Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB3737 Project Name IRAQ: Public Finance Management Project Region MIDDLE EAST AND NORTH AFRICA Sector Sub-national government administration (50%);Central government administration (50%) Project ID P110862 Borrower(s) GOVERNMENT OF IRAQ Implementing Agency Ministry of Finance of Iraq Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 24, 2009 Estimated Date of Appraisal Authorization February 11, 2009 (Actual) Estimated Date of Board Approval July 20, 2009 (Actual Date of Regional Vice President Approval) 1. Key development issues and rationale for Bank involvement 1. Sound public financial management (PFM) is critical to ensuring efficiency and accountability in the management of public resources . Iraq is resource rich and has enjoyed a substantial increase in oil revenues in recent years. However, for the people of Iraq to benefit from its resource wealth, public finance reforms are a priority. Weaknesses in the PFM system not only have high costs in terms of allocative and operational efficiency but also create high levels of fiduciary risk. 2. The GoI has made progress in recent years but much remains to be done. Iraq has made progress in reforming public expenditure policy and management since 2003 . Key measures include the adoption of a budget classification system that is compliant with Government Finance Statistics (GFS) standards and of a plan to integrate capital and current budgeting processes. However, many challenges remain. Selected examples include: · Budget Preparation : Budget negotiations between line ministries and central ministries are time- consuming as line ministries are not provided with ceilings within which to prepare budgets. The technical capacity of staff to evaluate and approve capital projects has eroded due to high attrition in recent years. · Budget implementation : Annual implementation plans for projects presented by line ministries are often revised during the lifetime of the project. Sites for projects are poorly prepared and disputes regarding ownership of the sites lead to further delays. Some line ministries interrupt project execution after projects have been approved and there is no system by which central ministries (finance and planning) can either support the implementation of these projects or find an alternative solution to delays in initiating project implementation by affected line ministries. · Contracting issues : Few contractors have the capacity to implement large capital projects, often lacking even the capacity to prepare contracts that meet the detailed specification required for the projects. Work orders are frequently changed leading to delays. There is no system to resolve differences between the contractors and spending agencies speedily. Delays lead to increasing project costs that need to go through an approval process leading to further delays. · Payments System : The payments system is insufficiently flexible. Currently, Iraq uses a cash- Page 2 based payments system limited to the fiscal year; this precludes the ability to make commitments when necessary and make cash payments according to these commitments. The system also allocates the total cost over the period of execution and requires that these amounts be fully spent within assigned years. · Reporting : The new chart of accounts is not uniformly used at all levels of government, leading to a weak control environment. Independent audits of all Government budget accounts for any recent financial year have either not been undertaken or have not been made available. 3. The main rationale for the Project is that it will improve PFM in Iraq thereby leading to better use of national resources for the public’s welfare. The areas where improvement is needed have been identified in the previous section. In addition, the Project will serve to improve donor coordination. Donor efforts in the PFM area to date are shown in Table 1. However, these efforts have not been adequately coordinated, resulting in duplication of effort. 4. The process of Project preparation has already contributed to improved coordination since key donor partners have been involved at all stages. The placement of a senior public sector specialist in the Bank’s Baghdad office has also been helpful: meetings are regularly convened to ensure that donor efforts in the PFM area complement one another. Moreover, the Ministry of Finance has developed and passed a PFM Action Plan with support provided by the Bank with inputs from the IMF and DFID during project preparation. This now serves as the blue print for all donor support including the proposed project. 5. The GoI has demonstrated its commitment by putting PFM issues at the heart of the socio- economic pillar of the International Compact for Iraq. The Government recognizes the importance of PFM reform, as indicated in the National Development Strategy and the International Compact for Iraq. 6. Finally, GoI is eager to bring to Iraq the Bank’s extensive worldwide (and regional) experience in providing guidance on good practices in PFM reform, as demonstrated by their strong commitment throughout project preparation. 2. Proposed project development objective 7. The total estimated cost of the Project is US$18 million, to be funded by: i) US$16 million from the ITF, to be recipient-executed; and ii) US$2 million from the ITF, to be Bank-executed, to allow initiation of some subcomponents as well as facilitate opportunities to disseminate results of the reform activities. 8. The Project Development Objective is to support the Government of Iraq's efforts to develop more effective, accountable and transparent public financial management . Cross-cutting reforms in PFM will be addressed by the reforms to the national system which will be extended where necessary and appropriate to the subnational system. The aim will be to strengthen budget formulation, execution and control, improve public financial reporting, strengthen public procurement and develop capacity in PFM. The project is the first stage in a multiyear strategy for budget reform. GOI is putting together a multi- year public financial reform strategy with an action plan which lays out the reforms that will be undertaken in each stage. The project builds on the support that GOI has requested from the donors in the first stage of implementation of their reforms strategy. The primary target group is resource managers and their superiors in the Ministry of Finance (MoF) and Ministry of Planning and Development Cooperation (MoPDC), as well as the line ministries. Effective Project implementation will require international experts to work alongside with these key GoI officials in Iraq on the practical tasks that need to be Page 3 supported and strengthened. 3. Project Description 9. The Project design reflects the agreements between GOI, the Bank, and the IMF, as expressed in the Public Financial Management Action Plan. 10. Component 1. Strengthening budget formulation and implementation (US $3.95 million) . The overall objective of this component of the project is to lay a stronger foundation--building on older procedures and accepted Iraqi norms--for credible annual budgeting framed by a medium-term perspective, and complemented by more rigorous selection and preparation of investment projects within a public investment programming process consistent with national development strategy and detailed sector strategies: execution including procurement. Activities include: · Develop detailed sector strategies for two key ministries : Ministry of Education and Ministry of Water Resources · Strengthen investment project preparation and appraisal · Strengthen the capacity of the Economic Department of MoF · Improve the process of annual budget formulation and budget classification and strengthen public financial regulatory framework · Improve content of and adherence to budget call circular 11. Component 2. Strengthening Public Sector Procurement (US$ 3.2 million). Improvements to the systems of Public Procurement are crucial to ensure successful budget execution. This Component would include: · Supporting the public sector procurement system · Developing sector specific standard bidding documents · Establishing a procurement information and monitoring system · Strengthening the capacity of key Iraqi implementing institutions, NGOs, and private sector in public procurement 12. Component 3. Strengthening Budget Execution and Implementation (US $2.33 million). This inc ludes the provision of technical support to improve administrative and functional aspects of GoI’s budget execution operations. Activities include: · Introduce improved cash release system · Assess multiple treasury system in KRG · Introduce new commitment control system · Improve financial reporting · Assess the internal financial control system, including the role of the Inspectors General · Upgrade content and functionality of MOF website · Create internal MoF Network · Capacity development of line ministries to enhance their ability to implement investment projects 13. Component 4. Capacity Development and Project Management. (US $3.0 million). This component will ensure coordination of the training and capacity building provided in the first three components of the project. The component also foresees a focused strengthening of the MoF’s internal training department, in order develop the department’s longer-term capacity to provide comprehensive Page 4 ‘in-house’ training The project would finance international and local advisory services (with a small provision for office equipment essential for the effectiveness of the project), as well as training and capacity building directly related to the envisaged reform measures. Bank-executed part of the Grant . At the request of the Recipient, a portion of the Project has been allocated for Bank-executed technical assistance (TA) to support the implementation of the Grant. In addition to the advisory services to be provided the Bank-executed part of the Grant will allow the Project to support the efforts of the Board of Supreme Audit (BSA) to reinforce their operational capacities. Specifically, support would be provided for advanced training of BSA staff in public finance, legal issues, accounting, auditing, etc. In addition, support could be provided for developing the capacity of the BSA to conduct performance audits. 4. Tentative financing Source: ($m.) Borrower 0 Iraq Trust Fund 18 Total 18 5. Contact point Contact: Yahia Khairi Said Title: Sr. Public Sector Specialist Tel: +9647 901 927 885 Fax: N/A Email: ykhairisaid@worldbank.org