Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 33791-GH PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR 17.3MILLION (US$25 MILLIONEQUIVALENT) TO THE REPUBLIC OF GHANA FOR AN ECONOMIC MANAGEMENT CAPACITY BUILDINGPROJECT October 19,2005 Finance Sector Unit Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective 30 September 2005) CurrencyUnit = Cedi Cedi 9,062.5 = US$1 US$1.44891 = SDRl FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AG Accounting General ADB Agricultural Development Bank ADMU Aid andDebtManagementUnit ARB Association o f Rural Banks BOG Bank of Ghana CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CMAs Central Management Agencies CPAR Country Procurement Assessment Report C U A Credit UnionAssociation CQS Consultant Qualifications DANIDA Danish InternationalDevelopment Agency DFID Department for InternationalDevelopment (UK) D C A Development Credit Agreement DPs Development Partners EMCB Economic Management Capacity Building EO1 Expression o f Interest ERSO Economic Reform Support Operation FAA Financial Administration Act FM Financial Management FMR Financial Monitoring Report FINSAC Financial Structural Adjustment Credit ECOWAS Economic Community of West African States FINSSP Financial Sector Strategic Plan FSD Financial Sector Division FSR Financial Sector Reform GCB Ghana CommercialBank GDP Gross Domestic Product GHAMFIN Ghana Micro-Finance Institutions Network GIMPA Ghana Institute o f Management & Public Administration GNA Ghana News Agency GNP General ProcurementNotice GOG Government o f Ghana GPRS Ghana Poverty Reduction Strategy FOROFFICIAL USE ONLY GSE Ghana Stock Exchange GSC Ghana Steering Committee GTZ German Agency for Technical Cooperation HFC HomeFinance Company Limited IAAA InternalAudit Agency Act IAIS International Association o f Insurance Supervisors ICB International Competitive Bidding ICT Informationand Communications Technology ICR Implementation Completion Report IDA InternationalDevelopment Association IMF Intemational Monetary Fund IPO InitialPublic Offering IOSCO Intemational Organization o f Securities Commissions JSC Joint Steering Committee LTS Long Term Savings M&E Monitoring & Evaluation MDAs Ministries, Departments & Agencies MDBS Multi-Donor Budget Support MIS Management Information System MOFEP MinistryofFinance& Economic Planning MOPSR MinistryofPublic Sector Reform M o U Memorandum o f Understanding MSME Micro, Small and MediumEnterprises NBFI Non-Bank Financial Institution N C B National Competitive Bidding NIB National Investment Bank NIC National Insurance Commission OHCS Office o f the Head o f Civil Service PPF Project PreparationFacility PRSC Poverty Reduction Support Credit PSC Public Sector Commission PSR Public Sector Reform PUFMARP Public Financial Management Reform Programme QCBS Quality and Cost Based Selection RCBs Rural and Community Banks RCP Remittance Country Partnership RFSP Rural Financial Services Project ROSC Report on the Observance of Standards and Codes RRA Rapid Results Approach RTGS Real Time Gross Settlement SDB Standard BiddingDocuments SDR Special Drawing Right SEC Securities & Exchange Commission SIC State Insurance Corporation SMAs Strategic Management Agencies SPEED Support Programme for EnterpriseEmpowerment and Development This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. SPN Specific Procurement Notice SRFP StandardRequest for Proposals SSB Social Security Bank SSNIT Social Security& National Insurance Trust SWAP Sector Wide Approach TA Technical Assistance TIPCEE Trade and InvestmentProgrammefor Competitive Export Economy TOR Tema Oil Refinery USAID United States Agency for Intemational Development Vice President: Gobind T. Nankani Country Director: Mats Karlsson Sector Manager: Antony Thompson Task Team Leader: ChristoDher Juan Costain GHANA EconomicManagementCapacityBuildingProject CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country andsector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 3 3. Higherlevelobjectivesto which the project contributes.................................................... 4 B PROJECTDESCRIPTION . ................................................................................................. 5 1. Lending instrument............................................................................................................. 5 2. Project development objective andkey indicators .............................................................. 5 3. Project components ............................................................................................................. 6 4. Lessons leamed andreflected inthe project design............................................................ 8 5. Altematives considered and reasons for rejection............................................................ 11 C. IMPLEMENTATION ........................................................................................................ 13 1. Partnership arrangements.................................................................................................. 13 2. Institutional and implementation arrangements ................................................................ 14 3. Monitoringand evaluation of outcomesh-esults................................................................ 16 4. Sustainablhty..................................................................................................................... * . . 17 5. Critical risks and possible controversial aspects............................................................... 17 6. Loadcredit conditions and covenants............................................................................... 20 D APPRAISAL SUMMARY . ................................................................................................. 21 1. Economic and financial analyses ...................................................................................... 21 2. Technical........................................................................................................................... 21 3. Fiduciary ........................................................................................................................... 21 4. Social................................................................................................................................. 21 5. Environment...................................................................................................................... 22 6. Safeguard policies............................................................................................................. 22 7. Policy Exceptions andReadiness...................................................................................... 22 Annex 1: Countryand Sector or ProgramBackground ......................................................... 23 1. Country Economic Background........................................................................................ 23 Annex 2: Major Related Projects Financedby the Bank and/or other Agencies .................35 Annex 3: Results Framework and Monitoring ........................................................................ 37 Annex 4: Detailed Project Description ...................................................................................... 47 Annex 5: Project Costs............................................................................................................... 60 Annex 6: Implementation Arrangements ................................................................................. 61 Annex 7: Financial Management and DisbursementArrangements ..................................... 65 Annex 8: Procurement Arrangements ...................................................................................... 74 Annex 9: Economic and Financial Analysis ............................................................................. 81 Annex 10: Safeguard Policy Issues ............................................................................................ 82 Annex 11:Project Preparation and Supervision ..................................................................... 83 Annex 12: Documents inthe Project File ................................................................................. 85 Annex 13: Statement of Loans and Credits .............................................................................. 86 Annex 14: Country at a Glance ................................................................................................. 88 Annex 15: M a p 33411................................................................................................................. 90 GHANA ECONOMIC MANAGEMENT CAPACITY BUILDINGPROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTFS Date: October 19,2005 Team Leader: Juan Costain Country Director: Mats Karlsson Sectors: Generalfinance sector (85%); General Sector ManagerDirector: Anthony Thompson public administration sector (15%) Themes: Other financial and private sector development (P);Other public sector govemance (S) Project ID:PO92986 Environmental screening category: Not Required [ ] Loan [XICredit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 25.00 ASSOCIATION OTHER 0.00 5.20 5.20 Total: 7.60 30.20 37.80 Borrower: Republic of Ghana ResponsibleAgencies: Ministry ofFinance and Economic Planning (MOFEP) and Ministry o f Public Sector Reform (MOPSR) ,-~-~ -~ I Estimateddisbursements(Bank N/US$m) FY 06 07 08 09 10 11 ~~~ ~~ Annual 2.50 5.00 5.00 5.00 5.00 2.50 Cumulative 2.50 7.50 12.50 17.50 22.50 25.00 Project implementation period: Start: January 2006 End:December 2010 Expected effectiveness date: March 2006 ExDectedclosing;date: June 2011 Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.3 [ ]Yes[X]No Does the project require any exceptions from Bank policies? Re$ PAD D.7 [X]Yes[ ]No Have these been approved by Bank management? [X]Yes[ ]No I s approval for any policy exception sought from the Board? [ ]Yes[X]No Does the project include any critical risks rated"substantial" or "high"? Re$ PAD C.5,Annex 7 [X]Yes[ ]No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [X]Yes[ ]No Project development objective Re$ PAD B.2, TechnicalAnnex 3 The proposed project aims at supporting the government to define and perform its role as a facilitator for economic development. The project seeks to establish a level playing field in the finance sector focusing upon outcomes rather than establishing new institutions, together with a clear policy to improve the efficiency of public sector management for an enhanced service delivery. The project, through support to Financial Sector Strategic Plan (FINSSP), will seek to catalyze the allocation of capital to Ghanaians and improve competitiveness and governance of long term savings institutions and markets. The project also aims to strengthen the Public Sector Reform Strategy through providing a framework for prioritization, consensus building and budgeting and to translate the strategy into detailed action plans supported by a thorough monitoring and evaluation mechanism. The objective o f the Public Sector Reform component would be to facilitate a reform initiative in the public sector which would be comparable to that achieved through FINSSP in the financial sector in recent years. While this project component might support future implementation of selected activities under some o f these action plans through collaboration with Development Partners, any more substantive engagement by the World Bank would be covered through a supplemental financing under this project. It i s proposed to design this project component with an open architecture to maximize the involvement o f interested Development Partners (DPs). Project descriptionRe$ PAD B.3.a, TechnicalAnnex 4 ComponentOne: PublicSector Reform(US5 millionequivalent) The project will support the development o f a framework for prioritization, consensus building andbudgeting o fpublic sector reform objectives. Once the framework for Public Sector Refom i s established, the project will support the development of detailed action plans for individual operations within Ministries, Departments & Agencies (MDAs) supported by rigorous monitoring and evaluation mechanisms. The project will support implementation, in collaboration with Development Partners, o f reform initiatives o f a scale which does no1 necessitate a separate operation. Component Two: Regulation and Supervision of Financial Markets (US$6.7 million equivalent) The component will support strengthening o f the Securities & Exchange Commission (SEC), The project will (i) provide SEC with technology upgrading; (ii) technical assistance and provide capacity building to enhance performance in the areas o f supervision, surveillance and enforcement; (iii) support the implementation o f amendments to the Long-Term Savings (LTS) Act, 2004; (iv) support the development, regulation and supervision o f the LTS agency; and (v) provide support to SEC public education campaign. Component Three: Banking and NBFI Regulation and Supervision (US$13.4 million equivalent) The component will support strengthening o f Bank o f Ghana (BOG) through (i) technical assistance to review the structure o f the Banking Supervision Department and the fit o f various departments in the overall organizational structure o f BOG; (ii) support to the enactment of several laws critical for implementation o f reforms (e.g. Bills and Checks Bill, Credit Bureaus Law); (iii)improvements to the technological base o f BOG; (iv) provide support to clarify regulations and supervision responsibilitiesbetween BOG and Credit Union Association (CUA), for credit unions and B O G and ARB Apex Bank for rural banks; and (v) the project will strengthen supervisory and regulatory capacity o f BOG, C U A and ARB Apex Bank. ComponentFour: InsuranceRegulationandSupervision(US$1.3 millionequivalent) The component will support the National Insurance Commission (NIC) in (i) providing technical assistance for the design of the curriculum and strategic plan to support training o f insurance industry staff at, and operation of, the Insurance Industry Training Center; (ii) revising and instituting a modern legal and regulatory insurance framework, including development of regulations; (iii)capacity buildingto improve insurance supervision; and (iv) capacity building support to the research and actuarial units withinNIC. ComponentFive: Strengtheningof CapitalMarkets(US$2.4 millionequivalent) The component will (i) provide support to review Ghana Stock Exchange (GSE) rules and regulations; (ii)provide expertise to manage the business and regulatory risks of demutualization; (iii) support GSE automation; and (iv) build GSE staff capacity and that o f market operators. ComponentSix: PensionSector Development(US$0.5 millionequivalent) This component aims to: (i) the strengthening of legislation for the governance o f the support pensions sector, inparticular inorder to establish the framework to transfer the responsibility for Social Security and National Insurance Trust (SSNIT) investment management to external, independent and regulated private investment fund managers; (ii) evaluate and design a process for such outsourcing of SSNIT's investment management functions; (iii) strengthenthe capacity o f SSNIT staff to undertake actuarial simulations o f revenue and benefit flows according to different medium-term reform scenarios; and (iv) strengthen the timeliness and accuracy o f individual data account records at SSNIT. Component Seven: Access to Finance and Financial Sector Governance (US$8.5 million equivalent) The component will seek to establish a strengthened Banking and NBFI system that provides a wide range o f competitive products through (i) providing technical assistance to develop a strategic vision and establish a govemance framework for Ghana Commercial Bank, Agricultural Development Bank, National InvestmentBank and State Insurance Corporation; (ii) applying the Finmark approach to better understand access to finance issues (with a focus on the demand side); (iii)facilitating the flow o f remittances; (iv) establishing a sound basis for governance and regulation o f the proposed Venture Capital Trust Fund; and (v) support the work program o f the Presidential Commission on Pension Reform through technical studies o f policy reform areas it i s considering. In addition, this component will support the Aid and Debt Management Unit (ADMU) of MOFEP to (i) segregate MOFEP borrowing activity from BOG monetary policy to engender transparency and information flow through the establishment o f a Domestic Debt Desk at ADMU and capacity building; (ii) restructure government borrowing pattems towards longer term maturities as well as long term debt market development and pricing. The component will also support research at Bank o f Ghana to study cross-border capital flows; and (iii) to support the Financial Sector Division o f MOFEP in the preparation and implementation o f the Borrower's financial sector policies and oversight o frelevant agencies. Which safeguard policies are triggered, if any? Re$ PAD D.6, TechnicalAnnex 10 EMCB focuses on technical assistance and capacity buildingandwill not finance civil works. It therefore does not trigger any environment safeguards policy. Inaddition, the project does not include components with potential negative social impacts (such as retrenchment). Significant, non-standard conditions, if any, for: Boardpresentation: None Loadcredit effectiveness: (i) The borrower has adopted a financial management system satisfactory to InternationalDevelopment Association (IDA); (ii) ThePublicSectorReform(PSR) MemorandumofUnderstandingandtheFinancial Sector Reform (FSR) Memorandum o f Understanding have been executed on behali on the borrower and IDA; (iii) The borrower has adopted the PSR Project Implementation Manual and FSR Projeci ImplementationManual ina form and substance satisfactory to IDA. Disbursement: (i) The Borrower has opened the Project Accounts and deposited therein the initial deposits referred to in section 3.04 o f the Development Credit Agreement (DCA), as well as the approval by IDA o f the PSR and FSR annual work plans andbudgets foi the respective fiscal year; (ii) The review o f the Long Term Savings Act in a manner satisfactory to IDA and the Borrower i s a condition for disbursement under component seven (Access to Finance and Finance Sector Govemance); (iii) The presentation o f the Insurance Bill to Parliament i s a condition for disbursemeni under component four (Insurance Regulation andSupervision). Covenants applicable toproject implementation: (i) The Borrower shall furnish to IDA,within six (6) months after the fiscal year for each financial institution, until the completion o f the project, annual reports on the financial status o f all financial institutions operating in the territory o f the Borrower and regulated by BOG, NIC, SEC, or any other statutory regulator that may be established by the Borrower; (ii) The Borrower shall, not later than six (6) months after the Effectiveness Date, appoint the independent auditors referredto inthe DCA. A. STRATEGICCONTEXTAND RATIONALE 1. Country and sector issues Since embarking on economic reforms in the mid-l980s, Ghana has made considerable progress in laying the foundations for sustainable growth and poverty reduction. This has resulted in sustained per capita output growth, averaging 1.6 percent per annum, and increased private sector activity and investment. Social indicators also improved over the period. Inparallel with the economic reforms, the country completed the political transition, moving to a firmly democratic form of Government. In2004 Ghana continued to enjoy robust growth and managed to avoid the weak macroeconomic management which has been traditionally associated with the electoral cycle. FinanceSector The Government of Ghana (GOG) has shown strong commitment to financial sector development, in particular with the Cabinet approval in 2003 o f the Financial Sector Strategic Plan (FINSSP) which aims at broadening and deepening the financial sector. In addition, the government has made substantial and tangible progress implementing various recommendations from the Financial Sector Assessment program (FSAP) in 2001 and the FSAP update in 2003 (including the enactment o f core legislation). However various weaknesses remain, which include among others: inefficiencies o f the state influenced financial institutions, lack of long- term capital and continued lack o f a level playing field for providers o f financial services. Improved govemance in the financial markets remains an important focus for the continued reform agenda. The March 2005 Corporate Govemance ROSC conducted by the World Bank noted that the "Ghana capital markets call attention to the paramount need for improved enforcement, and stronger institutional capacity o f most regulators and key administrative and judicial bodies. The legal and regulatory framework i s less o f a priority for reform in this respect.'' Through the implementation o f the FINSSP the Government of Ghana intends to promote the evolution o f a financial sector which i s appropriate for the needs of a country moving towards middle income status. The vision is one o f a financial sector which is responsive to the needs o f the 21st century, particularly given the prospect o f greater international and regional competition and opportunity for Ghanaian financial market participants. This i s reflected inthe 2003 National Budget "Ghana's vision is a financial sector that is efficient inthe mobilization and allocation o f funds, fully integratedwith the global financial system and supported by a regulatory system that promotes a high degree of confidence. A financial sector consistent with this vision will be a powerful driver of economic development, achieved through higher levels o f employment, savings, investment and tax revenues." Consistent with the government's vision, the project has an underlying theme o f establishing an enabling environment supported by effective regulation, with an objective that all savers and investors will have the benefit o f regulatory oversight. As a "second generation" financial sector reform program, it i s accepted that the basic institutions required for an effective provision of financial services are largely in place, the objective i s rather to allow them to operate more efficiently. While the project does not support establishing 1 new institutions, it i s intended to provide for capacity building to ensure that financial institutions are adequately resourced for the evolving environment. Marketparticipantsinboththeprivate sector and government have shown strongownership o f the FINSSPreformprogrammewith a view to developing a financial market inGhana which is competitive, fair and reflects a highdegree o f integrity.Underits National Medium-Term Private Sector Development Strategy, which was adopted by Cabinet inJanuary 2004, the Government of Ghana has also incorporatedthe implementation o f the FINSSP reform programme as a component o f the output relating to improving the efficiency and accessibility o f national markets. The stated objectives o f government under the FINSSP are to: 0 be the preferred source o f finance for domestic companies; 0 promote efficient savings mobilization; 0 establish Ghana as the financial gateway to the Economic Community o f West African States (ECOWAS) region; 0 enhance the competitiveness o f Ghana's financial institutions within a regional and global setting; 0 ensure stronger and more facilitative regulatory regime; and 0 achieve a diversifieddomestic financial sector within a competitive environment. Consistent with the findings o f the government's own Public Sector Reform strategy, the agencies responsible for the regulation and development of the finance sector in Ghana cite inadequate resources and pay scales insufficient to attract staff with the qualifications and experience required to carry through the reform agenda. At the same time, the global standards maintained for financial sector regulation continue to evolve (e.g. Base1 11, AMWCFT etc.). Globalization has increased the need for Ghana to maintain standards commensurate with international practice, particularly in light o f the prospect for greater capital account liberalization and integration with global and regional financial markets. Public Sector Reform The government recognizes that its past efforts inPublic Sector Reform have not had the desired impact. Among the main public sector issues are: (i) the current institutional setup in the public sector which i s characterized by weak policy and implementation coordination among government ministries, subvented agencies and local governments; (ii) the challenges in Human Resources facing the public service (particularly with regards to training and compensation) which are seen to compromise both competence and professionalism, (iii) ineffective allocation of equipment and resources within Government, (iv) poor record keeping and use o f Management Information System (MIS), (v) a perception that governance within the public service remains inadequate; and (vi) a public service pension system "Cap 30" which i s modest incoveragebut accounts for 1.3 percent ofGDP interms ofits cost. To tackle these issues, the government decided in 2003 to refocus its strategy for public sector reform. To consolidate public sector reform efforts, oversight o f the reform agenda was transferred to the office of the Senior Minister in early 2003. In June 2004, the office o f the 2 Senior Minister formally issued a Public Sector Strategy document "Towards a New Public Service for Ghana: a Working Document" to improve effectiveness, efficiency and accountability o f the public sector. InFebruary 2005, the government appointed a new Minister of State for Public Sector Reform to spearheadthe reform agenda. InM a y 2005 this position was elevated to that of a Ministry. An action plan was presented to Cabinet in June 2005. This strategy i s likely to prioritize the establishment o f a senior civil service leadership programme, training, a pay and performance management system, and the needto reform subvented agencies. Public Financial Management, decentralization, govemance and service delivery have been identified as core themes. The Minister o f Public Sector Reform recently announced an implementation plan for selected agencies and presented the principal programmes to Cabinet in August 2005. Cabinet approved the recommendations to restructure the management o f Public Sector Reform programmes in general and to reform the Civil Service specifically, with particular focus o n the appointment and remuneration o f the Civil Service leadership; refocusing the mandate and structure of the Civil Service, improving operational procedures; human resource management and compensation policies for all Civil Servants; enhancing financial management systems; and better use o f information technology. Cabinet decided that the progressive monetization of non cash benefits for Civil Service leadership shouldbe captured in the 2006 Budget. 2. Rationale for Bank involvement The proposedproject aims to support the Government o f Ghana in strengthening specific aspects o f economic management, namely financial sector development and public sector reform. The World Bank Country Assistance Strategy (CAS) has adopted a three pillar approach to support the Ghana Poverty Reduction Strategy (GPRS): (i)sustainable growth and job creation; (ii) service provision for human development; and (iii) govemance and empowerment. To support this strategy, the CAS highlights the need for investment and technical assistance in financial sector development and public sector reform. The World Bank has been closely involved in financial sector reform in Ghana since the late 1980s when the first Financial Structural Adjustment Credit (FINSAC) was launched. Following FINSAC Iand 11, hrther support was provided for reform under the Non-Bank Financial Institutions (NBFI) project which closed in 2002 and Economic Reform Support Operation (ERSO) IandI1which closedrespectivelyin1998 and2003. The World Bank has continued to support the government's poverty reduction agenda by being involved inthe design of the FINSSP through analytical and advisory work (including the FSAP in2001 andthe FSAP Update in2003) and various recommendationsmade by the World Bank and International Monetary Fund (IMF) teams that participated in above work have been incorporatedinthe FINSSP. The Government's Ghana Poverty Reduction Strategy (GPRS) has created the momentum for a significant group of donors to align their budgetary support under a common framework, the Multi-Donor Budgetary Support (MDBS), of which the PRSC is part. Through support to the implementationof FINSSP, the MDBS andthe PRSC aim to diversify the financial sector and to improve access to financial services. The MDBS and the PRSC also intend to support the 3 implementation of a refocused public sector reform. However, the MDBS and PRSC would support reforms at the policy level. There i s therefore a need, as indicated in the CAS, for targeted capacity building operations to support government implementation o f these reforms, with the understanding that the MDBS should be the appropriate mechanism for the support o f recurrent costs. 3. Higher level objectives to which the project contributes The GPRS aims to "create wealth by transforming the nature o f the economy to achieve growth, accelerated poverty reduction and the protection o f the vulnerable and the excluded within a decentralized, democratic government". The GPRS indicates that a crucial step to achieve this goal is to ensure sound economic management for accelerated growth. Financial sector development and public sector reforms are considered fundamental components o f sound economic management, key to continued macroeconomic stability and private sector-led economic growth. The government has also noted that the ability o f the financial sector to serve as an effective intermediary between savers and investors i s seriously affected by issues such as a lack of competitiveness and a low level o f integrity. The project is intended to establish a better intermediation function within the financial system so that funds can flow to their most productive economic use - thereby benefiting the entire economy in terms of more rational investment decisions, more sustained employment opportunities, increased production and exports - and ultimately enhanced growth. Through facilitating renewed efforts in the field o f Public Sector Reform, the project aims to assist in providing a platform for improving governance and reducing corruption in Ghana and therefore contributing to the GPRS objective o f ensuring good governance through accountability and transparency. The project seeks to focus on the expansion o f retail banking by removing policy and legal barriers to expansion of coverage. This i s part o f a complementary new focus on the expansion o f retail banking and removing policy and legal barriers to that expansion. The banking and money transfer sector can use the data from the survey on access to financial services in developing its strategy and financial products to serve lower income and more rural clients, The central bank and government ministries can use the access to financial services data to improve its policies to reduce financial inclusion, and to adopt headline indicators and targets for access to financial services. Competitive grant funding for innovations in remittances and financial service delivery should provide a significant impetus for expansion in financial services provision inGhana, and should help reduce poverty and stimulate economic activity. 4 B. PROJECTDESCRIPTION 1. Lendinginstrument The project i s to be supported through an IDA credit. The lending instrument used i s a specific investment loan. An investment operationwas chosen as, inaddition to direct use by the MOFEP and MOPSR, a substantial portion o f the funds are to be passed to a relatively large number o f implementing agencies, each with its own business development plan. IDA has agreed to the government's request for a Project PreparationFacility (PPF) assistance, and has granted two PPF advances for the preparation o f the project in the amount o f US$866,000. The PPF funds are beingused to support the activities o f the FINSSP secretariat in the implementation o f the financial sector components o f the project for the period between the cessation o f funding from United States Agency for International Development (USAID) and the creation o f the Financial Sector Division within the MOFEP. PPF funds are also being used to support the newly established Ministry o f Public Sector Reform as the financing provided by Department for International Development (UK) (DFID) for the PSR initiative has now come to an end and the new Ministry for Public Sector Reform is yet to receive resources from the budget. While inmost cases the government will not directly recover its investment inFinancial Sector Reform, the investment approach i s justified in as much as that this i s a public utility investment which facilitates holistic reform, moreover, each individual investment i s contingent upon reform in another institution (e.g. pension investment reform requires capacity building at the SEC). This rationale also broadly applies for Public Sector Reform, although for the PSR component it i s also anticipated that government will more directly receive an economic benefit from its investment through enhanced productivity and improved service delivery. All o f the agencies receiving financing under the project are government agencies or self regulatory bodies operating under government direction. 2. Projectdevelopmentobjectiveand key indicators The proposed project aims at supporting the government to define and perform its role as a facilitator for economic development. The focus of the project will be capacity enhancement, knowledge transfer and introduction o f best practices; it is not intended to finance recurrent spending which would be supported through the budget where necessary. The project seeks to establish a level playing field in the finance sector focusing upon outcomes rather than institutions, together with a clear policy to improve the efficiency o f public sector management for an enhanced service delivery. The project, through support to FINSSP, will seek to catalyze the allocation o f capital to Ghanaians and improve competitiveness and governance o f long term savings institutions and markets. The project aims to strengthen the Public Sector Strategy through providing a framework for prioritization, consensus building and budgeting and to translate the strategy into detailed action plans supported by a thorough monitoring and evaluation mechanism. The implementation o f any action plan will be covered by this initiative to the extent that these are of a scale that can be accommodated within the financial and technical resources o f the Public Sector Reform donor pool (see more details in section C. 5 Implementation). A more substantive reform initiative could be covered through a supplemental operation. In addition, the basket fund structure i s designed with an open architecture to maximize the involvement of interested DPs (Le. the structure is intended to be flexible to allow for entry of additional DPs and to accommodate a variety o f interventions). Key indicators for the finance sector will be the extent to which credit to the private sector (including bonds) and long term savings grow as a percentage o f GDP. In terms o f the public sector reform initiative the key indicator will be whether the Government i s able to establish a reform initiative comparable to that achieved through FINSSP in the financial sector in recent years. 3. Projectcomponents ComponentOne: PublicSector Reform (US$5 million equivalent) This component will support the development o f a framework for prioritization, consensus building and budgeting o f public sector reform objectives. Once the framework for Public Sector Reform i s established, the project will support the development o f detailed action plans for individual operations within MDAs supported by rigorous monitoring and evaluation mechanisms. The project will support implementation, in collaboration with Development Partners (DPs), o f reform initiatives o f a scale which does not necessitate a stand-alone operation. ComponentTwo: Regulationand Supervisionof FinancialMarkets (US$6.7 million equivalent) This component will support strengthening of the Securities & Exchange Commission (SEC). The project will (i) provide SEC with technology upgrading; (ii) technical provide assistance and capacity building to enhance performance in the areas o f supervision, surveillance and enforcement; (iii) support the implementation o f amendments to the Long-Term Savings Act, 2004; (iv) support the development, regulation and supervision o f the LTS agency; and (v) provide support to SEC public educationcampaign. ComponentThree: BankingandNBFI Regulationand Supervision(US$13.4 million equivalent) This component will support strengthening of Bank of Ghana (BOG) through (i) technical assistance to review the structure o f the Banking Supervision Department and the fit o f various departments in the overall organizational structure o f BOG; (ii) support to the enactment o f several laws critical for implementation of reforms (e.g. Bills and Checks Bill, Credit Bureaus law); (iii) improvements to the technological base of BOG; (iv) provide support to clarify regulations and supervision responsibilities between BOG and Credit Union Association (CUA), for credit unions and BOG and ARB Apex Bank for rural banks; and (v) the project will strengthen supervisory and regulatory capacity of BOG, CUA and ARB Apex Bank. 6 ComponentFour: InsuranceRegulationandSupervision(US$1.3 million equivalent) This component will support the National Insurance Commission (NIC) in (i) providing technical assistance for the design o f the curriculum and strategic plan to support training o f insurance industry staff at, and operation of, the Insurance Industry Training Center; (ii) andinstitutingamodernlegalandregulatoryinsuranceframework,including revising development o f regulations; (iii)capacity building to improve insurance supervision; and (iv) capacity buildingsupport to the research and actuarial unitswithinNIC. ComponentFive: Strengtheningof CapitalMarkets (US$2.4 millionequivalent) This component will (i) provide support to review Ghana Stock Exchange (GSE) rules and regulations; (ii) provide expertise to manage the business and regulatory risks o f demutualization; (iii)support GSE automation; and (iv) buildGSE staff capacity and that o f market operators. ComponentSix: Pension Sector Development(US$0.5 millionequivalent) This component aims to: (i) support the strengtheningo f legislation for the governance o f the pensions sector, in particular in order to establish the framework to transfer the responsibility for Social Security and National Insurance Trust (SSNIT) investment management to extemal, independent and regulated private investment fund managers; (ii)evaluate and design a process for such outsourcing of SSNIT's investment management functions; (iii) strengthen the capacity o f SSNIT staff to undertake actuarial simulations o f revenue and benefit flows according to different medium-term reform scenarios; and (iv) strengthen the timeliness and accuracy o f individual data account records at SSNIT. Component Seven: Access to Finance and Financial Sector Governance (US$S.5 million equivalent) This component will seek to establish a strengthened Banking and NBFI system that provides a wide range of competitive products through (i) providing technical assistance to develop a strategic vision and establish a governance framework for Ghana Commercial Bank, Agricultural Development Bank, National Investment Bank and State Insurance Corporation; (ii) applyingthe Finmark approach to better understand access to finance issues (with a focus on the demand side); (iii) facilitating the flow o f remittances; (iv) establishing a sound basis for govemance and regulation of the proposed Venture Capital Trust Fund; and (v) support the work program o f the Presidential Commission on PensionReform throughtechnical studies o fpolicy reform areas it i s considering. Inaddition, this component will support the Aid andDebtManagement Unit (ADMU)of MOFEP to (i)segregate MOFEP borrowing activity from BOG monetary policy to engender transparency and information flow through the establishment o f a Domestic Debt Desk at ADMU and capacity building; (ii)restructure government borrowing patterns towards longer term maturities as well as long term debt market development 7 and pricing. The project will also support research at Bank o f Ghana to study cross- border capital flows; and (iii) to the Financial Sector Division o f MOFEP inthe support preparation and implementation o f the Borrower's financial sector policies and oversight o f relevant agencies. 4. Lessons learned and reflected inthe project design Public sector reform Two recently completed World Bank projects in Public Sector Reform have been rated unsatisfactory'. According to the Implementation Completion Report (ICR), the very wide scope of the project objectives o f the Ghana Public Sector Management Reform Project made it a complex, ambitious and challenging project to implement and supervise. Doubts have also been raised as to the capacity o f government to implement a project on this scale. The current project is deliberately limited in its objectives to creating a platform for the identification o f reform initiatives, the more substantial o f which would be supported through supplemental financing under this project. Particularly through the coordination of Development Partners resources, the proposed structure aims at providing a low cost but effective mechanism for supporting the government's reform initiative at low risk. It has been a concern in previous Public Sector reform initiatives that multiple initiatives by many Development Partners led to a fragmentation o f the Public Service with government effectively ceding direction o f certain MDAs to donor bodies. The harmonization o f Development Partner activities utilizing the basket fund approach under the guidance o f government i s intended to ensure that the PSR initiative i s coordinated and that government i s the ultimate arbiter. There have been questions regardingthe government readiness to tackle effectively Public Sector Reform issues. The proposed two-stage approach for PSR draws on the lesson learnt that high level of funding does not lead to reform. Funding is available for policy dialogue, consensus buildingandprogram development as a first stage; additional funds would be made available at a second stage only ifgovernment agencies demonstrate strong progress in implementation o f activities inthe first stage. The Operations Evaluation Department (OED) report "An Independent Review o f World Bank Support to Capacity Building in Africa: The Case o f Ghana" notes that 33 percent o f World Bank investment lending in Ghana has beenfor improvements inpublic sector capacity but that this has lacked a strategy and has not been integrated into sector programs. The Economic Management Capacity Building(EMCB) proposes a broad approach to the field o f Public Sector Reform, under centralized ministerial direction as an integrated, strategically managed effort, rather than being sector-specific as in the past. It was a further finding o f the OED report that lack o f broad consultation inthe Public Service was a likely contributor to the lack o f success o f the World Bank's earlier PSR projects. It is a primary component o f the support to be given to ~ Ghana Public Sector Management Reform Project and Ghana Public Finance Management Technical Assistance Project. 8 the Ministry of Public Sector Reform that a broadprocess o f national stakeholder consultation on the PSR strategy precedes the implementation of any reform initiative. OED analysis o f the two Public Sector Reform ICRs mentioned above also highlights the following lessons: 0 If there is uncertainty as to ownership of the reform agenda, pilot projects are better suited to testing new approaches. 0 The implementing and coordinating agency needs to have authority commensurate with its task. 0 There i s a need o f sufficient attention to institutional issues at the initial stages o f project design. 0 Project design needs to take adequate account o f implementation capacity and borrower ownership. A simpler project focusing on core reforms fully endorsed by the government may have been more appropriate. Reflecting these concerns, a major aim o f the EMCB PSR component is to build broad ownership o f the reform process, following the FINSSP experience. A key issue will be to monitor that the new Ministry o f Public Sector Reform continues to enjoy sufficient authority to undertake the Public Sector Reform. Institutional issues have been carefully looked at during project preparation. Finally the approach chosen for the PSR component (a multi donor PSR pooled fund, see more details in Section C. implementation) lowers transactions costs for developmental assistance and facilitates demand driven reform programs to answer emerging reform opportunities. Financial sector reform The project design drew heavily from the detailed analytical work on financial sector issues provided by the World Bank, the IMF and external finance sector experts under the 2001 FSAP and the 2003 FSAP update. The findings o f these extensive studies have been integrated into the government's own Financial Sector Strategic Plan (FINSSP) an extremely detailed and thorough synopsis o f the finance sector reform agenda. The project evolution has benefited from an extended dialogue with the project counterparts through the evolution o f logframe analysis for the project components in addition to an active exchange o f ideas through a stakeholder workshop. The complicated design of both the NBFIAssistance Project and ERSO I1has been highlighted as a primary source o f difficulty in implementation, limiting the capacity to provide in depth support to the key components and institutions. Furthermore, having a design with a number of small unrelated components led to difficulties inproject coordination and monitoring. While it is inevitable that a holistic financial markets reform project will involve many counterparts, the number of implementing agencies has been limited to the extent possible, While the FSR component of the project is broad, this reflects an active distillation o f the 98 items recommendedfor action in the FINSSP. The extensive number o f components reflects the aspiration to attain a common standard for regulation and market efficiency. Moreover, many reform initiatives are complementary (e.g. the reform o f the GSE and the enhancement o f the 9 SEC both support the liberalisation o f SSNIT investments and the implementation o f the Long Term Savings Act). While it would be advantageous to have all components successfully implemented, material benefits will be achieved even ifa portion o f the components are not fully successful (i.e. while the approach i s holistic the benefits are stand-alone and synergies are a bonus). Inas much as a primary motive ofthe reform programme is to enhance competition, it is to be anticipated that some market operators will flourish and others will diminish. The broad impact of reform across distinct markets sectors is expected to develop through market forces; there is not a requirement for a coordinating hand. The Governmenthas indicated its wish to increase the international exposure o f the financial sector, providing opportunities for Ghanaian firms to win overseas business but also facilitating the provision o f services to Ghanaians from international providers. The govemment has shown its willingness to address the broad nature o f the reform agenda through its extensive legislative programme in support o f the FINSSP, the substantive part o fwhich has already been completed. Both the NBFI and ERSO I1projects intended to support the government divestiture from state banks (inparticular GCB and NIB).However both these projects failed to achieve this objective. E M C B will therefore rather seek to improve the management and the governance o f the three state-influenced financial institutions through management or governance contracts in the first instance, within a strategy o f transfer of ownership to the private sector. This approach is favouredby the government. The absence o f an appropriate procurement plan was perceived a major shortfall in the NBFI Assistance project. Procurement plans have been requested from each o f the implementing agencies and a procurement assessment has been carried out on two counterparts who were found to have adequate processes inplace. Procurement plans have been reviewed and finalized at appraisal. Cross-cuttingissues Perhaps the most important lesson leamt in past reform initiatives has been the key role o f government and stakeholder ownership. The establishment o f national ownership is the primary underpinning o f the EMCB. This is reflected in both the project design and in the implementation arrangements. The FINSSP is built out of a long process o f consultation of market participants and users, supported by an ambitious legislative agenda, now largely completed. The financial sector component o f the EMCB has grown out o f the FINSSP process, itself engendered by the 2001 and 2003 FSAP reviews. The PSR component comes after a long period o f consultation and the development o f the govemment's public sector reform strategy, published in June 2004, revised and resubmitted to Cabinet inAugust 2005. While this strategy did not itselfprompt the same level o f reform vigor as the FINSSP, the recent establishment o f the Ministry o f Public Sector Reform has increased the focus on this sector, both from those already engaged and from new entrants. The implementation strategy i s equally intended to generate a strong sense o f national ownership with the operation of a basket fund under the guidance o f a government steering committee. The 10 government intends to consolidate its oversight o f finance sector reform through a new Finance Sector Division at the MOFEP to coincide with the implementation o fthe FSRcomponent. It is not the approach of either the PSR or FSR components to attempt to "pick winners" and design solutions for Ghana. Rather in both sectors, the focus i s upon establishing an enabling environment under which local institutions can guide the reform programme. The OED report "An Independent Review o f World Bank Support to Capacity Building in Africa: The Case o f Ghana" highlights the main design deficiencies in capacity building operations as being the result o f over-ambitious and technocratic project design which has been consultant-led, poorly sequenced and not integrated among projects. These shortfalls have beenkept inmindwhile designingthe EMCB operation for both the public sector and the finance sector component. FINSSP benefits from strong ownership from the government and key stakeholders. While its programme i s ambitious, sequencing o f interventions has been carefully focused and the legislative programme - the launch pad for FINSSP - i s almost complete. In the light o f past failures, the PSR objective o f the EMCB project i s modest and the focus i s on establishing a conducive framework for reform (rather than an ambitious PSRprogramme). It is an observation of boththe NBFIproject ICR and the OED review of Public Sector capacity building that the World Bank must deploy professionals with skills developed in the sectors targeted for reform and this has been a guiding tenet for staffing o f the project team (inaddition to the substantive technical expertise which has beenprovided for the finance sector through the FSAPinitiative and for the PSR component underthe leadership ofDFID). 5. Alternatives considered and reasons for rejection Including theproposed operation in the MDBSPRSC The alternative o f relying upon the MDBS and PRSC for the implementation o f the proposed PSR and FSR policies was carefully analyzed as an alternative to the EMCB operation. However, as stated in the CAS, there i s a requirement for specific and targeted investment and technical assistance in financial sector development and public sector reform to provide an opportunistic, demand driven approach for knowledge transfer, capacity enhancement and the establishment o f best practices on a supplemental basis. The constraints on compensation within government suggested that it would be difficult to provide skilled expertise in implementation through a budget driven approach The need for a targeted fund to support PSR i s reinforced by experience in various developing countries. Some o f the benefits that have arisen from use o f targeted funds, with increased Government ownership and funds management, have included: reinforcement o f Government ownership o f reforms, encouragement o f greater coherence and avoidance o f Technical Assistance (TA) induced fragmentation, and reduced transaction costs through consolidation around a set o f procedures. Such a targeted fund may also provide a source o f helpful dialogue between government and DPs in areas where they have a shared interest that can benefit from 11 that dialogue and sharing o f experience, ultimately leading to a greater reliance upon budget based support2. Exclusive EMCBfocus onJirzancial sector In light o f the World Bank's disappointing past experience in Public Sector Reform, considerationwas given to focusing only on the financial sector. Ultimately, however, it was felt that the World Bank has a key role to play inPublic Sector Reform and shouldtherefore remain engaged in the dialogue despite the past difficulties. Moreover, in an environment o f DP harmonization it was felt that the Bank should be supportive o f the role o f DFID as lead DP in this sector, particularly as the DPs have expressed their aspiration that the World Bank should remain engaged to provide more substantive support as supplemental financing under this project for the implementation o f reform initiatives that arise out o f the PSR initiative. The chosen approach allows the Bank to remain involved inthe PSR dialogue with the government and DPs to seize opportunities inPSR should they arise. Furthermore, the government has shown a strong preference for the two components to be combined. Greater Focus on Structural Reforms in the Banking Sector The Government o f Ghana divested 41 percent o f its shares in Ghana Commercial Bank (GCB) in 1994 through an InitialPublic Offering (PO). Subsequently, in 1998, the government sold an additional 12.2 percent to the state-owned Social Security and National Investment Trust (SSNIT). It has been a long standing proposal from the Development Partners that the Government o f Ghana should contemplate the sale of Ghana Commercial Bank to a strategic investor or that, at a minimum, the government should enter into a management contract with an experienced banking or consultancy group from overseas, this topic was discussed with Government as part o f the 2001 FSAP and 2003 FSAP update. In 2003, however, the Government formally disavowed any immediate intention to seek a strategic investor. This position was in part based upon the expressed need to maintain a national interest in a leading commercial bank in Ghana and also an outcome o f the successful sale o f a controlling (51 percent) stake in Social Security Bank (SSB) to Societk Gkne`rale in March 2003 which had the dual effect of reducing the role o f the government in the banking sector and increasing the participation o f foreign banks to approximately 55 percent o f commercial bankingassets. As part o f the pre-appraisal an experienced banking sector consultant reviewed the activities o f both Ghana Commercial Bank and Agricultural Development Bank, the other major state influenced financial institution, and concluded that while further efficiency gains are possible and desirable, the management of these institutions has improved markedly in recent years and this has also been reflected in financial performance. Against the background o f the extended history with government on the issue o f further divestment of its equity holdings inthe banking sector andthe significant progress which has been achieved to date, as well as the strong position o f leading intemational banks in Ghana (recently supplemented by the commencement o f operations by two leading Nigerian banks) it was determined that the future o f the banking sector * "Ghana,Potential Multi Donor Fundto support Public Sector and Public Financial Management Reform", Peter Brooke, May 2005. 12 should remain an important part o f the Economic Management Building Project but should not dominate the dialogue with government. A stand-alone operation without DPs The World Bank has increasingly come to appreciate the advantages o f a harmonized approach to development assistance. Governments have expressed appreciation for the reduced implementation costs o f a coordinated approach and the Bank has benefited substantively from the expertise provided by our development partners. In the case o f Ghana, DFID has been a consistent partner through the FSAP process providing particular support for the private sector development linkages and for the prospective demutualization o f the GSE. For EMCB, DFID may be able to provide expertise and resources inthe fields o f access to finance, remittances and venture capital through financing outside o f the basked fund arrangement. Inaddition, DFID has an established leading position in the field o f PSR in Ghana and the Bank has undoubtedly benefited from both DFID's technical expertise and dedication o f resources to focus on this field. Leaving various components to other World Bank and donors existing or forthcoming operations Some components, such as microfinance or venture capital could have been left to other Bank or DPs initiatives (such as the MSMEproject, the RFSP or the SPEED project). However the broad focus o f the EMCB on effective regulation, a competitive market and efficient allocation o f government resources prompted an EMCB component for these sectors. It is broadly the case that EMCB addresses the role o f government, with a "top down" policy based focus while the other projects are "bottom up" with a focus on promoting services to the end user. Furthermore, EMCB supports a holistic architecture with a common approach to standards o f regulation across the finance sector so it i s important to encompass all key aspects o f regulation, including microfinance and venture capital. Using the FINSSP Secretariat as a Project Implementation Unit Because o f the commendable work realized by the FINSSP Secretariat since the FINSSP was formally endorsed by the government, the project could have relied on the Secretariat to implement its programme. However, in concurrence with government, it was felt that development best practice and the lessons from the NBFIproject would suggest that the project would bebetter implementedby the newly created Financial Sector Division o f MOFEP. C. IMPLEMENTATION 1. Partnershiparrangements EMCB will closely liaise with ongoing and forthcoming World Bank operations in related sectors. In particular, EMCB will closely work with RFSP in the field o f microfinance, with a special focus on Bank o f Ghana's regulation and supervision for Credit Union and Rural Banks (which i s not fully addressed by RFSP). The EMCB project will also closely liaise with other 13 DPs initiatives, such as the on going USAID TPCEE and forthcoming GTZDANIDA SPEED projects. Such collaboration will be formalized and GOG representatives from the RFSP and MSME projects will join the EMCB Ghana Steering Committees for the PSR and FSR components; while DPs (including USAID, GTZ, DANIDA and DFID) may join the Joint Steering Committees for one or both o f the basket fund arrangements (see Section 2 below for a description o f steering committee arrangements) although some DPs may coordinate activities under the MoUs rather than contribute to the basket funds. The GBP3 million contribution to be made by DFID to the FSR component o f the project i s anticipated to be in the form of co-financing through a basket fund arrangement. Preliminary discussions have been opened with other DPs who mayjoin the basket fund arrangements, or at least coordinate activities through the FSR and PSRMoUs. While it is anticipated that for both the FSR and PSR components, DFID will contribute to the basket funds it is also anticipated that DFID will take an active role in project design and implementation (more for PSR than FSR) and will also allocate funds outside o f the basket funds for technical assistance and project preparation (it i s understood, for example, that DFID is also providing launch support to the MOPSR to complement the support provided under the IDA PPF). As noted above, DFID will act as the lead DP for the PSR component and is expected to play an active role in providing guidance to the PSR agenda in Ghana. For FSR DFID's contribution to the programme will be a focus on improving access to finance through the development of tools and products for the commercial financial sector and for government. The rationale underlying this proposal i s for DFID to provide targeted resources to the financial sector reform component to facilitate project activity in access to finance and institutional strengthening. This will provide a focus on deepening financial sector reform with an emphasis on improving access to finance. DFID's contributions represent a complementary focus on widening access through the expansion o f retail banking (including the provision o f money transfer services) and removing policy and legal barriers to that expansion. 2. Institutionaland implementationarrangements The project will be implemented through two parallel mechanisms, one for the Public Sector Reform component and another for the Finance Sector Reform component. Both components will make use o f a Sector Wide Approach (SWAP) with basket funding arrangements for implementation and it i s anticipated that additional Development Partners will contribute to each component. A SWAP is an approach to support a country-led program for a coherent sector in a comprehensive and coordinated manner. It is characterized by: (i) country-owned sector policies and strategies; (ii)a sustained, country-led partnership among development partners and key stakeholders; (iii)a common program and an expenditure framework (usually a medium-term framework and an annual budget) based on agreed priorities and strategies; (iv) a financing plan that aligns government's and external resources under the common program; and (v) significant 14 movement towards common approaches inplanning, implementation,monitoring and evaluation with increasingreliance on country's systems and proced~res.~ The project takes the form o f a SWAP in that it i s intended to form the basis o f a country-led partnership among Development Partners and key stakeholders based on the accepted strategic frameworks developed through the FINSSP and the PSR Strategies.). The project will undertake a common program and expenditure framework using basket funds, relying upon the government's systems and procedures to the extent possible and under the direction o f two government nominated steering committees. Inthe initial stage it i s envisaged that DFID will be the primary Development Partner for the both components; however, it is understood that additional partners will bejoining the PSR component in the early stages and may also join the FSR component. DFID will take the lead in working with the government for the implementation o f the Public Sector Reform component and the World Bank will work with the government and DPs for the implementation o f the Finance Sector component. The implementation arrangements are guided by the need to (i)ensure ownership by the implementing agencies, (ii)strengthen existing statutory bodies, (iii) support coordination on policy matters; and (iv) transfer o f capacity to statutory bodies. Finance Sector Implementation The FSR comprises six core themes to be coordinated by six implementing agencies (MOFEP, SEC, GSE, NIC, SSNIT, and the Bank o f Ghana). MOFEP will be responsible for overall coordination through the Financial Sector Division (FSD), the establishment o f which i s being supported through the project preparation. Coordination with and between DPs will be guided by the terms o f a Memorandum of Understanding. The FSD will serve as a link between the Development Partners and the implementingagencies. It will coordinate the preparation o f work procurement plans by all implementing agencies and prepare composite work plans andprogress reports. Each agency i s to be responsible for implementation o f its component o f the project and will nominate a keytechnical level official to be liaisonperson for the project. A Ghana Steering Committee (GSC) for FSR comprising the head o f each implementing agency and chaired by the Minister o f Finance and Economic Planning will be constituted to provide oversight and policy direction for the project. In addition a Joint Steering Committee (JSC) comprising the GSC and the Development Partners will meet at least biannually to review and approve proposed activities and to review progress on implementation. Each implementing agency will have the primary responsibility for all procurement activities related to their component. However, for common user items, the Procurement Unit of MOFEP will collate all such items and organize one tender to ensure value for money. MOFEP will be responsible for the management o f projects funds. This function will be performed within the 3 See Real Lavergne & Anneli Alba, CIDA Primer o n Program-Based Approaches (2003), Andrew Cassels, A Guide to Sector Wide Approaches for Health Development (World Health Organization 1997),IHSD, Inter-Agency Group on Sector-Wide Approaches for Health Development: Seminar Handbook (2001), European Commission, Guidelines for European Commission Support to Sector Programmes (2003), The Broad Sector Approach to Investment Lending: Sector Investment Programs Peter Harrold and Associates, 1995. 15 Accounts Section o f MOFEP who will provide personnel with necessary qualifications and experience andwill prepare the requisiteFinancial Management Reports. Participation in the Financial Sector Basket Fund will be determined by a Memorandum o f Understandingto be entered into between the government and individual Development Partners, who mayjoin at any time. DPs may enter into the M o U without contributing to the basket fund, but rather utilizingthisprocess for the coordinationo f activities. Public Sector Implementation MOPSR will be responsible for overall coordination of implementation o f the PSR component. The design o f the implementation arrangements o f this component will take the form o f a basket fund to support Public Sector Reform which will broadly parallel those to be established by the Bank for the FSR component. DFID has signaled its intent to keep the PSR Basket Fund as simple as possible (consistent with clarity o foperation, authority and accountability) andto draw on established experience. Participation in the Public Sector Basket Fund will also be determined by a separate Memorandum of Understanding to be entered into between the government and individual MDAs, who may join at any time. DPs may enter into the M o U without contributing to the basket fund, but rather utilizing this process for the coordination o f activities. 3. Monitoring and evaluation of outcomes/results Financial sector component A strong Monitoring and Evaluation (M&E) framework has been developed for the FSR component. A matrix for FSR implementation has been developed by FINSSP,highlighting the key activities to be completed, the time frame, the performance indicator and the implementing agency. Each implementing agency reports against this matrix. In addition, each implementing agency will be required to report progress against the Results Framework (with a specific emphasis on quantitative indicators). Public sector component The Public Sector Component is less ambitious than the Financial Sector component and the M&E mechanism reflects this greater simplicity. The performance o f this component will be measured against two indicators: the establishment o f a costed, time bound and prioritized framework for government public sector reform and the initiation o f a substantive reform program at an MDA. The Ministry for Public Sector Reform will be responsible for monitoring and evaluating progress. 16 4. Sustainability The project will make use o f basket fund arrangements not only for the greater scope these provide for the harmonization o f DP activities but also for their greater use o f government systems and processes and the contribution that this makes to a sustainable capacity for the development and implementation o f policies and reform initiatives. This process will serve to reduce, but not eliminate, the use o f consultants in the formulation and implementation o f govemment policy. To the greatest extent possible responsibility will be assigned to mainstream civil servants and extensive use will be made o f governmental administrative support, human resource, operational and procurement processes and financial management resources. Financial sector component ' The government and the various implementing agencies have demonstrated their commitment to the vision for the financial sector spelled out inFINSSP through the enactment o f an extensive legislative agenda to facilitate reform. Important progress has already been made in the implementation in the four key areas defined in the strategy, namely strengthening o f financial market structure, reform and review o f legislative issues to improve the operating environment in the financial sector, strengthening o f the supervisory and regulatory framework and capacity development to improve the outreach and depth o f the financial sector. The government has already made significant progress inreforming the financial sector legislative environment and a number o f laws have been enacted or are in process o f being enacted (such as the Long Term Savings Act, the Venture Capital Fund Act, the Securities Industry Amendment Act and the Insolvency Bill). The sustainability o f the financial sector component is engrained in the strong and broad ownership o f FINSSP inGhana. Public sector component The objectives for PSR are less ambitious than those for FSR. Accordingly the time horizon for sustainability o f this component i s more immediate and will be achieved through the development and the implementation o f a Public Sector Strategy which demonstrates strong ownership and effectively prioritizes allocation o f resources to Public Sector Reform. The implementation of large-scale PSR initiatives goes beyond the scope o f the E M C B project; however, it i s a project objective that there should be a consensus that the reforms undertaken should be both important and realistic. 5. Criticalrisks andpossible controversialaspects Critical risks The mainrisk o f this proposed operation lies within the Public Sector Reform component. There i s a need for the government to clarify, in a sustainable manner, the roles and responsibilities between different ministers with regard to the Public Sector Reform agenda. Ln addition, because o f the poor record o f past Public Sector Reform projects, there i s a high level o f skepticism - within Ghana as well as outside Ghana - towards this reform agenda. However, as already 17 discussed, the chosen approach takes into account and addresses these concerns with what is perceived to be a low risk approach. Thanks to the broad stakeholders' ownership o f FINSSP, the risks with regards to the financial sector component are more limited. However, it i s possible to highlight some areas o f potential concern, which include: delays in the demutualization process o f GSE, limited outsourcing of asset management from SSNIT and inability to achieve consensus for a governance framework for state influenced financial institutions. It i s proposedto closely monitor the implementation of the agreed activities in order to be able to take rapid preemptive or corrective measures if these potential concerns transform into real issues. It i s undoubtedly the case, however, that issues which relate to the liberalization o f markets and the allocation o f substantial sums may prompt resistance from vested interests and strong government ownership o f the reform agenda will be required. 18 Risks IRiskmitigation measures 1I Risks rating with mitigation Public Sector Reform componl I t Current champions o f the Focus on a few achievable, very publicly Public Sector Reform agenda visible reforms to get the momentum and fail to buildpolitical support o fthe public andkey stakeholders S momentum with key ("quick wins") supportedby significant stakeholders and overcome resources to facilitate consensus building. public skepticism. This first phase o f staged project design focuses on consensus andcapacity building. Financial Sector Reform comuonent SEC fails to attract adequate Project provides for additional resources to o f new skilled staff to support upgrade skills and capacity andtrain L its broadened mandate additional staff Failed enactment of draft The presentation o f the insurance billto insurance legislation the parliament i s a disbursement condition L for the comDonent Vested interests o f current Closely monitor the implementation o fthe owners delay demutualization agreed activities inorder to be able to take process o f GSE rapidpreemptive or corrective measures if M these potential concerns transform into real issues, incentive structures aligned through financial support for GSEmodernization linkedto progress indemutualization. Political economy of out- Closely monitor the implementation of the sourcing o f asset management agreed activities inorder to be able to take function to private fund rapidpreemptive or corrective measures if S managers could lead to a these potential concerns transform into real withdrawal o f current SSNIT issues. Presidential PensionReform management support Commission raises public awareness o f reform agenda. Vested interests could Financial sector reformhas gathered jeopardize consensus and significant momentumand gained the broad based political support sustained support from key political actors S for a govemance framework building a good track record for for state influenced financial implementation o f reforms. Close progress institutions. Interpretations monitoring inorder to be able to take rapid may differ as to what preemptive or corrective measures constitutes good govemance. Riskratings: H(Highrisk); S (Substantial Risk); M(Modest Risk);N(Negligible or Low Risk) 19 Controversial aspects Because it i s a capacity building project, this project has fewer controversial aspects. As already discussed the objectives o f the Public Sector Reform have been deliberately scaled so as not to be over ambitious, the major objective beingthe establishment o f a framework for prioritization, consensus building and budgeting o f a widely owned Public Sector Reform strategy and to translate this strategy into detailed action plans supported by a thorough monitoring and evaluation mechanism. Inaddition, the project will only be able to support the implementation o f limited action plans due to resource constraints. It i s therefore unlikely that the activities undertaken under the Public Sector Reform component will be controversial; however, public service reform can often meet vociferous opposition from interest groups which might perceive reform to be to their benefit. Notwithstanding the risks associated with vested interests noted above, the Finance Sector Reform component does not involve any controversial activities, such as restructuring or privatization plans for financial institutions. 6. Loanlcredit conditions and covenants This operation strivedto minimize the use o f conditions. However, the following conditions have beenidentified: Conditionsfor effectiveness (i) TheborrowerhasadoptedafinancialmanagementsystemsatisfactorytoIDA. (ii) The PSR Memorandum of Understanding and the FSR Memorandum of Understandinghave been executed on behalf on the borrower and IDA. (iii) TheborrowerhasadoptedthePSRProjectImplementationManualandFSRProject ImplementationManual ina form and substance satisfactory to IDA, Conditionsfor disbursement (i) The Borrower has opened the Project Accounts and deposited therein the initial deposits referred to in section 3.04 o f the DCA, as well as the approval by IDA o f the PSR and FSR annual work plans and budgets for the respective fiscal year. (ii) The review o f the Long Term Savings Act in a manner satisfactory to IDA and the Borrower i s a condition for disbursement under component seven (Access to Finance andFinance Sector Governance). (iii) The presentation o f the Bill to Parliament is a condition for disbursement under component four (Insurance Regulation and Supervision). Dated covenants (i) The Borrower shall furnish to the Association, within six (6) months after the fiscal year for each financial institution, until the completion of the project, annual reports on the financial status o f all financial institutions operating in the territory of the Borrower and regulatedby BOG, NIC, SEC, or any other statutory regulator that may be established by the Borrower. (ii) The Borrower shall, not later than six (6) months after the Effectiveness Date, appoint the independent auditors referredto inthe DCA. 20 D. APPRAISAL SUMMARY 1. Economic and financial analyses Given the character o f this operation, a quantitative economic and financial analysis would not be the appropriate tool to assess the full significance o f this project. The reach and depth o f the reforms envisioned inthis operationwill determine the ultimate economic benefits o fthis credit. However, if the project is successful in increasing the availability o f private sector credit in Ghana the economic impact will be significant. Taking the banking sector average net interest margin ino f approximately 10 percent (as identified inthe 2003 FSAP update), even a 1percent increase in private sector credit (12.8 percent o f GDP as o f April 2005) would generate additional income o f 0.013 percent o f GDP every year, or a NPV o f more than US$27 million. If the access to financial services can prompt a 1percent shift from holdings o f physical currency to savings deposits this would generate interest income o f approximately Cedis 7 billion (almost US$1 million) per annum. Similarly, a 1percent improvement in the rate o f return eamed by SSNIT would generate an additional income o f Cedis 80 billion per annum, or around 1.2 percent o f GDP. 2. Technical ' The technical merits o f the project design have been examined by World Bank staff over the course of project preparation and are considered sound and in line with intemational standards. The design i s based on analytical work undertaken over the past four years, including the analysis and recommendations from the joint BarWFund FSAP in 2001 and FSAP update in 2003, as well as continued discussions with the government and other key stakeholders during the preparation o f the Financial Sector Strategic Plan (FINSSP). In addition technical assessmentswill continue throughout the implementationperiod. 3. Fiduciary Duringthe project appraisal apreparationassessmentwas carried out inthe areas o fprocurement and financial management. Provision has been made for the financing of technical assistance in procurement and financial management for the new Ministry of Public Sector Reform under the PPF. The financial management and procurement assessments conclude that the World Bank's financial management requirements will be satisfied prior to Effectiveness. 4. Social Reducingthe fiscal drain from state involvement inthe financial sector and the risk o f a financial sector crisis will free resources for important social sector expenditure inhealth, education, water and sanitation. Inaddition, the project does not include components withpotential negative socialimpacts (such retrenchment). 21 5. Environment EMCB focuses on technical assistance and capacity building andwill not finance civil works. It therefore does not trigger any environment safeguards policy. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) NaturalHabitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, beingrevised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects inDisputedAreas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50) 7. Policy Exceptions and Readiness Policy exceptions Retroactive Financing: In order to expedite project implementation and coordinate activities between implementation agencies, retroactive financing from March 15, 2005 in an amount not to exceed SDR3.46 million, which i s inexcess o f the current authorized limit o f 10 percent of the IDA credit amount, is contemplated underthe project. Readiness [XI 1.FinancialManagement andProcurement arrangements are inplace for MOFEP (and inthe process o fbeingset up for MOPSR through the PPF). [XI2. ProjectManagement staff and consultants havebeenidentified. [XI 3. The procurements documents for the first year's activities are complete andready for the start o f project implementation. [XI 4. M&Einstitutional obligations spelled out; M&Ecapacitywill beavailable withinFSD; indicators specified; base line data will be collected by FSD. [XI 5. The following items are lacking andare discussedunder C.6. Loardcredit conditions: (i)Department Instructions for Procurement and Financial Management at MOFEP and MOPSR (ii) Detailed organogram of Financial Sector Division at MOFEP By supporting theproposedproject, the Bank does not intend toprejudice theJinal determination of theparties' claims on the disputed areas 22 Annex 1: Country and Sector or ProgramBackground GHANA: EconomicManagementCapacityBuildingProject 1. CountryEconomicBackground The Ghanaian economy i s in its third year o f economic expansion, combining improvements in macroeconomic management and strong export growth and establishing a fair level o f stability. The latest figures are positive and indicate that: (i) the annual real GDP growth rate continues rising, reaching 5.8 percent for 2004 and averaging 5.2 percent over the last three years, exceeding the GPRS target o f 5.0 percent and the 4.4 percent historical average o f the last 20 years; (ii) overall fiscal deficit keeps on declining, falling to less than one-third o f its 2001 the levels, notwithstanding the more than two-fold increase in transfers to State-owned enterprises; (iii) end-year inflationratereachedthelowestlevelsince 1999,decliningfrom40.5% in the 2000 to 11.8 percent for 2004 (although the rate has now increased to 16.6 percent as o f April 2005); and (iv) export growth remains strong, reaching an estimated 7 percent growth in 2004, after peaking at 20 percent in 2003 (Table 1). It i s the stated ambition o f the Government of Ghana to reduce poverty in half by 2015 and ensure that Ghana becomes a middle income country with per capita income o f $1,000. However, prudent fiscal and monetary policies to ensure continuous macro economic stability (and an average growth rate o f 6 percent per annum over the next decade) will be essential for the fulfillment o f this objective. Table 1: Selected Economic Indicators, 2000-04 Real GDP Overall Fiscal Transfers to State Consumer Export Growth Balance OwnedEnterprises Price Index Growth Index (%) (%of GDP) (% o f GDP) (%) (2000=100) 2000 3.7 -9.7 1.6 40.5 100.0 2001 4.2 -9.0 2.1 21.3 96.4 2002 4.5 -6.8 2.4 15.2 106.3 2003 5.2 -4.4 2.3 23.6 127.7 2004(P) 5.8 -2.8 4.4 11.8 136.5 (p) Preliminary. Source: Ghana Statistical Service (GSS); International Monetary Fund; andWorld Bank staff calculations, Ghana's macroeconomic management in 2004 established an important historical precedent, achieving sustained growth and a broadly stable macroeconomic environment during an election year. Growth was driven by the strong performance o f exports, with another record cocoa harvest, and higher prices for gold exports. Strong inflows o f export revenues, as well as record remittances from Ghanaians living abroad, helped offset the increase in oil imports, allowing a hrther build up of intemational reserves. As a result, notwithstanding the rise in imports, intemational reserves in the Bank of Ghana equaled to 3.8 months o f imports o f goods and services at year end 2004, up from 0.9 months in2000. Macroeconomic stability was reflected in a relatively steady nominal exchange rate, with the cedi depreciating by only 2.2 percent against the dollar in 2004 and year to date has been stable against the dollar and modestly appreciating against the Euro and Pound Sterling. The real effective exchange rate has shown a slight appreciation. Monetary policy aimed at allowing the increase in foreign reserves, while supporting the disinflation process, keeping broad money 23 growth (including foreign currency deposits) below 2003 levels. Consumer price inflation closed the year at 11.8 percent, more than halving the end-2003 rate. Domestic interest rates declined from 40 percent in 2000 to 18 percent in 2004 (in line with lower inflation rates), allowing credit to the private sector as a share o f overall credit to increase to 58 percent by end- 2004, up from 52 percent inthe previous year. Figure 1:Headline Consumer Price Index and Interest Rates on 91 days Treasury Bonds March 2003-December 2004 (YO) , \ : : + = e = = * + ,110.0 5.0 ~ Mar-03 JUI-03 Sep-03 Dec-03 Mar-04 Ju~-04 Sep-04 Dec-04 Source: Bank o f Ghana Private investment remains below the levels o f mobilization o f private savings, however, indicating that the sustainability o f the current expansion remains an issue. The private sector financial surplus measured by the difference between private savings and investment reflect the need to offset, either partially or entirely, the public sector's financial deficit. Private investment will be unable to respond to the opportunities provided by the economic expansion, as long as the public sector deficit absorbs all the savings made available from outside the country plus a fraction o f the private sector savings mobilized domestically. Reversing this imbalance i s important because sustaining the current rates o f real GDP growth will require raising the aggregate investment rate by between 2 to 4.5 percent o f GDP. Table 2: Savings and Investment Balances, 2000-04 Gross National Private Aggregate Private Overall Fiscal Savings Savings Investment Investment Balance ("Aof GDP) (% ofGDP) (% o f GDP) (% o f GDP) (% o fGDP) 2000 15.6 13.9 24.0 14.8 -9.7 2001 21.3 18.2 26.6 13.8 -9.0 2002 20.2 17.6 19.7 13.6 -6.8 2003 24.6 18.4 22.9 14.0 -4.4 2004 (PI 27.8 15.7 26.5 15.0 -2.8 (p) Preliminary. Source: Ghana Statistical Service (GSS); Intemational Monetary Fund; and World Bank staff calculations. Oil imports continue to play an important role inthe Balance of trade, and indirectly inthe fiscal account (and ultimately in the financial sector). The impact of higher imported oil prices was absorbed primarily by the budget, given the government's decision to postpone increases in domestic petroleum retail prices. This decision led to higher subsidies to the petroleum sector, 24 reaching 2.4 percent o f GDP, against the 1.4 percent of GDP originally planned, and the 0.4 percent o f GDP provided in2003. Higher subsidiesto the petroleum sector were accommodated through a combination o f better-than-expected performance of tax and non-tax revenues, and delays in the plannedrepayment o f domestic debt, which meant drawing on the private sector's savings. 2. Financial sector Ghana's formal financial sector includes a broad range o f institutions, with the banking system accounting for most o f the sector's assets. As a result o f loose monetary conditions, the bank assets-to-GDP ratio grew rapidly inthe late 1990s, reaching 45 percent in2000, but dropped to a moderate 38 percent in2001 as monetary conditions were tightened, and remained at 39 percent to December 2003. The aggregate balance sheets o f the rural banks and other non-bank financial institutions have grown rapidly, but are very small, amounting to 5 percent o f GDP in2002. The insurance andpension sector i s dominated by SSNIT, and is otherwise small. The level of financial intermediation in the economy is low by the standards o f sub-Saharan Africa. M 2 as a share of GDP remains modest at 21 percent as o f March 2005, and the relatively high level of currency in circulation (7 percent of GDP) suggests that cash continues to be an important mediumof exchange for economic transactions. Table 3: Key Financial Sector Performance Indicators Source: Global Development Finance 2005 Table 4: Key Banking Sector Indicators 2004 2003 Return on assets (inpercent) 6.19 6.3 Return o n earning assets (inpercent) 7.62 8.0 Return o n equity (inpercent) 35.56 33.4 Net interest spread (inpercent) 11.27 12.3 Expense to income (inpercent) 63.31 63.9 Interest margin (inpercent) 9.50 10.6 The focus of developing country governments, regulators and the international community has been on promoting stability and security inthe financial sector, rather than on widening access to financial services; at the same time, financial exclusion acts as a significant `brake' on growth and livelihoods. Less than 10 percent o f people in Ghana have access to bank accounts as with many African countries. The ability o f people to reduce their vulnerability, improve their 25 incomes, pay for health care etc i s all directly hampered by lack of access to financial services. Remittances in particular are a valuable source o f funds for household expenditure on health, education, and housing, and one on which many low income households in Ghana rely. Table 5: Assets of the banking system (2003 and 2004) 2003 2004 Assets (US$ m.) YO Assets (US$ m.) % Commercial banks Ghana Commercial Bank 571.75 19.7% 635.98 18.0% SSB Bank Ltd 247.47 8.5% 275.54 7.8% Barclays Bank o f Ghana Ltd 427.48 14.7% 531.85 15.O% Standard Chartered Bank 450.09 15.5% 496.80 14.0% The Trust Bank Ltd 73.98 2.5% 101.89 2.9% Metropolitan and Allied Bank 14.61 0.5% 18.33 0.5% International CommercialBank 25.91 0.9% 37.93 1.1% Stanbic Bank Ghana Ltd 49.50 1.7% 83.93 2.4% Unibank 11.41 0.4% 19.35 0.5% HFC Bank Ghana Ltd d a d a 66.33 1.9% ARB Apex Bank Ltd 17.17 0.6% 28.71 0.8% Merchant banks Merchant Bank Ghana Ltd 117.73 4.0% 155.96 4.4% Ecobank Ghana Ltd 193.42 6.6% 258.72 7.3% C A L Merchant Bank 69.41 2.4% 93.74 2.6% FirstAtlantic Bank 49.05 1.7% 56.51 1.6% Amalgamated Bank 35.87 1.2% 42.05 1.2% Development banks Agricultural Development Bank 356.52 12.3% 364.82 10.3% National Investment Bank 125.38 4.3% 171.50 4.8% Prudential Bank 72.68 2.5% 98.14 2.8% Total 2909.43 3538.08 Source: Bank o f Ghana Banks and Non Bank FinancialInstitutions The banking system is dominated by GCB and three foreign-owned commercial banks, which account for about two-thirds of system assets, loans, and deposits. The development banks and merchant banks, which focus on medium- and long-term financing and corporate banking respectively, together share about 30 percent. The five small commercial banks operate on a much smaller scale. The importance o f foreign-owned banks in the system has increased, to about 55 percent of system assets, due in large part to the migration o f a domestic commercial bank to this category following its purchase by a foreign banking group. Banks only reach about 5 percent o f all households as more than 35 percent o f their branches are in the greater Accra region even though this regionrepresents less than 10percent o fthe country's p~pulation.~ This excludes branches ofruralbanks; however, these institutions account for less than 5 percent ofbanlung systemassets. 26 A large portion of the banks' resources continue to be absorbed by the public sector. Exposures to the public sector-either in the form of loans to state-owned enterprises or holdings of government securities-continue to represent more than 35 percent o f bank assets, reflecting Ghana's large fiscal deficits and high secondary reserve requirements that require banks to hold 35 percent o f their deposit liabilities in government securities. Although this represents a slight improvement in recent years, the prevalence o f high interest rates in real terms has served as a break on private sector credit growth and has also contributed to a sharp increase in bank holdings o f cash and short-term funds. Bank of Ghana The Bank o f Ghana has made significant progress in advancing the reform agenda under the overall framework o f FINSSP and made considerable difference towards improving institutional efficiency and effectiveness. However, major organizational reforms remain necessary. The Banking Supervision department i s presently responsible for all functions including on-site inspection, off-site surveillance, licensing policy and regulation, enforcement and consumer protection. There i s an inherent conflict of interest in some o f the areas to be housed together including, on-site, off-site, policy and enforcement. Banking Legislation and Regulation: Ther=50,000 - 2,000,000 NCB All contracts >=200,000 <50,000 Price Comparison None All values Direct contracting All contracts Goods and Services >=250,000 ICB All contracts other than Consulting Services >=50,000 - <2507000 NCB All contracts >= 150,000 <50,000 Shopping None All values Direct Contracting All contracts Consulting Services >= 100,000 fim QCBS All contracts Below 100,000, firms QCBSILCSISFBICQS None >=50,000 individuals Individual All contracts < 50,000, individuals Individual None OverallProcurementRiskAssessment: Average High Low U Frequencyof procurementsupervisionmissionsproposed:One every 6 month(s) l3All single source contracts will be subject to prior review. 80 Annex 9: EconomicandFinancialAnalysis GHANA: EconomicManagementCapacityBuildingProject Given the character o f this operation, a quantitative economic and financial analysis would not be the appropriate tool to assess the full significance o f this project. The reach and depth o f the reforms envisioned inthis operationwill determine the ultimate economic benefits of this credit. To examinejust some aspects o f the financial sector reform, however, ifthe project is successful in increasing the availability of private sector credit in Ghana the economic impact will be significant. Taking the bankingsector average net interest margin inof approximately 10 percent (as identified in the 2003 FSAP update), even a 1percent increase in private sector credit (12.8 percent o f GDP as of April 2005) would generate additional income o f 0.013 percent o f GDP every year, or a NPV of more than $27 million14without taking into account the additional utility created for both savers and the borrowers. Similarly, the benefits for the increased access to financial services are hard to exactly quantify but even a 1 percent shift from holdings o f physical currency to savings deposits would generate interest income o f approximately Cedis 7 billion ( almost $1 million) per annum. 1 percent improvement in the rate o f return earned by SSNIT would generate an additional income o f Cedis 80 billion per annum, or around 1.2 percent o f GDP. Similar benefits can be identified for improved use o f remittances and lower transaction costs as. Given an estimated US$1 billion inremittances per annum, each percentage point decrease in transaction costs would make an additional US$10 million available to the economy and a more efficient and targeted infrastructure supporting remittances would likely increase the total amount o f remittances reaching Ghana. In as much as that SSNIT will also be collecting a contribution for health insurance from its members, any improvement in the collection processes of SSNIT will have important ramifications for the provision of health services. l4Using a real discount rate of 5%, as the increment i s reflected as a percentage of GDP this would increase with inflation and so the real rather than nominal interest rate i s the appropriate discount rate. 81 Annex 10: SafeguardPolicyIssues GHANA: EconomicManagementCapacityBuildingProject EMCB focuses ontechnical assistance and capacity building andwill not finance civil works. It therefore does not trigger any environment safeguards policy. Inaddition, the project does not include components with potential negative social impacts (such as retrenchment). 82 Annex 11: ProjectPreparationand Supervision GHANA: Economic ManagementCapacityBuildingProject Planned Actual PCNreview 12/13/2004 01/19/2005 InitialPID to PIC 05/13/2005 Initial ISDS to PIC 05/17/2005 Appraisal 07/2005 07/25/2005 Negotiations 09/2005 10/03/2005 Board/RVP approval 11/15/2005 Planned date o f effectiveness 05/2006 Planned date o fmid-termreview 06/2008 Planned closing date 06/2011 Key institutions responsiblefor preparationof the project: Ministry of Finance andEconomic Planning (MOFEP) MinistryofPublic Sector Reform(MOPSR) FINSSP, Secretariat, MOFEP Bank o f Ghana (BOG) Securities and Exchange Commission (SEC) Social Security andNationalInsurance Trust (SSNIT) National Insurance Commission (NIC) Ghana Stock Exchange (GSE) Bank staff and consultantswho worked on the project included: Name Title Unit Kofi-BoatengAgyen Senior Operations Specialist AFTPS Tsri Apronti Procurement Specialist AFTPC FatouAssah Senior Operations Officer OPD Samuel Bruce-Smith Consultant AFTFM Irene Chacon Operations Analyst AFTPS Wolfgang Chadab Finance Officer LOAG2 Juan Costain LeadFinancial Sector Specialist (TTL) SASFP Salli Cudjoe Program Assistant AFC10 Mark Dorfman Senior Economist HDNSP ManushHristov Counsel LEGAF GuillemetteJaffrin Young Professional SASFP Mudassir Khan Senior Financial Sector Specialist SASFP Smile Kwawukume Public Sector Specialist AFTPR Thomas Muller Young Professional AFTFS Montserrat Pallares-Miralles Social Protection Specialist HDNSP Andrea Vasquez-Sanchez Senior Program Assistant AFTPS Frederick Yankey Senior Financial Management Specialist AFTFM 83 Bank finds expended to date on project preparation: Bank resources:US$201,185.64 1. Trust funds:US$O 2. Total: US$201,185.64 EstimatedApproval and Supervision costs: 1, Remainingcosts to approval: US$20,000 2. Estimatedannual supervision cost: US$150,000 84 Annex 12: Documentsinthe ProjectFile GHANA: EconomicManagementCapacityBuildingProject Project Concept Note 05/13/2005 Integrated Safeguards Datasheet (concept stage) 05/18/2005 Project Information Document (concept stage) 05/13/2005 BTOR-Mission to Ghana (26 - 31January 2005) 07/02/2005 Approved Minutes of Project Concept Review Meeting 03/18/2005 Integrated Safeguards Datasheet (appraisal stage) 09/23/2005 Project Information Document (appraisal stage) 09/23/2005 Aide MemoirePre-Appraisal Mission 04/15/2005 Approved Minutes of Quality Enhancement Review 06/29/2005 Approved Minutes of DecisionMeeting 08/03/2005 Aide Memoire Appraisal Mission 08/05/2005 85 Annex 13: Statementof LoansandCredits GHANA: EconomicManagementCapacityBuildingProject Difference between expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Ong. Frm. Rev'd PO56256 2005 GH-Urban Water (FY05) 0.00 103.00 0.00 0.00 0.00 104.13 0.00 0.00 PO81482 2005 H:Community Based Rural Development 0.00 60.00 0.00 0.00 0.00 60.23 2.17 0.00 PO84015 2005 Small Towns Water Supply & Sanitation 0.00 26.00 0.00 0.00 0.00 26.23 0.00 0.00 PO82373 2004 GH-Urban Env Sanitation 2 (BD FY04) 0.00 62.00 0.00 0.00 0.00 61.26 0.33 0.00 PO71157 2004 GHLandAdministration 0.00 20.51 0.00 0.00 0.00 20.80 3.04 0.00 PO50620 2004 GH-Edu Sector SIL (FY04) 0.00 78.00 0.00 0.00 0.00 74.17 -3.12 0.00 PO71399 2003 Partnerships w/ Traditional Authorities 0.00 0.00 0.00 0.00 0.00 3.60 1.70 0.00 PO73649 2003 2nd Health Sect. Prog. Support 0.00 57.30 0.00 0.00 0.00 53.90 -8.72 0.00 PO50623 2002 GH ROAD SECTOR DEVELOPMENT 0.00 220.00 0.00 0.00 0.00 178.06 55.32 0.00 PROGRAM PO67685 2002 Ghana:GEF- Northem Savanna 0.00 0.00 0.00 7.90 0.00 5.91 2.84 0.00 PO71617 2001 AIDS ResponseProj. (GARFUND) 0.00 25.00 0.00 0.00 0.00 8.12 -19.78 0.00 PO00968 2001 GH-Agricultural Services APL (FYOl) 0.00 67.00 0.00 0.00 0.00 46.46 60.16 0.00 PO50616 2000 COMMUNITY WATER I1 0.00 25.00 0.00 0.00 0.00 4.90 6.41 1.34 PO69465 2000 Ghana:RURAL FINANCIAL SERVICES 0.00 5.13 0.00 0.00 0.00 3.60 20.61 0.00 PROJECT PO40659 1999 Community-based Pov. Red. 0.00 5.00 0.00 0.00 0.00 1.46 1.12 0.72 PO00974 1999 Nat. Func. Lit. Program 0.00 32.00 0.00 0.00 0.00 18.98 14.09 10.69 PO00970 1999 TRADE GATEWAY & INV. 0.00 50.50 0.00 0.00 0.00 23.26 21.49 0.00 PO00926 1995 GHThermal (Power VII) 0.00 175.60 0.00 0.00 0.00 18.06 20.37 26.62 Total: 0.00 1,012.04 0.00 7.90 0.00 713.13 178.03 39.37 86 GHANA STATEMENT OF IFC's Held andDisbursedPortfolio InMillions ofU S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1990/91/96 AAIL 0.00 0.00 3.26 0.00 0.00 0.00 3.26 0.00 1993 AEF Afanwaa 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00 1995 AEF Antelope Co. 0.40 0.00 0.00 0.00 0.40 0.00 0.00 0.00 2001 AEE GPPI 1.17 0.00 0.00 0.00 1.17 0.00 0.00 0.00 1998 AEF NCS 0.00 0.00 0.53 0.00 0.00 0.00 0.53 0.00 1991 AEF PTS 0.00 0.00 0.31 0.00 0.00 0.00 0.31 0.00 1999 AEF PharmaCare 0.05 0.00 0.00 0.00 0.05 0.00 0.00 0.00 1994 AEF Shangri-la 0.93 0.00 0.00 0.00 0.93 0.00 0.00 0.00 1996 AEF Tacks Farms 0.43 0.00 0.00 0.00 0.43 0.00 0.00 0.00 1989 Cont Acceptances 0.00 0.88 0.00 0.00 0.00 0.88 0.00 0.00 2001 DiamondCement 4.25 1.oo 0.00 0.00 4.25 1.oo 0.00 0.00 2000 ELAC 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1991 GHANAL 0.00 0.44 0.00 0.00 0.00 0.44 0.00 0.00 2001 MFISSLC 0.00 0.49 0.00 0.00 0.00 0.49 0.00 0.00 Total portfolio: 7.39 2.91 4.10 0.00 1.39 2.91 4.10 0.00 ApprovalsPendingCommitment F Y Approval Company Loan Equity Quasi Partic. 2004 BP Ghana 0.00 0.00 0.00 0.00 2004 Japan Motors 0.00 0.00 0.00 0.00 2004 Takoradi I1 0.06 0.00 0.00 0.00 Total pendingcommitment: 0.06 0.00 0.00 0.00 87 Annex 14: Country at a Glance GHANA: EconomicManagementCapacityBuildingProject Sub- POVERTY and SOCIAL Saharan Low- Ghana Africa income 1 Development diamond* 2003 Population,mid-year (millions) 20.4 703 2,30 Lifeexpectancy GNI per capita (At/asmethod, US$) 320 490 450 T GNi (Atlasmefhod, US$ billions) 6.5 347 1,038 ~ Average annual growth, 1997-03 1 Population (%) 2.6 2.3 1.9 Labor force (%) 2.2 2.4 2.3 GNI Gross per * primary M o s t recent estimate (latest year available, 1997-03) capita enrollment Poverty (%of populationbelownationalPO vertyline) 40 Urbanpopulation (%oftotalpopulation) 45 36 30 Life expectancyat birth (years) 55 46 58 L Infant mortaiity(per looolive births) 60 n 3 82 Childmalnutrition (%of children under5) 25 44 Access to improvedwater source Access to an improvedwater source (%ofpopulation) 73 58 75 Illiteracy(%ofpopulationage 59 26 35 39 Gross primaryenroilment (%of school-age population) 81 87 92 - --Ghana Male 85 94 99 Low-income group Female 78 80 85 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios* GDP (US$ billions) 4.1 6.0 6.2 7.7 Gross domestic investment/GDP 3.7 22.2 22.3 8.4 Exports of goods and sewices/GDP 5.6 20.3 42.5 37.2 Trade Gross domestic savings/GDP 3.3 6.0 n.3 5.6 Gross national savings/GDP 2.4 P.8 22.8 8.9 Currentaccount balance/GDP -6.1 -9.4 0.5 -0.5 Interestpayments/GDP 11 14 12 1.4 Total debt/GDP 411 820 18.1 n3.5 Total debt service/exports 30.4 24.6 7.3 23.1 Present value of debtlGDP 63.4 1 Present value of debtlexports 147.5 Indebtedness 1983-93 1993.03 2002 2003 2003-07 (average annualgrordh) GDP 5.0 4.3 4.5 5.2 4.9 ,*-= -Ghana GDP percapita 2.0 2.3 19 2.5 2.6 1 I LOw-incomeorom - . STRUCTURE o f the ECONOMY 1983 Igg3 Growth of investment and GDP (%) (%of GDP) I Agriculture 59.7 36 9 360 352 40 Industry 6.6 24 8 243 248 20 Manufacturing 3.9 9 4 9 0 8 4 0 Services 33.6 38 3 39 7 40 1 -20 Private consumption 90.8 Generalgovernment consumption 5.9 Imports of goods and sewices 6.O 1983-93 1993-03 2002 2003 (averageannualgrordh) Growth of exports and imports (%) Agriculture 2.3 4.0 4.1 4 6 Industry 6.6 4.6 6.3 0 7 40 Manufacturing 3.9 4.0 0.0 -14 20 Services 7.8 4.5 4.4 6 9 0 Private consumption 4.4 4.6 9.1 4 3 -20 Generalgovernment consumption 5.9 3.9 -4.4 7 2 -40 Gross domestic investment 6.2 2.0 -V.6 24 1 Imports of goods and services 8.5 7.1 -4.4 7 7 -.---Exports -Inports 88 Ghana PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (%) Domestic prices 1 (%change) Consumer prices Q2.9 25.0 14.8 26.9 Implicit GDP deflator P3.1 318 22.8 29.3 Government finance (%of GDP. includes current grants) Current revenue 5.5 23.5 20.2 24.3 98 99 00 01 02 Current budget balance -1.9 5.5 0.2 4.1 Overall surpius/deficit -5.6 -5.9 -4.5 -,---GDPdeflator -CPI TRADE 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 1,064 2,661 3,025 Cocoa 286 463 772 I Timber 147 182 176 Manufactures Total imports @if) 1,880 4,099 4,469 Food Fuel and energy 258 275 295 I Capital goods Export price index(895=X)O) 94 76 81 88 97 98 99 00 01 02 03 Import price index(1995=WO) Q2 96 96 97 Q h P O r t S Q InpOflS Terms of trade (1995-00) 92 79 85 90 BALANCE of PAYMENTS L------ 1983 1993 2002 2003 (US$ millions) Current account balance to GDP ( O h ) Exports of goods and services 477 1208 2,613 2,856 imports of goods andservices 634 2,l72 3,355 3,9Q Resource balance -257 -964 -742 -1,054 0 Net income -90 -1P -P9 -258 -5 Net current transfers -2 5 7 901 1,v7 .lo Current account balance -248 -559 30 -35 Financingitems (net) -7 600 427 413 -15 Changes in net reserves 256 -41 -157 -378 Memo: ReSeNeS includinggoid (US$ mi//iOnS) 631 811 Conversion rate (DEC,/ocal/US$j 45.4 649.1 7,932.7 8,677.4 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) 1 Composition o f 2003 debt (US$ mill.) Total debt outstandinganddisbursed 1,666 4,834 7,339 7,926 IBRD P6 77 5 4 IDA 141 1.838 3,471 3,950 I G.698 A'4 Total debt service 145 303 8 3 670 iBRD 20 20 2 2 IDA 2 l7 30 29 Compositionof net resourcefiows Official grants 46 222 328 Official creditors 61 302 v5 6 7 Privatecreditors 26 25 -23 -294 Foreign direct investment 2 t?5 50 Portfolio equity 0 0 0 I c:453 World Bank program Commitments 72 269 0 6 6 Disbursements 23 205 99 8 8 A-IBRD E - Bilateral B-IDA D-Othermltllatetal F-Rlvate Principal repayments 0 v t? 0 C - I M F G - Short-teri 89 IBRD 33411 2°W 0° 2°E To Tenkodogo BURKINA FASO To Hamale Navrongo U P P E R E A S T Bobo- Diolasso WalewaleTumu Bolgatanga GHANA Nakpanduri U P P E R W E S T Walewale To Dapaong 10°N Black Volta Kolpawn Wa Wa 10°N Gushiegu White Volta To Djougou N O R T H E R N Yendi To Tamale Ferkéssédougou BENIN Sawla Fufulsu Bole Daka To Djougou CÔTE Nakpayili Oti TOGO D'IVOIRE To BlackVolta Salaga Bouna Makongo Yeji Kintampo Dambai 8°N 8°N Jema V O L T A B R O N G - A H A F O Atebubu Kwadwokurom Tain Techiman Pru Berekum To Sokodé Sunyani Mount Afadjato (880 m) K w Bia a h Afram u Lake Kpandu nges AgbovilleoT P Volta To l Agogo Ra Abomey Goaso a t e a u Kumasi Bibiani E A S T E R N -Togo Ho Krokosue A S H A N T I Anum im To Porto- no Obuasi Diaso Birim p Novo a aT Kade Koforidua kw Volta Aflao 6°N Oda W E S T E R N A 6°N Dunkwa Enchi GREATER 2°E ACCRA AbidjanoT Tema Twifo Praso ACCRA Prestea C E N T R A L GHANA Ankobra Pra Tarkwa Winneba SELECTED CITIES AND TOWNS Cape Coast REGION CAPITALS Newtown NATIONAL CAPITAL This map was produced by Sekondi the Map Design Unit of The Axim Takoradi RIVERS World Bank. The boundaries, Gulf of G uinea colors, denominations and any other information shown MAIN ROADS on this map do not imply, on the part of The World Bank 0 20 40 60 80 Kilometers RAILROADS Group, any judgment on the legal status of any territory, REGION BOUNDARIES or any endorsement or 0 20 40 60 Miles a c c e p t a n c e o f s u c h boundaries. 2°W 0° INTERNATIONAL BOUNDARIES SEPTEMBER 2004 IBRD 33411 2°W 0° 2°E To Tenkodogo BURKINA FASO To Hamale Navrongo U P P E R E A S T Bobo- Diolasso WalewaleTumu Bolgatanga GHANA Nakpanduri U P P E R W E S T Walewale To Dapaong 10°N Black Volta Kolpawn Wa Wa 10°N Gushiegu White Volta To Djougou N O R T H E R N Yendi To Tamale Ferkéssédougou BENIN Sawla Fufulsu Bole Daka To Djougou CÔTE Nakpayili Oti TOGO D'IVOIRE To BlackVolta Salaga Bouna Makongo Yeji Kintampo Dambai 8°N 8°N Jema V O L T A B R O N G - A H A F O Atebubu Kwadwokurom Tain Techiman Pru Berekum To Sokodé Sunyani Mount Afadjato (880 m) K w Bia a h Afram u Lake Kpandu nges AgbovilleoT P Volta To l Agogo Ra Abomey Goaso a t e a u Kumasi Bibiani E A S T E R N -Togo Ho Krokosue A S H A N T I Anum im To Porto- no Obuasi Diaso Birim p Novo a aT Kade Koforidua kw Volta Aflao 6°N Oda W E S T E R N A 6°N Dunkwa Enchi GREATER 2°E ACCRA AbidjanoT Tema Twifo Praso ACCRA Prestea C E N T R A L GHANA Ankobra Pra Tarkwa Winneba SELECTED CITIES AND TOWNS Cape Coast REGION CAPITALS Newtown NATIONAL CAPITAL This map was produced by Sekondi the Map Design Unit of The Axim Takoradi RIVERS World Bank. The boundaries, Gulf of G uinea colors, denominations and any other information shown MAIN ROADS on this map do not imply, on the part of The World Bank 0 20 40 60 80 Kilometers RAILROADS Group, any judgment on the legal status of any territory, REGION BOUNDARIES or any endorsement or 0 20 40 60 Miles a c c e p t a n c e o f s u c h boundaries. 2°W 0° INTERNATIONAL BOUNDARIES SEPTEMBER 2004