The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) REPORT NO.: RES51297 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SECOND PUBLIC FINANCIAL MANAGEMENT CAPACITY STRENGTHENING PROJECT APPROVED ON JULY 7, 2015 TO FEDERAL REPUBLIC OF SOMALIA GOVERNANCE EASTERN AND SOUTHERN AFRICA Regional Vice President: Hafez M. H. Ghanem Country Director: Keith E. Hansen Regional Director: Asad Alam Practice Manager/Manager: Nicola J. Smithers Task Team Leader(s): Frederick Yankey, Sher Shah Khan The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) I. BASIC DATA Product Information Project ID Financing Instrument P151492 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 07-Jul-2015 30-Jun-2022 Organizations Borrower Responsible Agency Ministry of Finance Federal Government,Ministry of Federal Republic of Somalia Finance of Somaliland Hargeisa,Ministry of Finance, Puntland Project Development Objective (PDO) Original PDO The Project Development Objective is to establish and strengthen institutional capacity for the management of public funds inCentral Finance Agencies and targeted sectors. Current PDO To strengthen systems of domestic revenue mobilization, expenditure control and accountability in the Federal Government, Puntland State of Somalia, and Somaliland. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-D3700 25-Sep-2018 31-Oct-2018 01-Apr-2019 30-Jun-2022 20.00 13.82 5.99 TF-A8218 25-Sep-2018 31-Oct-2018 01-Apr-2019 30-Jun-2022 4.00 2.30 1.70 TF-A8217 22-Aug-2018 26-Nov-2018 26-Nov-2018 30-Jun-2022 6.00 5.29 .71 The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) TF-A0389 10-Nov-2015 10-Nov-2015 07-Dec-2015 30-Jun-2022 4.00 4.00 0 TF-A0388 06-Jul-2015 22-Jul-2015 09-Sep-2015 30-Jun-2022 16.00 16.00 0 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES Rationale for proposed changes: 1. The Mid-Term Review (MTR) as well as the Implementation Completion and Results Report (ICRR) Mission of the Somalia Domestic Revenue Mobilization and Public Financial Management Capacity Strengthening Project (P151492) concluded, that the project implementation is Satisfactory, and most key activities have been completed, except the selection of the third-party provider (vendor) to develop and implement the Integrated Tax Administration Automation System (ITAS) for the Federal Government of Somalia (FGS) and Puntland State of Somalia (PSS). ITAS is estimated to cost USD 8.5 million. 2. This places at risk completion of the ITAS activity before the project closing, which is scheduled for June 2022 and consequently, undisbursed US$ 8.5 million. One Project Development Objective (PDO) and one Intermediate results indicator will also not be achieved. 3. The FGS and PSS authorities agreed (January 2022) to develop and implement one-system. The authorities are at advanced stages of finalizing the Request for Bidding (RfB) to initiate joint procurement per the Bank’s procurement policy and practice. The extension will avail time for conclusion of the procurement and activity initiate implementation, thus facilitating orderly transition of ITAS activities to the proposed Somalia Enhancing Public Resource Management Project (SERP). Given the on-going political transition in Somalia, there is no assurance that a new government will be in place soon for the SERP project to be negotiated and ensure seamless transition of ITAS procurement and implementation activities to SERP from July 2022. 4. The DRM & PFM has an undisbursed proceeds of about US$10.5 million that is not likely to be disbursed by the June 2022 project closing. This includes an estimated amount of US$8.5 million ITAS allocation. Since the project is still ongoing, the balance of $2 million is likely to be utilized by close of the project. 5. The requirements of both the World Bank Policy: Investment Project Financing and World Bank Directive regarding extension of closing dates have been met, specifically the following: (a) the project objectives remain achievable; (b) the performance of the recipient remains satisfactory; and (c) the World Bank and the recipient agree on actions that will be undertaken by the recipients to complete the project. 6. There are no outstanding audits or interim financial reports under the project. Implementation Status and achievement of PDO indicators and intermediate indicators The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) Component 1: Strengthening Tax Policy and Inland Revenue Administration systems 7. In the FGS, the authorities confirm the FGS domestic revenue collection of US$225 million in 2021 (from US$114 in 2015). The project’s major achievements include operation of the Tax Policy Unit (TPU) training of 71 participants (16 females) and preparing evidence-based reports that inform policy including contributions to the 2020 and 2021 annual budgets, establishment and operation of the Large and Medium Taxpayer Office (LMTO), the FGS and the PSS jointly working on the design for a ‘fit-for-purpose’ ITAS, issue of 1,062 taxpayers identification numbers (TINs) using the SFMIS, training of 111 officials (20 females), completion of training needs assessment (TNA)-based medium-term training plan, obtaining of membership of the African Tax Administration Forum (ATAF) and availing of the membership for training of 17 officials (7 females), contribution to operationalizing the Revenue Academy including a plan for setting up local units at Federal Member States (FMSs), engagement of 1,441 (292 females) taxpayers and citizens in taxpayer education and facilitation, and procurement of the services of an expert to draft regulations for the Revenue Administration Law (2019). 8. In Puntland, the project’s major achievements include operation of the TPU, training of 59 participants (7 females), and informing of policy including contributions to the 2020 and 2021 annual budgets; operation of the LMTO; issue of 4,287 TINs, using the Puntland FMIS; completion of TNA-based medium-term training plan; registration of 246 officials in the domestic revenue mobilization (DRM) training course in addition to the training of 104 officials (20 females); and engagement of 533 (183 female) taxpayers and citizens. 9. In Somaliland, the project provides limited support for DRM activities to complement the UK Foreign, Commonwealth, and Development Office (FCDO) Prosperity from Revenue Programme (PROFR) support. The project’s major achievements include the following: finalization of the needs assessment for ITAS by the MoF and training of 205 officials (46 females), including the 68 officials (13 females) registered for the DRM training course. Component 2: Strengthening Capacity for Public Financial Management Control and accountability 10. Project activities under component 2 have progressed well and assessed as Satisfactory. The two PFM PDO indicators supported by this component have been achieved and most activities completed or nearing completion. IPSAS basis of accounting and ISSAI auditing standards have been adopted, and other related trainings implemented. A few of the activities have been delayed in the recent period due to the pandemic and the elections in Somalia, however progress toward achieving the PDO is on track. Subcomponent 2.1: Strengthening systems of treasury management, budget execution, procurement, accounting and reporting. 11. In the FGS, the government has enacted the PFM Act and the amended Procurement Act. The related regulation for procurement has been passed, completed, and posted on the MoF website. The FGS has fully implemented IPSAS cash basis of reporting and financial statements have been prepared using same. The quality assurance (QA) review of the IFMIS has been completed; however, an agreed action plan has yet to be approved. The FGS Accountant General has committed to establishing an internal audit unit within their office and in critical/key ministries, departments, and agencies (MDAs) to strengthen controls. The Accountant General’s office has established a framework that will enable their office to provide the required FM staff to support all new development Project Implementation Units (PIUs) for the FGS. 12. In Puntland, the draft PFM Act is ready and is undergoing translation for submission to the legislature. This revised act increases alignment with that of the FGS for uniformity of the PFM legal framework. The quality assurance (QA) The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) review of the PFMIS has been completed; however, recommendations are being implemented slowly. The project has supported the integration of the PFMIS functions with the Puntland State Bank to facilitate online payment operations and direct payments of staff payroll into individual bank accounts, provide real-time bank balances, and facilitate cash management processes. The Cabinet has approved the Treasury Single Account (TSA) framework for implementation; however, systems will need to be strengthened at the Puntland State Bank for successful implementation of the TSA. 13. In Somaliland, updating of the PFM Act is ongoing to ensure inclusion of legal provision for internal audit function in the government. In this regard, the project has supported consultation among stakeholders including parliamentarians. The Fixed Assets Policy was developed and approved by the Cabinet and is being implemented. The National Tender Board (NTB) is being supported by the project. Draft procurement regulations have been developed together with procurement manuals and staff training on their use is ongoing. With the Minister of Finance’s intervention, the chart of accounts and SLFMIS were rolled out to the local government and all government payments were done using the SLFMIS. Internal audit framework, audit charter, and internal audit manuals have all been developed and staff are being trained on their use. Subcomponent 2.2: Strengthening the integrity systems 14. In FGS. The annual audit of the government financial statements for the year ended December 2020, and the project’s audits [A4] were delayed due to a late start because of the COVID-19 pandemic and late selection of a Technical Assistance (TA) firm. However, these have now been successfully completed and have been published on the website of the Office of the Auditor General (OAG), and copies of the project’s audits have been submitted to the World Bank. On the Audit Bill, despite its approval by both Houses of Parliament, it was not signed by the President, and the management has been requested to continue to engage with the Government of Somalia to enact this critical accountability law. 15. In Puntland. Most of the planned activities are also progressing well and all previous agreed actions have been actioned. It has been agreed with the Puntland management that all revisions to their laws, for example, the PFM Law, should be aligned with that of the FGS to ensure consistency within the Somalia federation. The PSS submitted the project audited financial statements for the financial year ended December 31, 2020, with the delay due to late recruitment of the external audit firm to support the Puntland OAG . The Puntland OAG does not routinely publish its annual audit report on its website and has been advised to do so to promote transparency and provide access to its citizens. 16. In Somaliland. The project continues to support the OAG on establishing effective office operations. The office has conducted performance audits for two World Bank-funded projects and completed them successfully. The office should identify some critical areas of expenditure to also perform the same audits to help improve performance. All agreed actions with the OAG have been completed. The support provided to the Parliamentary Accounts Committee (PAC) is also progressing and clerks in the PAC office are being trained to support the committee’s work on reviewing government-audited financial statements. Subcomponent 2.3: Professionalization of PFM staff 17. The PFM Staff Professionalization Certificate Program was extended to benefit the other FMSs, where currently 32 candidates from the FMSs are undertaking the Chartered Institute of Public Finance and Accountancy (CIPFA) certificate course with the Puntland team. In addition, Puntland is running the diploma-level program, where 14 candidates have already passed the first module and are preparing for the second module. In Somaliland, the program is running the diploma-level program, and 10 candidates have passed the first two modules. The concern however is The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) that to date no candidate has as yet passed the diploma level and the management has been requested to review the program and help address challenges identified so far. In total, there are166 candidates (FGS - 65, Somaliland - 33, and Puntland - 68) and out of this number, 21 are female (FGS - 6, Somaliland - 8, and Puntland - 7) who have passed the certificate level. Most of these candidates have been successfully deployed in various PFM institutions in the governments of FGS, Puntland, and Somaliland. Component 3: Rapid Response Facility 18. This component supports the FGS and SL. In the FGS, the MoF Phase 2 building has been completed and handed over, and its defects liability period has expired; however, the final statement of completion together with the final statement of accounts have still not been submitted by the government and United Nations Office for Project Services (UNOPS). The World Bank has requested the government to submit this statement as soon as possible to allow final closure. In Somaliland, the current inland revenue automation needs assessment, which is being financed from this component, has been completed and the government is requested to use this to support its plans to establish its ITAS program. Component 4: Public financial management reform oversight, coordination, and management 19. In the FGS, the Project Coordination Unit (PCU) continues to support all the component heads and all related procurement has either been completed successfully or is ongoing. The new project coordinator of the DRM and PFM Project took office in July 2021 and has supported the teams to ensure effective progress till project closure in June 2022. 20. In Puntland, the PCU’s performance under the project continues to be Satisfactory. Governance arrangements under the project are now operating well with full participation from senior leadership of the MoF. The component implementation teams (CITs) and Technical Steering Committee (TSC) meet as required and can follow up and monitor ongoing activities and provide guidance on any challenges. 21. Similarly, in Somaliland the PCU has performed well in managing the project and supporting the various participating institutions and ensuring that the required procurement of their needs are met on time. The PCU has also facilitated the training required by the institutions and many have been able to undertake their required trainings. 22. This restructuring seeks management approval to extend the project closing date of IDA 3700, TFA8217 and TFA8218 from June 30, 2022, to June 30, 2023, to allow completion of implementation of ITAS activities under the DRM Component. After Board Approval of the Project on September 25, 2018, this would be the first restructuring request for this project. Description of proposed changes 23. Change in loan closing date. The restructuring seeks an extension of the project closing date of IDA 3700, TFA8217 and TFA8218 noted in the Financing Agreement and Grant Agreements from June 30, 2022 to June 30, 2023. The extension is being sought for DRM Component only. The World Bank Second Public Financial Management Capacity Strengthening Project (P151492) III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-D3700 Effective 30-Jun-2022 30-Jun-2023 30-Oct-2023 30-Jun-2020, 30-Jun- TF-A0388 Effective 30-Jun-2018 2022 30-Jun-2020, 30-Jun- TF-A0389 Effective 30-Jun-2018 2022 TF-A8217 Effective 30-Jun-2022 30-Jun-2023 30-Oct-2023 TF-A8218 Effective 30-Jun-2022 30-Jun-2023 30-Oct-2023