Nepal: Integrated Public Financial Management Reform Project First Implementation Support Review September 26 to October 4, 2018 Aide Memoire 1. During September 26 to October 4, 2018, a Bank Team led by Jiwanka Wickramasinghe, Akmal Minallah and Zafrul Aslam (refer Annex 1) carried out the formal project launch and the first Implementation Support consultations for the Integrated Public Financial Management Reform Project (IPFMRP). This Aide Memoire (AM) summarizes the findings on the status of the project implementation, recommendations and agreements reached with the relevant agencies to take corrective measures and/or to expedite implementation. The AM was discussed at the wrap-up meeting on October 4, 2018 with the PEFA Coordinator Mr. Sushil Pandey, as the chair. The persons met is attached in Annex 2. As agreed during the wrap-up meeting, this Aide Memoire will be at public disclosure as required by the Bank's Access to Information Policy. OVERALL STATUS AND KEY PROJECT DATA 2. The development objective of the IPFMRP is "Strengthening the effectiveness of selected Public Financial Management (PFM) institutions and procurement institutions, systems, and procedures at the federal and subnational levels." 3. PDO-Level Results Indicators/Key Results: (1) Improved aggregate capital budget out-turns at the federal level; (2) Comprehensive accounting and reporting procedures in place in federal and subnational governments; (3) Improved audit planning and quality management for audit of federal and subnational entities; and (4) Improved timeliness of contract award in selected key sector agencies (KSAs) at federal level and selected subnational governments. Table 1: Project Data Project Data Projects Performance Ratings Approval Date: June 27, 2018 Summary Ratings Current Effectiveness Date: August 24, 2018 Achievement of PDO S Implementation Progress S Closing Date: July 30, 2021 imntion rvauai S Momitoring & Evaluation S Grant Amount: USD 15,000,000 Project Management S Amount Disbursed 0 Procurement MS (As of September 30, Financial Management S 2018) Counterpart Funding S Ratings: HS=Highly Satisfactory; S=Satisfactory; MS= Moderately Satisfactory; MU= Moderately Unsatisfactory; U=Unsatisfactory; HU=Highly Unsatisfactory 4. The Government of Nepal in collaboration with the Bank, formally launched the Project on September 27, 2018 under the leadership of the Financial Comptroller General (FCG) and the World Bank Country Manager. Senior officials and project teams from all project implementing agencies, representatives of development partners of the Multi Donor Trust Fund and the Bank task team participated in the event. The objective of the event was to provide an overview of the project objectives, results and components and discuss implementation arrangements. FCG and other senior Government officials pledged support for project activities. Leading up to the formal launch, the essential operational training was provided to all the implementing agencies. KEY POINTS DISCUSSED AND AGREED ACTIONS Component 1: Strengthening Public Expenditures and Revenue Management in Federal and Subnational Governments (US$ 7 million) 5. Medium Term Expenditure Framework (MTEF): The Bank team was informed of the need to strengthen the existing fiscal forecasting model and further strengthening the existing MTEF processes. There exists a manual for preparation of MTEF, which needs to be improved and updated to suit its usage at the provincial and local levels. The Intergovernmental Fiscal Arrangement Act 1 mandates the subnational level governments to prepare MTEFs, and therefore it is crucial to develop uniformity in the preparation of MTEF templates and guidelines at Sub-National Government (SNG). Additionally, the National Planning Commission (NPC) also requires a software for forecasting and for sectoral projections. NPC also plans to establish an inventory of projects (Project Bank) that will feed into the MTEF process. It was agreed that a consultancy firm will be hired to cover these activities and start with a Quality Assurance (QA) review of the existing arrangements. A draft Terms of Reference (TOR) has been prepared. 6. Revenue Management: The Bank and Norway Tax for Development team are exploring the possibility to jointly conduct an assessment of tax systems at both the federal and subnational levels in agreement with the government. Furthermore, the Internal Revenue Department (IRD) has proposed an awareness program on tax issues for SNGs executives and parliamentarians. 7. Just-in-time support for improving subnational government (SNG) fiduciary assurance: Government counterparts noted that despite some gaps, Sub-national Treasury Regulatory Application (SUTRA) provides an immediate term solution to the budgeting, accounting and reporting requirements at the local level and informed the mission that SUTRA development and roll out work will continue. Additionally, the Bank team requested the Government to provide support to SNGs to clear the backlog and prepare financial statements for FY 2017/18. Directly aligned with project results, the Project will support the FCGO to prepare a model budgeting, accounting and reporting procedural manual for SNGs; To complete the support to the local level, Government via other sources of financing, will continue to maintain a help desk and establish additional help desks at the Provincial Government HQs; provide IT equipment, internet connectivity and refresher training. 8. Integrated Financial Management Information Systems (IFMIS): The team discussed and agreed to fast track the IFMIS Study that covers all tiers of Government that will provide recommendations for a medium-term strategy and action plan to implement an integrated solution to improve financial management. A draft TOR was discussed during the mission, accordingly PEFA Secretariat will finalize the ToR and communicate to the Bank. 9. Chart of Accounts (CoA): Currently, there is partial use of the old CoA - GFS 2001 for expenditures at the federal level- while for revenues and SNG (province and local) at the lowest levels are using GFS 2014 compliant CoA effective FY2017. The team noted that the CoA can be improved further. It was agreed that an individual consultant will be hired to carry out a quality assurance of the chart of accounts and provide support to improve the CoA. 10. Strengthening fiscal reporting and controls: FCGO is exploring to move to International Public-Sector Accounting Standards (IPSAS) 2017 framework in consultation with other stakeholders. The Government plans to conduct quality assurance of the current Nepal Public Sector Accounting Standards (NPSAS) and its implementation, training on how to prepare Financial Statements on the updated IPSAS and prepare a road map for accrual accounting, through consulting support including international expertise. Recommendations of this exercise will be used by the Government to inform the Accounting Standards Boards to update NPSAS on the basis of IPSAS 2017. It plans for an exposure visit to understand IPSAS implementation in a similar country and enhance FCGO capacity to prepare consolidated financial statements based on NPSAS. FCGO team is preparing a general internal control guideline for the GoN and seek consultancy support for quality assurance of these guidelines and to develop sector specific guidelines. An exposure visit is sought to study the best practices of internal control system and inform the general internal control guidelines. Institute of Chartered Accountants of Nepal (ICAN) has signed a Memorandum of Understanding (MoU) with the PEFA Secretariat. The Bank team urged ICAN to initiate the revision of Nepal Financial Reporting Standards (NFRS)', hire consultants for Quality Assurance activities/NFRS training and start dialogue with select State-owned Enterprises (SoEs) in consultation with the Government to implement NFRS. 11. Capacity Building: The Government of Nepal (GoN) has recently renamed the Revenue Administration Training Center as the Public Financial Management Training Center (PFM institute) which is responsible for fulfilling the skill and capacity gap of the government personnel in revenue and all areas of PFM. The PFM Institute is also expected to cater to the needs of sub-national Standards followed by the private sector and state-owned enterprises. 2 government until such resource is available at the sub-national level. For developing a structured approach to fulfil this vision, an assessment has been planned to guide GoN on the required sequence of actions which is underpinned by a comprehensive Training Needs Assessment (TNA) for the three tiers of the government. With inputs from PFM Institute, the initial draft TOR is being revised for conducting Training Needs Assessment and developing a roadmap to strengthen the PFM Institute. 12. The Public Accounts Committee (PAC): The PAC Chair has now been appointed and the PAC team is finalizing the initial draft of TOR for capacity development of PAC members and PAC Secretariat for Federal and Provincial governments. Component 2: Strengthening the Office of the Auditor General (US$4 million) 13. Support to audit planning and execution of federal and sub-national entities: It was agreed that a consultancy firm will be contracted to support audit planning and execution in the federal structure, updating the existing manuals in the light of extended mandate of OAGN, support to quality assurance and effective follow up. 14. Effective use of IT systems: OAGN has developed Nepal Audit Management System (NAMS) for better management of risk-based audit and acquired IDEA software for Computer Assisted Auditing Techniques. These applications should be optimally used through setting up of IT governance structure, improving the NAMS application for its seamless usage, access to information systems data like SuTRA, Treasury Single Account (TSA) etc., establishing Centre for Excellence for audit to enable effective use of data and training of auditors and adoption of disruptive technology like mobile phones, artificial intelligence to support effective audit in IT environment. These activities are included in part II of the ToRs. 15. Citizen Participatory Audit (CPA): OAGN is collaborating with Global Partnership for Social Accountability (GPSA) for immediate needs of the CPA, which includes, updating the guidelines, mapping the CSOs in seven provinces, intensive training of performance auditors and CSOs and implementation of CPA in selected performance audits. This activity is expected to be completed by January 2019. Concurrently, OAGN is preparing a ToR for engaging a firm to support CPA for three years. Since hiring of firm will take around six months, the support from GPSA shall fill the gap. It was agreed that the development and implementation of citizen participatory performance audits with 50% female participation will increase to 150 in select 2 or 3 SNGs in year 1. Component 3: Public Procurement Improvement (US$ 4 million) 16. Capacity Development and Professionalization: The TOR for the contract of capacity development and professionalization (about $1.7 M) is finalized. The process of contracting has been initiated for award on a Direct Contracting method to the pre-identified institutions, that is, International Training Center of ILO (ITC-ILO)/ Turin in collaboration with the local institute, Nepal Administrative Staff College (NASC), as the nominated sub-consultant. 17. Other Major Consultancies: The TORs of the two individual consultants (Lead Project Management Consultant and Procurement Specialist) have been finalized. Concurrently, PPMO is progressing to finalize the TOR of enhancing e-GP system. 18. Support to Sub-National Government (SNG): The Bank team has broadly identified capacity constraints at the SNG level to deal with procurement. PPMO will prepare and issue at least the basic procurement documents and initiate training. Component 4: PFM Reform Management and Coordination 19. Implementation Arrangements: The Bank team discussed the legal covenants on the project related governance arrangements and established that the arrangements are in place. If there are any changes to these arrangements, it was agreed that, the Government will keep the bank abreast of the situation and take necessary actions to maintain satisfactory arrangements. The team was informed that the current PEFA Member Secretary is being rotated as per the official rotation policy, and subsequently 3 his replacement was appointed and currently overlapping with the outgoing Member Secretary. The project teams in implementing agencies are in place, 20. Project Operations Guideline: With due consultation with the Bank, PEFA Secretariat has finalized the IPFMRP Operation Guideline and it has been approved by the Secretary of Ministry of Finance as decided by the PFM Reform Steering Committee, which now forms the basis for all implementing agencies to implement project activities. 21. Citizen's Engagement (CE): It was discussed and agreed that CE strategy will be developed by the PEFA Secretariat in consultation with all key stakeholders and an action plan prepared and adopted. FIDUCIARY COMPLIANCE 22. Procurement Performance: From the initial TORs received for Bank's review, it was evident that procurement related capacity needs further strengthening for the client to be able to distinguish information relevant for the TOR and information to be included in the subsequent stages of the procurement process. All three implementing agencies need to expedite the procurement activities of approved Procurement Plan (PP) on the Systematic Tracking of Exchanges in Procurement (STEP) system of the Bank. Approved procurement activities (prior/post review) should be updated in the first week of each calendar month by uploading bidding/proposal documents, evaluation reports, contract documents and by revising the dates of those activities remains to be initiated and/or with red flags on STEP. The Project Procurement Strategy for Development (PPSD) should be followed with special attention provided to procurement caveats. In view of current progress, Procurement performance is rated "Moderately Satisfactory". 23. Financial Management (FM) Performance: The Designated Account for the Project has been opened, Authorized Signatory Letter has been received and project account is being set up in the Client Connection. The budget for the current FY including counterpart funding is considered adequate. The Finance Officer dedicated for the Project has been assigned in PEFA Secretariat. As there are retroactive expenditures, it has been agreed with PEFA Secretariat to submit external audit report for the Project for FY 2017/18 by January 15, 2019. It was agreed to implement Computerized Government Accounting System (CGAS) in all lAs (already implemented in FCGO, PEFA Secretariat and PAC) upon assurance of its technical soundness. The 'Treasury Single Account' system will be used to generate project reports. There are no pending agreed actions at this stage. In view of the current progress, Financial Management rating is "Satisfactory". 24. Disbursement: The retroactive expenditures for OAG component of around NPR 1.18 million (around USD 10,000) has been incurred. The project team is in the process of requesting reimbursement for this along with an advance into the Designated Account (advance up to the ceiling of USD I million). Approximately USD I million is planned to be spent during FY2018/19. SAFEGUARD MANAGEMENT 25. Environmental and Social Safeguards: Project is a category C and does not trigger any environment safeguards actions. There are no issues related to social safeguards as OP 4.12 on resettlement and land acquisition has not been triggered. 26. Gender Considerations: It was agreed that as part of the Training Needs Analysis, a list of female staff and their training status will be compiled, and the training plan developed in year 1. The team noted that no guidelines exist for the adoption of Gender Responsive Budgeting processes at SNGs. It was agreed that GRB procedures will be included in the unified budgeting guideline to be developed, and for the transition period the SUTRA guideline to include a separate section on GRB. NEXT REVIEW: The next review is tentatively agreed for March 2019. 4 Annex 1: Bank Team Name Title Franck Bessette Lead FMS/MDTF Program Manager Jiwanka Wickramasinghe Sr. Financial Management Specialist and TTL Zafrul Islam Lead Procurement Specialist and Co-TTL Akmal Minallah Sr. Financial Management Specialist and Co TTL (The Co- TTLship was handed over to Yogesh Born Malla). Yogesh Bom Malla Sr. Financial Management Specialist Winston Cole Lead Financial Management Specialist Kene Ezemenari Senior Economist Timila Shrestha Financial Management Specialist Jaya Sharma Sr. Social Development Specialist Pragya Shrestha Public Sector Specialist Chandra Kishore Mishra Procurement Specialist Shraddha Shah Operations Analyst Shreeram Ghimire Team Assistant Nagendra Nakarmi Sr. Program Assistant 5 Annex 2: List of Persons Met Ministry of Finance 1. Mr. Adesh Khadka, IT Director Financial Comptrollers General office 1. Mr. Suresh Pradhan, Financial Comptroller General 2. Mr. Sansar Jung Dewan, IT Director 3. Mr. Baburam Subedi, Deputy Financial Comptroller General 4. Mr. Dinesh Regmi, Deputy Financial Comptroller General 5. Mr. Niraj KC, Deputy Financial Comptroller General PEFA Secretariat 2. Mr. Sushil Pandey, Coordinator, PEFA Secretariat 3. Mr. Murari Niraula, Member Secretary, PEFA Secretariat 4. Mr. Rajendra Bajracharya, National PFM Consultant, PEFA Secretariat 5. Mr. Shreeram Thakur, Accounts Officer, PEFA Secretariat National Planning Commission 1. Mr. Sushil Bhatta, Member 2. Mr. Khomraj Koirala, Joint Secretary 3. Mr. Narayan Khatiwada, Program Director-PPP 4. Mr. Arjun Prasad Poudyal, Under Secretary 5. Mr. Narhari Ghimire, Under Secretary 6. Ms. Babita Bhattarai, Planning Officer Public Accounts Committee 1. Mr. Netra Bhattarai, Under Secretary Office of the Auditor General 1. Mr. Tanka Mani Sharma, Auditor General 2. Mr. Ramu Prasad Dotel, Deputy Auditor General 3. Mr. Padam Raj Paudel, Assistant Auditor General 4. 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