the accessibility of Maseru from South Africa. Based on the 1999 estimates, and utilizing a mean risk of biological infection of 2 percent for heterosexuals to estimate the annual increase in WV infection (see Whiteside, 1998), WHV infections and AIDS cases are projected to 2003 Additional work in estimating prevalence rates is clearly needed in Lesotho and should include such variables as: rural-urban differences in transmission rates, age group differences, differences in transmission from men to women versus women to men, sigmoidal curves for increase in rates, etc. - 67 - Table 8: Projection of HIIV infections and AIDS c-ases. 1999 2000 2001 2002 2003 Newly infected infants 5,140 5,284 5,432 5,584 5,740 HIV+ children + infants 8,240 8,384 8,532 8,684 8,840 HIV+ adults 98,400 118,080 141,696 170,035 204,042 % of adults who are HIV+ 10.0% 11.7% 13.6% 15.9% 18.5% % of population who are 4.6% 5.4% 6.3% 7.3% 8.6% HI_V+ Adult AIDS cases 12,300 14,760 17,712 21,254 25,505 % of Adults 1.2% 1.5% 1.7% 2.0% 2.3% Child AIDS cases 1,030 1,048 1,066 1,085 1,105 Total AIDS cases 13,330 15,808 18,778 22,340 26,610 AIDS cases as % of 0.6% 0.7% 0.8% 1.0% 1.1% population Source: UNAIDS, 1997 One of the main drivers of the AIDS health care costs is treatment of opportunistic infections, the most common of which is tuberculosis. TB occurs in about 40 to 60 percent of AIDS cases and this co-infection is the cause of death of 30 percent of all AIDS cases. The national TB prevalence is 17.7 percent. In 1997, nearly 5,500 TB cases were notified, with case notification rates nearly twice as high in men (152 per 100,000 versus 74 per 100,000) (WHO, 1999). TB is curable, regardless of HIV status. More effective case-finding and preventive therapy for HIV+ people is needed to prolong life and reduce morbidity, as well as mitigate the impact of TB on health care costs. The direct annual costs of in-patient care for people with AIDS (PWAs) is presented in Table 9 below. These calculations are a first estimation and are meant to stimulate further discussion and review. -68 - Table 9: Projected annual costs of care for AIDS-cases ('000 US$) 1999 2000 2001 2002 [ 2003 In-patient care for 100% AIDS cases Low case 4,532 5,375 6,385 7,596 9,048 Medium case 7,332 8,694 10,328 12,287 14,636 High case 9,171 10,876 12,920 15,370 18,308 In-patient care for 75% of AIDS cases Low case { 3,399 4,031 4,789 5,697 6,786 Medium case 5,499 6,521 7,746 9,215 10,977 High case 6,878 | 8,157 9,690 11,527 13,731 In-patient care for 50% of AIDS cases l l Low case 2,266 2,687 3,192 3,798 4,524 Medium case 3,666 4,347 5,164 6,144 7,318 High case 4,586 5,438 6,460 7,685 9,154 These calculations measure the impact of different rates of utilization and coverage. In one instance, 100 percent of AIDS cases seek in-patient care, while in other instances coverage is limited to just 75 and 50 percent of AIDS cases. Different levels of health provision are also simulated. In the high case scenario, the unit cost of providing care for an AIDS patient is estimated to be US$ 688 per year, the medium case costs $ 550, and the low case costs $340 per year Outpatient costs that have not been included in this analysis: in Lesotho (1994) in-patient AIDS cases reported using, on average, out-patient services twice before being admitted. In this 1994 analysis distinction was made between in-patient costs for adults (Ml,985) and for pediatric AIDS cases (M1,973). Based on this small difference, the assumption used in this analysis where it was assumed to be the same may be valid. A finer analysis would make distinction between the health care costs of AIDS cases and symptomatic HIV+ cases. The model presents sobering findings. Even in a scenario where only 50 percent of AIDS cases seek in-patient care and are provided a relatively low level of care (US$ 340), the demands on public health expenditures are as high as US$ 2.3 million per year, growing as prevalence rates increase to US$ 4.5 million per year by 2003. Under a high case scenario (high coverage and relatively expensive care), these annual costs rise to US$ 18.3 million. Given existing government health expenditures levels of US$ 26 million, AIDS in-patient care would require an additional 7 percent of expenditures in the lowest scenario and as much as an additional 70 percent in the highest scenario. AIDS is also likely to have an impact on the ability of the MOHSW to deliver services as health providers, themselves, contract HIV, leading to increased absenteeism, reduced work performance, and death of skilled workforce. As turnover rates increase, returns to investments in formal training will even be lower than in the past. - 69 - Defining the District Health Package During the first phase of the Reform Program, the government has committed to defining a package of primary and secondary health services which will guide investment activities in the sector, and set priorities for public sector allocations. This will imply that decisions guiding future investment into infrastructure, equipment, manpower production, in-service training and essential drugs, will be informed by the defined package. The "package" will comprise the prioritized services for delivery by district hospitals through to community health workers, as well as defined standards for delivery of these services. Staff performance and facilities will be assessed against the defined service standards. They have indicated that the services to be prioritized for inclusion in the package will be prioritized based upon cost-effectiveness analysis, the burden of disease and affordability (as well as community demand and the need of vulnerable groups). This process will demand additional information in costs, utilization and incidence which will be sought under the FMIS, baseline and follow-up surveys and evolving HMIS. It will also demand consensus building around the commitment to basing sectoral allocations upon defined and transparent criteria. - 70 - Annex 5: Financial Summary LESOTHO: Health Sector Reform Project Years Ending (US$ Millions) Year I Year 2 Year 3 | Year 4 | Year 5 I Year 6 X Year 7 Total Financing Required Project Costs Investment Costs 2.7 4.8 6.0 0.0 0.0 0.0 0.0 Recurrent Costs 1.8 3.2 1.9 0.0 0.0 0.0 0.0 Total Project Costs 4.5 8.0 7.9 0.0 0.0 0.0 0.0 Total Financing 4.5 8.0 7.9 0.0 0.0 0.0 0.0 Financing IBRDIIDA 2.2 2.5 1.8 0.0 0.0 0.0 0.0 Government 1.2 0.4 0.4 0.0 0.0 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 2.2 4.9 5.2 0.0 0.0 0.0 0.0 Total Project Financing 5.6 7.8 7.4 0.0 0.0 0.0 0.0 Main assumptions: - 71 - Annex 6: Procurement and Disbursement Arrangements LESOTHO: Health Sector Reform Project Procurement Procurement Arrangements refer to- the IDA-financed portion of the Program. It is not possible to determine the exact mix of goods and services to be procured under the project due to the adaptable feature of an APL and the flexibility of the sector program. Details of procurement and sources of funds for each will be agreed annually through a joint review between the Government and a group of cooperating partners at the Joint Planning (Appraisal) meeting. The specific procurements for the first year have been defined and agreed upon. Cost for the subsequent years are only indicative at the time of Negotiations, and the exact mix of procurement will be determined on an annual basis. Given the objectives of the Project, it is envisioned that IDA will finance mainly consultancies, services and training, as well as goods (mainly information technology) required to support the capacity-building efforts. Procurement for all IDA-financed activities will be conducted in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January, 1995, and revised in January and August, 1996; September, 1997; and January, 1999). Consulting services financed by IDA will be awarded in accordance with the Bank's Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January, 1997, revised in September, 1997). The procurement will be conducted through the MOHSW implementation arrangements described in Section C4: of this document. Given the focus of this project, all procurement is expected to be managed centrally through the Ministry's Procurement Unit. This will be a new unit, which will work closely with the new Project Accounting Unit (PAU), to replace the previous system of separate PIUs for each donor/partner. IDA will be financing TA to support both units. Procurement methods (Table A) Procurement of goods and works for all IDA financed components will be carried out in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995 and revised in January and August 1996, September 1997 and January 1999). Consulting services by firms or individuals financed by IDA will be awarded in accordance with the Bank's Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised in September 1997 and January 1999). It was agreed during the Appraisal Mission how the institutional home for management of the procurement of goods and equipment, civil works and consultant services under the project will fit into the Ministry's new organizational structure, within a new Procurement Unit to be housed within the office of the Deputy Principal Secretary. Further, it was agreed that the unit will be supported, in the first year of implementation by qualified procurement technical assistance and required staff as needed. Two General Procurement Notices (GPN), one for consulting services and one for works and goods, will be prepared for the project and published in United Nations Development Business, immediately after Board approval. The GPNs will be updated at least once a year and submitted to IDA for review. GPNs will describe all outstanding ICB for goods and works contracts, as well as consulting assignments. A procurement plan has been prepared by the Borrower. The plan includes relevant information on goods, works and consulting services under the project as well as the timing of each milestone in the procurement process and a critical path. The procurement schedule will be updated every month and reviewed by IDA at - 72 - quarterly intervals. Civil Works Only minor, small civil works are scheduled for the first phase of the Program, the Project. The indicative budget estimates that these works will total about US$330,000. Yet, the preparation of tender packages for works conducted under Phase 11 will take place. In the longer term Program, civil works contracts, financed by IDA for the or the construction/rehabilitation of training facilities, Queen Elizabeth II Hospital and Botsabelo Hospital that are estimated to cost more than US$500,000 equivalent per contract, will be procured through International Competitive Bidding (ICB) procedures. The flexible nature of the program would allow for the rehabilitation of Botsabelo Hospital to be accommodated under this project in the event that the various related studies and design work would be completed sooner than currently expected. Civil Works contracts financed by IDA that are estimated to cost less than US$100,000 equivalent per contract, up to an aggregate amount of US$200,000 equivalent, will be procured through National Competitive Bidding (NCB) procedures. Contracts for small works estimated to cost less than US$ 30,000 equivalent per contract, up to an aggregate amount of US$100,000 equivalent, may be procured under lump-sum, fixed-price contracts awarded on the basis of quotations obtained from three qualified domestic contractors invited in writing to bid. The invitation shall include a detailed description of the works, including basic specifications, the required completion date, a basic form of agreement acceptable to IDA, and relevant drawings where applicable. The awards will be made to the contractors who offer the lowest price quotation for the required work, provided they demonstrate they have the experience and resources to complete the contract successfully. These contracts will mostly be for works relating to minor rehabilitation of CHAL and NHTC. Goods The total cost of goods is estimated at US$820,000 for the initial three-year project. Procurement will be bulked where feasible into packages valued at US$100,000 equivalent or more and will be procured through International Competitive Bidding (ICB) procedures. Goods that are estimated to cost more than US$100,000 equivalent per contract will be procured through International Competitive Bidding (ICB) procedures. Goods estimated to cost less than US$100,000 equivalent per contract, up to an aggregate amount of US$ 1.0 million equivalent, will be procured through NCB. Goods that are estimated to cost less than US$30,000 equivalent per contract up to an aggregate of US$ 200,000 equivalent, may be procured through National Shopping procedures (for goods available locally) and/or through International Shopping procedures (for those goods not available on the national market), in accordance with the Bank Guidelines, and/or through the Inter-Agency Procurement Services Office of the UIDP (IAPSO). Services The total cost of consultant services is estimated at US$ 4.0 million equivalent for the entire three-year project. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality and Cost Based Selection (QCBS) by evaluating the quality of the proposals before comparing the cost of the services to be provided. - 73 - Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract, up to an aggregate of US$200,000 equivalent, will be selected through Least Cost Selection method. Consultants for services estimated to cost less than $100,000 equivalent per contract may be selected based on Consultants' Qualifications in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. Consultants for services meeting the requirements of Section V of the Consultant Guidelines will be selected under the provisions for the Selection of Individual Consultants method. Individual Consultants (IC) will be selected through comparison of job description requirements against the qualifications of those expressing interest in the assignment or those approached directly. To ensure that priority is given to the identification of suitable and qualified national consultants, short-lists for contracts estimated under US$100,000 or equivalent may be comprised entirely of national consultants (in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines), provided that a sufficient number of qualified individual or firms (at least three) are available at competitive costs. However, if foreign firns have expressed interest, they will not be excluded from consideration. The Standard Request for Proposal (RFP) as developed by the Bank will be used for requesting proposals, and for selection and appointment of consultants. Simplified contracts will be used for short-term assignments -- simple missions of standard nature (i.e., those not exceeding six months) carried out by individuals consultants or firms. The government will be briefed during negotiations about the special features of the new guidelines and the RFP, in particular with regard to advertisement, public bid opening, and evaluation criteria. Table A: Project Costs by Procurement Arrangements (US$ million equivalent) I1. Works 0.00 2.04 2.03 0.00 4.07 I (0.00) (0.27) (0.06) (0.00) (0.33) 2. Goods 0.76 0.64 0.25 0.00 1.65 (0.44) (0.31) (0.07) (0.00) (0.82) 3. Services 0.00 0.00 10.51 0.00 10.51 Consultant Services/Technical (0.00) (0.00) (5.35) (0.00) (5.35) Services/Training 4. Recurrent 0.00 0.00 0.00 1.87 1.87 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Unallocated 0.00 0.00 2.30 0.00 2.30 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.76 2.68 15.09 1.87 20.40 (0.44) (0.58) (5.48) (0.00) (6.50) " Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies - 74 - 2J Includes civil works and goods to be procured through national shopping, consuiting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local govemment units. Prior review thresholds (Table B) Type of Expenditure Contract Value Procurement Contracts Subject to (Threshold) Method Prior Review (US$ thousands) (IJS$) 1. Works < 100 NCB All contracts 2. Goods >=100 ICB All contracts < 100 NCB All post review < 30 IS/LS All contracts > $10,000 3. Consultant Services Firms >=100 QCBS/QCS All contracts >$50,000 <50 LCS All post review Individuals <100 Individual All contracts >$30,000 Consultant Frequency of procurement supervision missions proposed: At least one every 6 months (includes special procurement supervision for post-review/audits). Overall Procurement Risk Assessment High The project does not satisfy the Bank's minimum procurement management requirements due to the following: (i) Lack of previous experience both at managerial and staff level, (ii) Lack of experienced procurement staff, (iii) Lack of proper procurement monitoring system The project is however vital for capacity building and the establishment of a more experienced implementation staff. The action plan agreed with MOH and project team will include (a) the use of either an experienced "management firm" or "individual consultants" with function of support and transfer of skills to local staff. Moreover an extemal "implementing agency" will manage the AIDS/HIV component. (b) the carry out of a procurement seminar for procurement staff, and (c) the establishment of a modem M.I.S. system. It is expected however that capacity will be gradually built during the first two years of the project, and that up to 8 MOH staff will be sufficiently trained to take over procurement and implementation functions. - 75 - Disbursement Allocation of credit proceeds (Table C) Disbursement Disbursement and withdrawal procedures are detailed in the World Bank Disbursement Handbook (1992 edition). All disbursements are subject to the conditions of the Credit Agreement and the procedures defined in the Disbursement Letter. The proposed IDA Credit of US$15.25 million would be disbursed over three years with an expected Project Completion Date of September 30, 2003 and a closing date of March 31, 2004 . The proposed allocation of Credit proceeds is shown in table C below. MOHSW will be responsible for ensuring that financial management and reporting procedures for the project meet GOL and the World Bank standards. A Financial Management Action Plan has been developed to lay out an essential institutional set-up and internal control mechanisms as well as to set forth necessary actions for systems development for sound financial management, and incorporated in the Operational Manual. As MOHSW is not yet ready for disbursements based on Project Management Reports (PMR), existing World Bank disbursement procedures, as outlined in the World bank's Disbursement handbook, will be followed, i.e. Direct Payment, Reimbursement and Special Commitment. Table C: Allocation of Credit Proceeds E j7 A.... Works, equipment, furniture, vehicles, 0.80 100% of foreign expenditures and 90% materials, and other goods for the of local expenditures Health Sector Program Technical services, consultants' 2.85 100% of amounts disbursed services, and training for the Health Sector Program Materials and other goods for 0.20 100% of foreign expenditures and 90% HIV/AIDS Component of local expenditures Consultants' services and training for 0.38 100% of amounts disbursed HIV/AIDS Component HIV/AIDS Grants 1.42 100% of amounts disbursed Refinancing of PPF 0.40 Unallocated 0.45 Total Project Costs 6.50 ___ Total 6.50 Use of statements of expenditures (SOEs): All applications to withdraw proceeds from the Credit account will be fully documented except for expenditures against contracts (i) with an estimated value of $US 100,000 each or less for works; (ii) with an estimated value of US$100,000 or less for consulting firms and goods; (iii) with an estimated value of US$50,000 or less for individual consultants; and (iv) for all training workshops and study tours, which may be claimed on the basis of certified Statements of Expenditure (SOEs). Documentation supporting expenditures claimed against SOEs will be retained at MOHSW and will be available for review as requested by IDA supervision missions and project auditors. - 76- Special account: To facilitate disbursements of eligible expenditures for works, goods and services, the Government will open a Special Account within a commercial bank maintained by the Central Bank in US dollars to cover part of IDA's share of eligible expenditures to be managed and administered by the MOHSW. The Authorized Allocation of the Special Account would be US$300,000, covering an estimated four months of eligible expenditures financed by IDA. Initially, the authorized allocation will be limited to an amount of US$150,000 until the aggregate amount of withdrawals from the Credit account plus the total amount of all outstanding special commitments entered shall be equal to SDR 1.0 million. MOHSW will be responsible for submitting monthly replenishment applications with appropriate supporting documents for expenditures. To the extent possible, all of IDA's share of expenditures should be paid through the special account. - 77 - FINANCIAL MANAGEM1ENT ACTION PLAN A. General Under the supervision of the Financial Controller of the MOHSW, the Project Accounting Unit (PAU) - a new Unit that will be established at the Ministry in substitution for previously externally operating arrangements by donors (African Development Bank, Ireland Aid and World Bank) - will be responsible for ensuring that financial management and reporting procedures will be acceptable to Government and Donors. The principal objective of the MOHSW's financial management system will be to support management in their deployment of limited resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes, that will serve the needs of the people of Lesotho. MOHSW's financial management system will be capable of producing timely, relevant, understandable and reliable financial information that should enable management to plan, implement, monitor and appraise the Program's overall progress towards the achievement of its stated and agreed objectives. However, for MOHSW's financial management systems to fully deliver on the aforementioned objectives, its financial management system (including assets/ procurement management) must be substantially strengthened and enhanced. In this regard, a 24 month Financial Management Information Systems Technical Assistance Team has been retained. B. Financial Management Action Plan Financial Management Commiftee: A representative FMC will be appointed to review the Project Management Report (PMR) every quarter. The PMR will comprise: Financial Statements, as discussed below. Members of the FMC will review and approve Quarterly and Annual Financial Statements; they will also examine material variances between budgetlactual figures, seeking remedial action as appropriate within an agreed time-frame. Project Progress, i.e., Output Monitoring Report (OMR). The format and details of the OMR will need to be developed. An important aspect of the OMR will be the accompanying narrative interpreting the project's progress with agreed financial performance indicators and how costs to date relate to those planned at appraisal, and the likely effect of the Project by completion. Procurement Management (including Goods, Works and Services). The FMC will also be responsible for monitoring the work of the FMIS Technical Assistance, for providing help and guidance as appropriate and for ensuring that recommendations made are given timely consideration by the relevant authorities. Staffing A Chief Accountant will be appointed to the PAU, in order to direct and guide financial management operations. Relevantly qualified/experienced accounting support staff will be in place. Varying levels of training will be required in financial, management, and government accounting; inforrnation systems and computer applications; and procedures relating to utilization of funds (e.g. Special Accounts, SOEs, Special Commitments, procurement, etc.) On-the-job coaching will also be provided. - 78 - Financial Procedures Manual/Internal Controls The Chief Accountant will document the internal control systems in a Financial Procedures Manual. The activities of Program will be periodically reviewed by the Internal Audit Unit of the Ministry of Finance (MOF). Accounting System and Information Technology The Govermnent of Lesotho's Financial Information System (GOLFIS) was developed in 1992 with the assistance of ODA (now DFID). Technical assistance is currently being sought by the Treasury, MOF, to carry out a full-scale review of the System. Presently, GOLFIS is unable to satisfy the financial management information requirements of Donors. Pending the completion of the Financial Management and Information System consultancy (initiated under Project preparation), and following discussion with the Accountant General, it has been agreed that the Chief Accountant at the PAU will introduce a spreadsheet system (e.g. Excel) as a transitional arrangement to facilitate timely accounting for Donor and Counterpart Funds. The financial management information technology requirements for the Ministry of Health - hardware, software and training (including e-mail requirements) - will be determined by the FMIS consultants in consultation with the Accountant General, IT Manager (Ministry of Finance) and the Financial Management Committee. Planning and Budgeting Counterpart Funding will be approved in line with the Government's budgetary process. Donor contributions will be deter-mined in line with annual planned activities, analyzed by quarter. The Chief Accountant, in consultation with the Financial Controller and Financial Management Committee, will be responsible for preparing the Project's Quarterly/Annual Cash Flow Forecast in line with generally accepted accounting practice. Government Accounting - Cash vs. Accruals The Program must meet the Treasury's requirement for cash accounting. Thus, for the Project, Donor and related Counterpart Funds will be accounted for by the PAU on a cash basis. In due course, for management reporting purposes, the Financial Management Committee will decide whether to convert to an accruals basis of accounting (whilst maintaining a cash basis for Government reporting purposes). Procurement of Goods, Works, and Services The Chief Accountant and members of staff will work closely with the Procurement Advisor and Procurement Unit, as internal control issues and the incurring of liabilities on behalf of the Program will be matters of particular concern to the financial management function. A Procurement Management Report, showing procurement status and contract commitments, will be prepared quarterly for consideration by the Financial Management Committee. Procurement procedures will be documented in the Financial Procedures Manual. Banking Activities - Flow of Funds Regarding IDA and Government of Lesotho funding, the PAU will monitor bank accounts as follows: - 79 - (a) A Current Account in Maloti with a commercial bank in Maseru (Part I Account) to which drawdowns from the Special Account - (c) below - will be credited for Project financing and administrative expenses. (b) A Current Project Account in Maloti with a commercial bank in Maseru (Part 2 Account) to which Counterpart Funding by the Government will be deposited. (c) Special Account managed by the Central Bank in US Dollars (residing in a commercial bank), which will show: Dollar cost of transfers to Part 1 Account; * Dollar cost of direct payments to suppliers; Dollar advances from the World Bank Ledger Loan Account; Opening and Closing Balances. All project bank accounts will be reconciled with bank statements on a monthly basis. These reconciliations will be prepared by the Project Accountants and approved by the Chief Accountant on a monthly basis. Identified differences will be expeditiously investigated. Control procedures over all bank transactions (e.g. cheque signatories, transfers etc.) will be documented in the Financial Procedures Manual by the Chief Accountant. Withdrawals/Disbursements Disbursement procedures will be documented in the Financial Procedures Manual prepared by the Chief Accountant. Key features of the process should include: Disbursement procedures will be documented in the Financial Procedures Manual prepared by the Chief Accountant. Key features of the process should include: Approved Annual Work Programs, analyzed by quarter; Approved Annual Cash Flow Forecast, analyzed by quarter; Operation of bank accounts on an imprest basis, replenishments being made on the basis of forecasted cash flows for planned activities; Monthly bank reconciliations; * Approval of the Quarterly Project Management Report by the Financial Management Committee. Fixed Assets/Civil Works and Inventories A Fixed Assets Register will be prepared, regularly updated and periodically checked. Regarding Construction/Capital Work in Progress, controls will be established to ensure that payments made are in respect of certified work. Contract Status Reports will be prepared quarterly for consideration by the Financial Management Committee, as part of the Procurement Management Report referred to above. Control procedures over fixed assets will be properly documented in the Financial Procedures Manual. Financial Reporting (Monthly and Quarterly/Annually) Monthly Cash Reporting In compliance with Government reporting requirements, The PAU (via the Office of the Financial Controller, MOHSW) will provide a Monthly Return to the Treasury (MOF) for incorporation into the National Accounts. - 80 - Quarterly/Annually The Financial Management Committee, having considered the recommendations of the Chief Accountant, will determine: * The Chart of Accounts; * The format/content of Quarterly/Annual Financial Statements; and * The selection and adoption of accounting policies and accounting standards. The Financial Statements and Annexes are likely to include: * A Consolidated Statement of Sources and Uses of Funds (including Donor and Counterpart Funds); * Project Balance Sheet; * Notes in respect of: significant accounting policies and accounting standards adopted by management when preparing the accounts; any supplementary information or explanations that may be deemed appropriate by management in order to enhance the presentation of a "true and fair view ". * Special Account Statements/Reconciliations showing deposits and replenishments received, payments substantiated by withdrawal applications, interest that may be earned on the account and the balance at the end of the fiscal year; * SOE Withdrawal Schedule (World Bank requirement), listing individual withdrawal applications relating to disbursements by the Statement Of Expenditure (SOE) Method, by reference number, date and amount In due course, a Cash Withdrawal/Disbursement Schedule will be required following the introduction of the Project Management Report (PMR) method of disbursement, as described in the Loan Administration Change Initiative Handbook (LACI), a September 1998 World Bank publication. * Project Cash Forecast. Financial Performance Indicators The Financial Management Committee will define (in consultation with Government and Donors), and employ performance indicators to assess and report upon its progress in meeting financial management requirements of GOL and donors. External Audit Relevantly qualified, experienced and independent auditors will be appointed with acceptable Terms of Reference. The extemal auditor will also be expected to prepare a separate Management Letter giving observations and comments, and providing recommendations for improvements of accounting records, systems, controls and compliance with financial covenants. -81 - Annex 7: Project Processing Schedule- LESOTHO: Health Sector Reform Project Time taken to prepare the project (months) 48 51 First Bank mission (identification) 03/12/98 03/12/98 Appraisal mission departure 11/28/99 11/28/99 Negotiations 02/15/2000 04/25/2000 Planned Date of Effectiveness 06/01/2000 09/0112000 Prepared by: Ministry of Health and Social Welfare Preparation assistance: Japanese PHRD Grant No. 025082 (US$ 400,000 equivalent), Project Preparation Facility (US$ 420,000 equivalent), Netherlands CTF No. TF035623 (44,420 NLG), Swedish CTF No. TF026983 (US$ 101,225) Bank staff who worked on the project included: ame Spca Julie McLaughlin (AFTHI) Health Systems/Team Leader Gayle Martin (AFMZA) Health Economics David Bruns (AFTM1) Economics Andrew Follmer (AFTHI) Operations Anthony Hegarty (AFTS1) Financial Management T. Mpoy-Kamulayi (LEGAF) Legal Francesco Samo (AFTS 1) Procurement Steve Gaginis (LOAAF) Disbursement K.G. Awunyo (LEGAF) Legal Eliezer Orbach (AFTI2) Capacity Building Paul Ickx (Consultant) Pharmaceutical Management Delanyo Dovlo (Consultant) Human Resource Development Pieter Smoor (Consultant) Architect/Physical Planner Andrev Nyamete (Consultant) Monitoring and Evaluation Carin Lengren Martin (Consultant) Physical Planning Lori Geurts (AFTH1) Team Assistant - 82 - Annex 8: Documents in the Project File* LESOTHO: Health Sector Reform Project A. Project Implementation Plan Phase I Project Implementation Plan (Microsoft Project Document) Detailed Logical Framework for all Reform Components - September 1999 B. Bank Staff Assessments Eliezer Orbach - "Assessment of Institutional Capacity" Delanyo Dovlo - "Lesotho Health Sector Programme: Summary of Human Resources Development Issues" Anthony Hegarty - "Draft Financial Management Action Plan" - Carin Lenngren-Martin - "Joint Health Sector Mission: Technical Report on Infrastructure" - May 1999 Paul Ickx - "Joint Health Sector Mission: Debriefing Note on Lesotho Trip" Pharmaceutical Sector Development - May 1999 C. Other Draft Health Sector Reform Program Plan - October 1999 Strengthening Lesotho's Health Care System - 1998 Report on De-Linking of the National Drug Service Organization (NDSO) from the Lesotho Pharmaceutical Corporation (LPC) - August 1997 Lesotho 8th Round Table Conference - November 1997 Lesotho Health Sector Public Expenditure Review - June 1996 Health Services in Lesotho: A Study of New Possibilities for Cooperation with South Africa - November 1994 *Including electronic files - 83- Annex 9: Statement of Loans and Credits LESOTHO: Health Sector Reform Project Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P001402 1998 Lesotho AGPOL&CAPBLDG 0.00 6.80 0.00 6.52 2.81 0.00 P058050 2000 Lesotho Community Development Support Project 0.00 4.67 0.00 4.83 0.00 0.00 P001409 1998 Lesotho HILAND WATER IB 45.00 0.00 0.00 43.60 14.60 0.00 P001401 1994 Lesotho PRIVATISATIONIRESTRU 0.00 11.00 0.00 3.10 -1.73 0.00 P001403 1996 Lesotho ROAD REHAB. & MAINT 0.00 40.00 0.00 30.20 24.46 19.82 P066416 1999 Lesotho SECOND EDU SEC DEVP 0.00 21.00 0.00 19.33 1.73 0.00 Total: 45.00 83.47 0.00 107.58 41.87 19.82 - 84 - LESOTHO STATEMENT OF IFC's Held and Disbursed Portfolio In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Total Pending Commitment: 0.00 0.00 0.00 0.00 - 85 - Annex 10: Country at a Glance - LESOTHO: Health Sector Reform Project Sub- POVERTY and SOCIAL Saharan Low- - _____- Lesotho Africa lnqomg* Development diamond' POWIlatinol mid.vftr Im11#011ns 2 I 628 3 1ISie xecac IGNP Der caoitso (Atlss method. US$) 570 480 520Liexpcay GN,KP (Atlas Afethod, USS biflions) I ? 304 1,844 Aversaii annual drowth. 1992-98I Population (161 22 ~ 286 1 Labor force M% 2.8 2,6 1~9 GGross per primary most recant estimate *lat.,t Vogl, Avallobte 1"44.811 capita enrollment Poverty (16 of DOD ulatiof~belov nOtional ooverfv line) 49~ uirban nonuilation (16 o(lfaio..lto26 33 1 Life exoectancv at birth (vears) 56 St. 83 infant moortalII4lv (r 1. 000 liv. births) ..93 91 11)1 rhild mnalnutrition (16 of children ufnder S1 is Access to safe water AccesS to safe water ff6 of Dooulefloq) 62 47 , 7 Illiteracy (1 of ooot,at,on aooe isCI 16 42: 7 Gross orln,arv enrollment 1% ot'SChdlo(-aoe logalon 0 7 10 eoh Female . ~~~~~~~~oouaio) 1148 77 10 KEY ECONOMIC RATIOS aend t.ONG.TERM TRENDS 19'?? 1987 199? 198 Economic ratios GDP (US$ billions) 0.19 3 10 0,87 Gross do nesiifr invaoitmartlflflP 25.0 464 866S 48 8 Fynorts of onoods .nd ".rviras1/G0P 1n 7, 16 177 32.6 35 rd Gross domnestic savinaslGDP 744.5 -70.0O -9A -42.7 G ross natinn.8l savlnos/Gr)nP -5.80 -41 .s 472 1 5 Current account batance/GODP .902: -89. .283 -27.2 Dmsi Ivsmn Interest oavmpnts./GO rP 0 1 1 q IA 24 Ivsmn Total debtJGflIP 121 7 A 64 .5 o0. Savings Total deabt servicelexoorts 0.2 3,5 6.4 8.1 PreAAnt valueo of dfebtlGnp. 46 4 Preseolt valu~e of debtlex borts 6. Indebtedness 197747 1988t-98 1997 1998l 1999-03 (averaoe annual growth) GOP . 16 6~~~~~~~~~~~~~7 .80 . -66 , Lesotho G~NP net caoita -2 13 1 -4 36A Low-income group Exports of aoods and servces. 16 8.0 19.1 15. ~12.8 STRUCTURE of the ECONOMY 1977 1987 1997 1998 Growth rates of output and investment % (16 of GDP) 30 Anricijlt:ira 34 3 20 1 1 1 5 11 6 2 Industrv 15.5 32.5 42.0 42-0 to Mantifanturino 5.0 149q 17 2 Services 50.2 47.5 48.5 48.5 194 5 96 9 Private. ronoujmotion 15.7 2 147.2 82 0 120 9 -20 G eneral novernment consurinotion 17 4 22 ii 278E 21 7 GDI -'*GDP ImDorts of noods and services 110.2 131.8 127.8 124.7 (averaae annual arowth 11977-87 1988-98 1997 1998 Growth rates of exports and imports(% Aorinulture -5.8 2 3 0 7 4 6 40 Industrv 4.1 10.3 1.1 -12.3 30 Mant,facti,rinn 18 5. 5 3 20 Servicesq 43 8.0 6.6 4.8 Private. consjmntinn 1 4 -2 7 134 8 5.10 Ge tneral novernment consumption 60 44 17 0 0995 9 97 O Gross domestic investment 2.0 13.3 3.5 -10.4 . 0 4 97 9 lmnorts of nonds and ser-vices 2 3 1 8 11 9 I 6 Exports - l-mports Gross national oroduct 2.4 3.8 4.5 -3.1 Note: 1998 data are preliminary estimates. -The diamonds show four key indicators in the country tin bold) comoared with its income-aroun averane. If data are mission, the diamond will he incomnlete -86 - Lesotho PRICES and GOVERNMENT FINANCE 1977 1987 1997 1998 Inflation (%) Domestic prices 20 (% change) Consumer prices 16.7 11.8 8.6 8.7 15 Implicit GDP deflator 7.5 13.5 9.6 3.7 i, Government finance (% of GDP, includes current grants) Current revenue 32.6 38.5 47.7 47.7 93 94 95 90 97 98 Current budget balance 8.6 -0.2 13.2 4.7 GDP deflator - t CPI Overall surplus/deficit -7.9 -22.1 -4.6 -9.3 TRADE (UIS$ millions) 1977 1987 1997 1998 Export and Import levels (USS millons) Total exports (fob) 15 47 195 183 1,250 n.a. 100 n.a. Manufactures ..0 Total imports (cif) 211 452 1,012 873 s00 Food 250 * Fuel and energy .. Capital goods .. .. .. .. 0 92 93 94 95 96 97 98 ExDort Dnce index (1995=100) . Imoort orice index (1995=1001 .. . .. .. * Exports * Imports Terms of trade (1995=100) . BALANCE of PAYMENTS (US$ millions) 01977 1987 1997 1998 Current account balance to GDP ratio (%) Exports of goods and services 29 74 267 250 0 Imports of goods and services 236 512 1,080 932 Resource balance -206 -438 -813 -882 20 I 'l l ' Net income 166 350 318 281 I I Net current transfers .. -241 227 166 40 Current account balance -174 -329 -269 -235 Financing items (net) 174 330 412 241 l Changes in net reserves 1 -1 -143 -6 -80 Memo: Reserves includino oold fUSS millions) .. 68 484 576 Conversion rate (DEC. locaW//SS) 0.9 2.0 4.3 5.1 EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 /USS millions) Composliton of total debt, 1998 (USS millions) Total debt outstanding and disbursed 25 259 660 692 IBRD 0 0 58 61 G a A 61 IDA 15 81 163 180 F: 55 _:0 A:51 Total debtservice 0 16 45 51 E 107 IBRD 0 0 6 8 . 1_7 IDA 0 1 3 3 B:180 Composition of net resource flows 6 : 2 4 Offidal grants 19 47 38 59 Official creditors 8 29 21 10 Private creditors 0 12 13 16 Foreign direct investment 0 6 29 30 : 2C 24 Portfolio equity 0 0 0 World Bank program A- IBRD E - Bilateral Commrtments 10 0 0 52 B - IDA D - Other multilateral F - Private Disbursements 5 9 20 18 c - IMF G - Short-ternm Principal repayments 0 0 4 6 Netflows 5 8 16 11 Interest payments 0 1 5 5 Net transfers 5 8 11 7 Development Economics 9/3/99 -87 - IBRD 30879 LESOTHO HEALTH SECTOR REFORM oTEYArEYANENG t MASERU *MOKHOTLONG ,3 e ~~ROMA 0 THABA.TSEKA \ *MWKAFETENGE' I {MOHALE'S L g HOEK _ ING 0 1 0 20 30 40 50 60 70 KILOMETERS MILES lo 5 l l 0 1 0 20 30 40 50 ZAIRE ANANIA * DISTRICT CAPITALS * NATIONAL CAPITAL GOLA ZAMBIA DISTRICT BOUNDARIES INTERNATIONAL BOUNDARIES IqAMIBIA t P } [ BarNA NA -o O T preIl rpfdb TIW ~.y~d'W~ AFRiCA MY20 This nap hoe bee noo tb The World Benk'a stcff ecoloeiooly for thte conoonienoe of the ,aodoer end is eooloeo'elp fo te ntrolus o oWod-ak onid th. Interelel ie Coorie. The~ deaiot do osd end oondco owan on thi s-p do not imply, n the port ao The World Bock e-d the c i=ca thc cee Corporntion, any jodg-ment -t the legal stoles of any te-pitoey ou any endorsement or - oepta-oe at -Joh b...ndares MAY 2000