Discussion Draft IMPROVING CAPACITY IN PUBLIC FINANCIAL MANAGEMENT (GUIDANCE TO STAFF) FINANCIAL MANAGEMENT ANCHOR

Transcription

1 Discussion Draft IMPROVING CAPACITY IN PUBLIC FINANCIAL MANAGEMENT (GUIDANCE TO STAFF) FINANCIAL MANAGEMENT ANCHOR DECEMBER 10, 2003

2 ACRONYMS AG ADB APL CFAA CAS CIDA DFID ESW FMS FM ID IDF HIPC IFMIS IMF GP LIL MDB MOF MTEF NGOs OECD OPCS OPCFM PAD PCN PER PFM PIP PIU PPF PRSC ROSC SFAA SOE SWAps TA TOR TOT UNDP WBI Auditor General Asian Development Bank Adaptable Program Loan Country Financial Accountability Assessment Country Assistance Strategy Canadian International Development Agency Department for International Development Economic and Sector work Financial Management Specialist Financial Management Institutional Development Institutional Development Fund Highly Indebted Poor Countries Integrated Financial Management Information System International Monetary Fund Good Practices Learning and Innovation Loan Multilateral Development Bank Ministry of Finance Medium-term Expenditure Framework Non-Government Organisations Organization for Economic Co-operation for Development Operation Policy and Country Services Operational Policy and Country Financial Management Project Appraisal Document Project Concept Note Public Expenditure Review Public Financial Management Project Implementation Plan Project Implementation Unit Project Preparation Facility Poverty Reduction Strategy Credit Report on the Observance of Standards and Codes State Financial Accountability Assessment State Owner Enterprises Sector-Wide Approaches Technical Assistance Terms of Reference Training of Trainers United Nations Development Programme World Bank Institute ii

3 GUIDANCE NOTE FOR IMPROVING CAPACITY IN PUBLIC FINANCIAL MANAGEMENT CONTENTS Page I. Introduction...1 II. PFM Diagnostics and FMSs Role...2 III. Bank Instruments and Experiences in PFM Capacity Development...3 IV. Principles of PFM Capacity Development...4 V. Designing A Capacity Development Intervention...9 VI. Implementing Capacity Development Intervention...11 Annex A - Useful Websites...13

4 GUIDANCE NOTE FOR IMPROVING CAPACITY IN PUBLIC FINANCIAL MANAGEMENT I. INTRODUCTION 1. Strengthening capacity is now a leading issue in development and improved public financial management (PFM) is key to improving a country s ability to use development support more effectively. PFM capacity development has emerged as a priority for the World Bank and other donors, multilateral and bi-laterals including the borrowers. Capacity development in PFM is complex; it requires careful analysis of the country s environment, institutions, and their missions and results. Many developing countries have undertaken capacity-building initiatives in PFM over the last decade with the assistance of the Bank and other donors. Despite this, and for a variety of reasons, capacity could not be developed or even when developed could not be sustained in many countries. 2. Purpose and Structure. This note aims to provide guidance to Financial Management Specialists (FMS) and Task Team Leaders to undertake successful PFM capacity building. Following this introduction, Section II discusses PFM diagnostics, and the role of Financial Management Specialists (FMSs) in capacity development. Section III describes the Bank s experiences and instruments for capacity development; Section IV discusses the principles of PFM capacity development; Section V highlights major design considerations for capacity development interventions, and Section VI addresses issues to be considered in implementing capacity development initiatives. This note also includes a list useful websites in Annex A for PFM capacity development. 3. Conceptual Framework. The term capacity development came into common use in the late 1980s. In 1991, a Bank technical assistance task force defined capacity development as enhancing domestic capacity, but the reference was only to organizations. 1 In 1994, Good Practice (GP) 8.40 on Technical Assistance (TA) used the term capacity building interchangeably with institutional development (ID). For the purpose of this note, capacity development is defined as the process by which individuals, groups, organizations, institutions, and countries develop their abilities, individually and collectively, to perform functions, solve problems, and achieve objectives. This framework can be applied to assess constraints, capacity gaps, and opportunities in financial management capacity building. It reinforces the view of the capacity as the overall ability of the organization to perform See Managing Technical Assistance in the 1990s, CEBP91-10, November 13, Development suggests that capacities are latent within the country; therefore, the aim is to strengthen and sustain them. It also implies that capacity development is a long-term learning process. Process describes the way individuals and organizations interact, learn, assess information, gauge opportunities, solve problems, and make decisions to reach their goals. Individuals, groups, organizations, institutions and countries implies that capacity development requires the full involvement of people and groups whose capacities are to be developed, and stresses the relationships among them. It also implies that capacity development reaches beyond government institutions to include all levels of society and the overall environment in which the capacity is being developed. Perform functions, solve problems and achieve objectives implies that capacity development involves more than human resource development and training. It aims to foster changes to processes, organizations, and institutional arrangements. McKinsey and Harvard Business School and Stanford Business School developed a similar

5 4. Areas and Institutions. PFM can be described as a set of procedural rules or procedures for planning and prioritization, budget formulation, budget execution, accounting, reporting and internal control, and ex-post reporting and evaluation. Capacity building interventions thus aim at developing these rules and procedures, organize the work and provide resources (physical, human, funds) in a way that facilitates their efficient implementation, and equips people in the organizations with competence to operate efficiently in accordance with them. The overall aim is to make PFM an efficient tool for implementing policies and producing services for the benefit of the people, as well as providing an accountability mechanism through which the government and the public service can be controlled. 3 The key institutions involved are typically: Ministry of Finance (MOF), line ministries; Office of the Accountant General (if not part of MOF); national audit institution (Office of the Auditor General or Court of Accounts); Parliament and its standing committees; sub-national governments and local government institutions (municipalities, city corporations, counties, communes, etc.); parastatals and state-owned enterprises (SOEs); and the accountancy profession Capacity Development Dimensions. Capacity development can have five dimensions. The action environment. This refers to the economic, social, and political environment in which organizations attempt to carry out their activities and the extent to which conditions in the environment facilitate or constrain performance. The public sector institutional context. This refers to the institutional environment within the public sector that facilitates or constrains organizational activities and affects their performance. The task network. This refers to the coordinated activities of several organizations that are required to accomplish particular tasks. The interactions of organizations within this network can facilitate or constrain organizational performance. For example, to be effective, the Auditor General (AG) should prepare audit reports having significant findings so that the executive arm of the government is likely to take actions and Parliament and its committees are interested in pursuing these issues. The AG needs the capacity to prepare such reports and the executive arm of the government and the Parliament need the capacity to understand the reports and act on them. Organizations. This focuses on organizational structures; processes, resources, and management style that affect how individual talents and skills are used to accomplish particular tasks. Human resources. This relates to training, recruitment, utilization, and retention of managerial, professional and technical talent that contribute to task performance at the organizational level framework to assess and enhance organizational performance, which is knows as 7 S Framework. This framework includes: shared vision, strategy, structure, systems, staffing, skills, and style of an organization. Best Practices in Capacity Development in Public Financial Management in Africa The experiences of NORAD and SIDA by Andersen and Isaksen, This guideline also covers capacity development of accountancy profession in client countries, as the basic issues for capacity development are same as for PFM. Building Sustainable Capacity - A Challenge for the Public Sector, UNDP,

6 II. PFM DIAGNOSTICS AND FINANCIAL MANAGEMENT SPECIALISTS ROLE 6. PFM diagnostics identify the capacity gaps of the related institutions. The FMSs can use the findings of PFM diagnostics as a basis for capacity developments in PFM. 7. Diagnostics. The Bank has made significant progress in identifying capacity gaps by carrying out Country Financial Accountability Assessments (CFAA) and Accounting and Auditing ROSCs. 6 The Bank also carries out State Financial Accountability Assessments (SFAA) at the subnational level. In addition, Poverty Reduction and Economic Management (PREM) conduct Public Expenditure Reviews (PERs), the International Monetary Fund (IMF) conducts Fiscal Transparency ROSCs, and the Bank/Fund jointly conducts Highly Indebted Poor Countries (HIPC) expenditure tracking assessments. The findings of these diagnostic studies identify PFM capacity gaps in the developing countries. These diagnostics often include recommendations followed by action plans. Capacity development may originate from these action plans. 7 The CFAA has both fiduciary and development objectives. Strengthening institutional capacity in PFM and developing a culture of accountability within the country, institutions and society can minimize the fiduciary risks. 8. The Role of Financial Management Specialists (FMSs). FMSs should work closely with the country team and the government to identify capacity development needs based on the PFM diagnostic and action plans. The Bank, other donors and the government, may carry out such diagnoses. The Country Assistance Strategy (CAS) is the central planning tool for the Bank s operations. The findings of the diagnostic studies should be incorporated in the CAS. The CAS should highlight the possible areas for intervention for PFM reforms and capacity development project or program. The FMSs should be proactive and use all opportunities for capacity development in PFM. A question may arise when the FMSs should take the lead in capacity development. The FMS should take the lead only when a dedicated project is designed to build PFM capacity. Ideally, the FMS should lead provided he or she has sufficient experience and comparative advantage over other staff available in the country team. However, this should be decided based on discussions with the country team and Regional Financial Management Adviser. 9. Examples of FMSs Work. Apart from large investment operations in Ecuador and Pakistan on Integrated Financial Management Information System (IFMIS), FMSs have been mostly involved in small capacity development projects financed by the IDF. These projects, led by FMSs, cover capacity development in national audit institutions, ministries of finance and the accountancy profession for improving accounting and auditing. 8 FMSs are also involved in some public sector reform projects led by PREM and financial sector reform projects or central bank TA projects led by financial sector or private sector development staff. When government systems are used for project financial management, capacity development components are included in many investment projects financed by the Bank. The FMSs are involved with these capacity development initiatives. The Sector-Wide Approach (SWAps) and policy-based lending also include PFM reforms and address capacity development issues and FMS are actively involved with these operations. In some By June 30, 2004, CFAAs will be completed in about 87 active borrowers of the Bank, and accounting, and auditing in about ROSC in 34 countries. Other diagnostics includes Institutional and Governance Review (IGR), Country Procurement Assessment Report (CPAR), anti-corruption diagnostics or diagnostics done by other donors and governments should also be considered for PFM capacity development. See for a list of these projects. 3

7 cases, other donors have taken the lead in capacity development using Bank diagnostic studies (for example, DFID in Bangladesh) and building on the CFAA. FMSs also coordinate capacity development work in PFM with other development partners. III. BANK INSTRUMENTS AND EXPERIENCES IN PFM CAPACITY DEVELOPMENT 10. The Bank has been investing in PFM capacity development for more than a decade. The World Bank Institute (WBI) played an important role in building capacity apart from support provided by the Institutional Development Fund, investment operation, and PFM policy reforms through policy-based support. Some recent Bank experiences in PFM capacity development are as follows: 11. Institutional Development Fund (IDF). Following a 2001 strategic review of IDF, the Bank declared financial management a focus area. 9 Currently IDF is widely used to implement small capacity development initiatives. A recent review of 15 IDF projects in PFM concluded: (a) (b) (c) (d) (e) Capacity building projects should be designed based on detailed assessments of the situation and prospects of the institutions to be assisted; Adequate studies should be made to identify the institutional weaknesses for preparing a sound capacity-building strategy; The training components in projects should be designed for institutional development of the training institutes for ongoing capacity development and sustainability of capacity development efforts; Efforts should be made for development of systems and processes of the institutions; and The development of integrated financial management information systems should be based on realistic assessments of technological capacities. 12. The guidelines for preparing IDF projects and prescribed forms for designing IDF projects are available in Bank website Investment Loans/Credits. Investment loans may be Technical Assistance (TA), Adaptable Program Loans (APL), or Learning and Innovation Loans (LILs). Box 1 below explains some of the experiences in recent capacity development projects. Technical Assistance. Technical Assistance (TA) is widely used for capacity development. Through TA, consultants and equipment are provided to client countries to carry out specific tasks and build capacity through knowledge and technology transfer. Ideally, by the time the consultants leave the project, the counterpart staff are able to continue the activity and perform similar tasks efficiently. This approach has not been very successful. The consultants maintained their positions for long period and adequate sustainable local capacity failed to develop. Some of the lessons learned include the following: 9 10 This facility is available for technical assistance on a grant basis for quick, action-oriented, small projects. See more on IDF for the focus criteria. See IDF website on Preparation of IDF Grants. 4

8 (i) (ii) The task team should build local capacity and take special care to sustain the capacity while designing the project; The terms of reference (TORs) of consultants should specify that the transfer of expertise and technology must take place; TA projects should have strong interim mechanisms to monitor the achievement of outputs/ outcomes and transfer of knowledge and technology. Box 1. PFM Capacity Development Projects Some Learning Points Pakistan: The Project for Financial Reporting and Auditing (PIFRA -I) is under implementation and the second phase of the project is under preparation. Lessons learnt are: (a) Ownership of PFM capacity development initiative by the government in general and Ministry of Finance in particular is critical for the success of the project, (b) It is better to address policy issues through policy-based operations. If policy issues are addressed through invest projects these should be part of the conditions for presentation of the project before the Board; (c) Consult all stakeholders and take them on board and the project should receive the support of more than one champions at the senior level; (d) Have a communication strategy to inform the stakeholders about the outputs and outcomes of the project, and (e) Major computerization program should include an IT specialist with international experience. Guatemala: The main outcome of Guatemala Integrated Financial Management Project 11 are procurement and payment systems modernization; reduced number of government bank accounts to save time and transaction costs while maintaining transparency; designed a unique relational database. The database provide immediate and detailed info rmation on all recorded financial transactions, thus providing an audit trail as well as relevant and timely budget execution information for managers at various levels, and access for legislators, private citizens, NGOs, and any other stakeholder to budget information at several dedicated sites. Lessons learnt from the project are: (a) A committed project team from the Bank and client is needed for achieving the outcomes of the project; (b) Stakeholders should be involved in project designing and the achievements of the project should be communicated to them; (c) Capacity development in PFM takes more than a decade and there is a need for successive interventions; and (d) The project should have visible and measurable monitorable indicators. Ecuador: The Public Financial Management Project in Ecuador implemented an integrated financial management information system (IFMIS) and the task was led by an FMS. Lessons learnt from the project are: (a) Reform should be driven by the Government and not by the donors; (b) The government should decide the scope and components of the project, which should be linked with outputs and outcomes; (c) Sustainability of the capacity development should be considered during the design stage of the project; (d) The participation of the responsible heads of the operating units in the project design is key both to getting their input on needs and to handling expectations. If they are not directly involved they will assume that all their control and reporting requirements will be solved by the "Project"; (e) The project must be fully integrated in the Ministry of Finance or other entity responsible for PFM; and (f) The project goals and time frame should be realistic; the project in Ecuador took two years from identification to effectiveness; 6 months to design and 18 months to become effective because Ministers of Finance used to last six months in their post and each minister took time to get on board with the project. 11 This project received the President s Award of Excellence See and the image bank for PAD 5

9 Adaptable Program Loan. APL is an appropriate instrument for capacity development as it may provide support for long-term development programs. So far, no example of APL for building capacity in PFM is available. See more on APL website. 12 Learning & Innovation Loan. So far, LIL has not been used for capacity development in PFM. LIL may be used for piloting Medium-term Expenditure Framework (MTEF) or performance audit or piloting capacity building in a particular government ministry or department and then rolling it out to other or all government ministries and departments through another investment or TA project based on the learning experience in LIL. See more on LIL website Sector-Wide Approaches (SWAps). The Bank is considering providing more loans and credits through SWAps, which feature country ownership, the donor and the client working as a team, harmonized implementation structures and procedures and a comprehensive sector strategy. As such, SWAps provide a good environment and opportunity for PFM capacity development. For building PFM capacity using SWAps, the following issues should be considered: (a) (b) (c) (d) The government sector strategy should include the PFM capacity development strategy with a short, medium, and long-term framework and FMSs should work with the Government and the task team upfront at the preparation stage of sector strategy; The FM assessment in SWAps should be comprehensive and identify the institutional strengths, weaknesses, fiduciary risks and opportunities for PFM capacity development including the strengths and weaknesses of financial management staff; The objective of the task team should be fiduciary risk mitigation in the short term and minimize fiduciary risk through capacity development in PFM in the medium and long term in the sector; and Necessary funds should be allocated based on agreed capacity development intervention either through SWAps or through a separate capacity development intervention in the sector. 15. Policy-Based Lending. Policy-based lending only sets the agenda for capacity development and government commitment for PFM reforms leading to capacity development. It addresses inadequate economic policies and institutional deficiencies of governments in the developing countries. As such, lending is often conditional on institutional reforms, such as reforms in budgeting and expenditure control, making the office of Auditor General or Court of Accounts more independent, or improving the timeliness and quality of government financial statements. The Bank experience in addressing PFM reform issues through policy-based lending is quite encouraging. Some good practice examples of policy-based lending are available in FM website.[this will be made available soon] 12 See for more on APLs. 13 See for more details on LILs. 6

10 IV. PRINCIPLES OF GOOD CAPACITY DEVELOPMENT IN PFM 16. Addressing capacity constraints in developing countries in PFM demands a targeted strategy. Developing capacity is a means and not an end in itself; capacity strengthening is an integral part of the overall development agenda. Consequently, a capacity building strategy must be based on a broader vision of improving public financial management and increasing organizational effectiveness leading to good governance, and improving private sector accounting and auditing leading to good corporate governance. Capacity building should be linked with achieving organizational objectives and related to systemic or control risk in a country and its institutions. The following principles may be followed in building PFM capacity: 17. Sequencing of Capacity Development Initiatives. Prioritizing or sequencing PFM capacity building with government s own reform agenda in public sector is crucial because PFM capacity development is central for increasing the efficiency and effectiveness of the public sector. The FMSs and the task team should take a longer-term view, and sequence capacity development according to the absorptive capacity of the country. Each capacity development components has prerequisites. For example for performance budgeting, a performance measurement system needs to be in place, this in turn requires prior development or articulation of policies, so that performance measurement is relevant. Capacity needs to be built gradually so that there is no reform overload. Experiences indicate that the degree of improvement and success of interventions in one component are limited by the state of play in other components. Therefore, the entire PFM system should be analyzed at the diagnostic stage and undertake interventions that are balanced between components. Such analysis also increases the importance of conducting joint recipientdonor diagnosis and building a common understanding of project goals. 14 In addition, the environment for capacity development may be different. A country may have low reform or high reform environment depending on the willingness of the government to change and bring fundamental change in PFM. In a low reform environment, it is ideal to implement the technical fixing first (For Example developing training infrastructure, computerization, carrying out feasibility studies for bigger change, etc) and then gradually implement higher level of reform for improving PFM and address managerial capacity problems Client Ownership. For capacity building in PFM, clients should be encouraged to prepare their own action plans and attach them as annexes to the CFAA and ROSC. Such plans should prioritize the actions to be taken in the short, medium, and long term. Ownership and commitment require strong political support from the highest levels, evidenced in timely decisions and agreement to introduce new legislation. Working-level commitment from the client s staff is also essential. Thus, Bank staff must evaluate country ownership and use diagnostic tools for assessing readiness for reform, which is demonstrated by willingness and ability to Best Practices in Capacity Building in Public Finance Management in Africa Experiences of NORAD and SIDA by Goran Andersson and Jan Isaksen. The development of managerial capacity is the most difficult challenge and not always recognized as a key issue by those who are directly concerned. A building up of trust and success in technical matters may therefore be required before managerial capacity problems are addressed. 7

11 (a) Specify strategic importance and implications and engage in two-way communication with key stakeholders, including a discussion of expectations and outcomes; (b) (c) (d) (e) (f) Create an enabling environment at all levels country, sector, or agency; Contribute by borrowing if necessary, or by assigning staff; Proactively manage donors, and the support they provide; Define and enforce accountability for implementation and outcomes; and Monitor, evaluate, and adapt. As capacities are built by the project and the benefits become visible, these should be communicated to the staff. This will create a support base for the project and may stimulate the staff that supports the project. 19. Government Commitment. Several factors may work against government commitment. First, pressure to lend may discourage analysis of ownership by the client. Second, analyzing ownership is conceptually difficult and necessarily subjective. The Bank has no reliable means of measuring ownership, and technical Bank staff may feel unable to exercise judgment on political issues. 16 However, to have basic understanding of client ownership, the stakeholders should be extensively consulted. If there is some doubt about the ownership of the project, the task team may consult the Result Secretariat of OPCS (OPCRX), who may review the project, consult the stakeholders and provide independent opinion whether project will achieve its outcomes under a given circumstances. 20. Institutional and Human Resource Development. Capacity development is linked with institutional and human development. CFAA and the accounting and auditing ROSC 17 may help in identifying capacity gaps. However, they may not always provide enough analysis of the institutional and human resource issues related to PFM. Further institutional and human resource issues analysis may be needed in certain cases or institutional issues may be identified through focus group discussions or mapping of the stakeholders views, and subsequently fed into the project design. Each country and institution is unique in its requirements, ability, and willingness to change. These should be carefully analyzed. Care should be taken to build on the existing base and not to re-invent the wheel or unnecessarily create new institutions. 21. Training Infrastructure Development. Capacity development includes skills development, and training plays an important role. Many developing countries may not have adequate facilities for PFM training. In such countries, there may be a need to build such institutes or make alternative training arrangements before taking up any big PFM capacity development projects or program. For example, the local universities or public servant training academy may be used. Where such institutes already exist, care should be taken to build their capacity. Consideration should be given to training of trainers. The quality and quantity of training programs may be enhanced through improving the quality of curriculum, training materials and use of technology. The World Bank Institute (WBI) has good experience in training and should be involved in assessing and building training infrastructure For more details, see PREM study on Reforming Public Institutions and Strengthening Governance Web link ROSC means Accounting and Auditing ROSC, which is done by the Bank. 8

12 22. Legal and Regulatory Reform. Ensure the legal and regulatory requirements are changed to match new PFM systems. These are likely to be based on traditional business processes, systems and documentation, so they may be inappropriate or conflict with reformed processes and systems, and must be changed to enable and support such reforms. 23. Use of Technology. Use technology appropriately for modernization of PFM functions. In recent years, the Bank has helped many countries to modernize treasury systems and implement integrated financial management information systems (IFMIS) (e.g. Guatemala, Ecuador, and Pakistan, etc.). Care should be taken first to review the existing systems and processes and computerize basic functions before undertaking any comprehensive computerization program. The capacity of the staff needs to be increased in a phased manner. The level of sophistication of systems should take account of the real information needs and the capacity to operate the system. It is important to have the users in the driver s seat, not the Bank, and not the IT professionals. 24. Mainstream Project Financial Management. The government ministries and departments should as far as possible assume the role of project financial manager using the government s own PFM systems and develop their own capacity in financial management. If external assistance is needed to build capacity, the FMS should agree upfront with the Task Leader and make necessary provision in the project. The Box 2 explains the experiences in capacity development through investment projects. Box 2. Designing PFM Capacity Development Component in Investment Projects The Bank approves about 300 investment projects almost every year. These projects may include PFM capacity development components or sub-components. For this, a comprehensive FM assessment is needed to identify institutional weaknesses and strengths. All projects normally get Trust Fund (TF) support for designing the project. The FMS needs to take the TF support for such assessment for appointing consultant, who may assist in designing the PFM component for capacity development. However, this should be agreed with the Task Team upfront. For leading capacity development activities during the implementation of the project, it is ideal to appoint a financial management specialist having adequate expertise to lead the task. Clear terms of reference with realistic time-bound deliverables should be prepared. This approach was followed in the Bangladesh Third Rehabilitation and Maintenance Project. However, the FMS faced stiff resistance from the senior managers. Points for consideration by FMSs are (a) Capacity development issues in projects should be demand-driven and should not be pushed too much by the Bank; (b) Make provision in the project for change management, if any project addresses institutional development; and (c) Identify champions within the organization to support and lead the change. 25. Strengthen Partnership. Capacity being an integral part of the development agenda, internal Bank collaboration between the FM, PREM, Procurement, Private Sector and Financial Sector and other sectors within the Bank is important. With the country team managing the overall process, the FMSs should act proactively in any sector within the Bank where there is a need for PFM capacity development. There is a need for donor coordination to avoid duplication, unhelpful competition or an excessive number of projects. In principle, the government should do this coordination. If it fails to do so, the responsibility for coordination falls onto the donors, possibly under the leadership of the Bank or a donor who is lead donor in PFM capacity development, with government participation. Many other donors provide grant funds for capacity development. Where this is not done, in some cases, the Bank or other donor may act as facilitator or lead agency. 9

13 V. DESIGNING A CAPACITY DEVELOPMENT INTERVENTION 26. The Country Assistance Strategy (CAS) sets clear strategic priorities for future Bank assistance to the country, with the objective of maximizing development effectiveness. It is essential that institutional weaknesses in PFM be reflected in the CAS based on the findings of CFAA, PER, and ROSC, which will underpin the Bank s intervention in capacity development. The FMSs should be proactive and work closely with the country team to include PFM capacity development issues in the CAS and lending portfolio. In Brazil and Bangladesh, the Bank is piloting Financial Management Strategies with a view to (a) scaling up and aligning Bank processes to country institutions and sectors, and (b) assisting the Governments to build strong financial management capacity in country institutions and sectors. Similar strategies are being prepared for other borrowing countries. These strategies should be linked with CAS for due implementation. 27. Approach for capacity development intervention. Project Concept Notes (PCN) and Project Appraisal Documents (PAD) essentially discuss the rationale for Bank involvement in an operation. 18 A project story line can be identified in three distinct parts: (a) the problem being addressed; (b) the strategy to overcome the problem; and (c) the expected results (which should solve the original problem). An effective story line needs to convince the reader that an appropriate problem is being addressed, that the strategy to solve the problem is likely to work (given what is known about the country and sector context), and that the proposed results (including the expected outcomes) can be realistically achieved within the time and resources available to the operation. In development projects, the story line essentially outlines the project's causal logic, or 'intervention model', which will be verified only when the expected results begin to emerge before completion of project implementation. 28. Problem Definition. The problem definition should emerge from the description of the country context and current priorities. Problems that have obvious political ramifications (hence visibility) often lend themselves to more immediate solutions because politicians and decision makers are often actively looking to solve them. While many problems may be present within a country context, only solutions that have a strong champion (or owner) willing to sponsor them throughout the approval process are likely to be addressed in the near-term. For designing the project, the Task Team needs clear understanding and knowledge of the institution and weaknesses and capacity gaps of the staff, which will feed into the project components or subcomponents. The task team may need to carry out sectoral studies as CFAA may not always cover the institutional development and human issues. 29. Strategy. Once an appropriate problem has been identified, a strategy is required to solve it. Effective strategies can often be found from good practice examples that have been tested in similar sector contexts. These can then be adapted to the unique features of the country situation, where required. 30. Vision. Given the identified problem and the strategy for solving it, the story line also needs a clear vision of the results that can be expected, particularly outcome-level results, in order to complete the story and show that the problem can be solved. Since outcomes occur in the real world outside the control of the projects and the implementing agencies, outcomes occur when 18 See for guidelines on PCN and PAD. 10

14 stakeholders outside the control of the project favorably respond to the outputs that the project has delivered. In the case of PFM, training and improved capacity development for PFM that are delivered by the project at the output level should result in improved organizational performance, institutional effectiveness, and improving financial accountability at the outcome level in response. Outcome-level indicators that are specific to the sector should verify these outcomes. 31. Team Building. A committed and qualified project team is a pre-condition for designing a meaningful project. Teamwork depends on the communication and leadership skills of the Task Leader. In addition, excellent writing and negotiation skills 19 for good communications and reaching consensus on issues within the task team, with the Bank management and with the client, are also essential. The Task Leader has the overall responsibility for design and implementation of the project. It is essential that the Task Leader have sound knowledge of Bank policies and procedures including all safeguard policies and procedures, see Investment Lending website Stakeholders Consultation. The project Task Team needs to consult both the internal and external stakeholders of the organization during the design and implementation of the project. The Task Leader should work closely with the client and involve the client through project identification, preparation, appraisal, and negotiations. 33. Financing for Project Designing. For designing projects, the Trust Fund facility is available see Trust fund website. 21 In addition, pre-financing from the proposed project budget may also be available in advance. This is adjusted later, when the project is approved. 34. Donors Coordination. It is advisable to consult other donors while designing project or program. Governments are always interested in bilateral donors as most of them provide funds on a grant basis. Even if other donors provide no funds, the task team should consult other donors to understand their views and avoid duplication. 35. Project Implementation Plan (PIP). The PIP is prepared before the project is negotiated. The Task Team should ensure that the client has a sound project implementation plan covering the critical areas of project implementation, for example, processing of procurement documents, appointment of consultants, setting up the project office, procurement of all goods and services, financial management of the project, etc. VI: IMPLEMENTING A CAPACITY DEVELOPMENT INTERVENTION 36. The implementation of capacity development is a challenging task. It important to have a dedicated government team to lead the implementation of the project and build a support base for capacity development amongst the key stakeholders. The following issues should be considered while implementing a project: 37. Building Local Capacity. During implementation, care should be taken to ensure that the consultants are building local capacity rather than doing the work of the client. The transfer of Negotiation skills include creative thinking, assertiveness, and creative questioning techniques. The Bank s Safeguard policies on environment, procurement and financial management are available in the website- See 11

15 skills and knowledge and training and retraining of the staff should be the guiding principle for supervision of the consultants. 38. Knowledge Mapping. One innovative idea is mapping the knowledge of the staff of the organization being developed. This map can form an integral part of the organization s knowledge transfer strategy to support succession planning, including mentoring, coaching and knowledge sharing, for better capacity development. As part of this, expert mapping to identify the subject matter expertise within the organization can later be used to provide on the job training. 39. Managing Change. Proper management of change within the organization is critical for success in capacity development. Needed change can stall because of inwardly focused cultures, bureaucracy, parochial politics, a low level of trust, lack of teamwork, arrogant attitudes, and a lack of leadership in middle management and the general fear Strategy at Entry Change Management Strategy Technical Organizational Human Resource Attitude Project Management Financing Communication Building ownership Quality management of the unknown. 22 The change management strategy covers the management of change in four areas. These are: technical, organizational, human and attitude. A well-structured methodology should embrace all of the requirements of change management, and ensure these are captured within the project. The PRINCE methodology developed by the UK government provides an example of a non-proprietary methodology. 40. Sustainability. Sustainability of capacity building depends on many factors. These include regular training as part of career development having adequate incentives and promotion prospect, an appropriate pay package, and sufficient training infrastructure for training of staff. Capacity building frequently centers on behavioral change improving policies, strengthening institutions, and enhancing skills. Consequently, incentives that reward desired changes in behavior and attitude are crucial to project success. Incentives may include rewards and penalties, competition, and reputation effects. In a competitive environment, it may be difficult for the government to retain highly skilled staff that may look for better opportunities in the private sector. Still, some staff may like their government jobs if there are better promotion and career development prospects. The project should provide adequate training opportunities on a competitive basis. For example, the staff that will support the reform and have the potential to be very useful should get more training opportunities for development. The project/concerned Exit Strategy Management tasks: Plan changes, identify benefits to stake holders, agree management structures, establish outputs and outcome milestones, plan human resources, institutional changes, laws and finances. 22 The basic principles for capacity development and change management are: (a) establish a sense of urgency for capacity development and change among the leaders of the organization; (b) identify and discuss problems, potential problems and main opportunities; (c) create a coalition of key stakeholders with enough power to lead the change; (d) identify the staff that will drive the change and those who will resist the change; (e) reduce the number of staff who will resist the change through regularly communicating the change vision; (f) generate short-term wins, consolidate gains, and visibly recognize and reward people who made the wins; (g) identify and promote the deliverables from the change and how they will benefit the organization; and (h) hire, promote, and develop people who can implement the change. The above diagram shows a model change management approach. 12

16 institution should create an environment of competition to perform better with opportunities for more development. In addition, an adequate budget must be provided for ongoing costs of changes, e.g. maintenance contracts, software licenses, consumables. The organizational arrangements should accommodate new or changed positions, roles, and responsibilities. 41. Consultants. The appointment of consultants is the responsibility of the client. However, the Bank s Task Team has also the responsibility to oversee that the Government selects consultants with appropriate qualifications and experience. The record of accomplishment of the consultant in implementing other projects or in the specific subject area should be carefully reviewed. The Task Team should ensure that the consultants are properly supervised and key deliverables are monitored on a regular basis in terms of their timeliness and quality. 42. Supervision. Bank project supervision cannot substitute for good project implementation by the client, but good supervision can help identify emerging issues at an early stage and help the client to address them. In addition, careful reporting, particularly on progress toward achievement of the project s development objectives, is a prerequisite for project restructuring or other corrective action at an early stage. 43. Monitoring and Evaluation. It is essential to measure the progress of the project on a periodical basis. The project implementation team will have its own internal monitoring and evaluation tools. The Government normally monitors and evaluates achievements of the project. However, in complex and risky projects, it is better to use an independent reviewer for measuring the progress and impact of the project. For monitoring and evaluation, indicators should be designed properly. Outcomes should be time-bound, measurable, and visible. It is better to have intermediate outcomes and outcomes. For example, reconciliation of all government accounts may be an intermediate outcome and preparation of financial statements within six months from the end of the financial year may be the outcome. ANNEX A USEFUL WEBSITES FOR PFM CAPACITY DEVELOPMENT 1. WBI or 2. PREM or 3. UNDP or and 4. CIDA or 5. OPCFM or 6. OECD or 7. ADB or 8. WORLD BANK or 13