INTEGRATED SAFEGUARDS DATA SHEET CONCEPT STAGE Public Disclosure Copy Report No.: ISDSC2660 Date ISDS Prepared/Updated: 25-Mar-2013 Date ISDS Approved/Disclosed: 25-Mar-2013 I. BASIC INFORMATION A. Basic Project Data Country: Lebanon Project ID: P133226 Project Name: Lebanon Fiscal Management Reform 2 (P133226) Task Team Wael Mansour Leader: Estimated 00-undefined-0000 Estimated 14-Nov-2013 Appraisal Date: Board Date: Managing Unit: MNSPS Lending Specific Investment Loan Instrument: Sector(s): Central government administration (100%) Theme(s): Debt management and fiscal sustainability (25%), Macroeconomic management (25%), Public expenditure, financial management and procur ement (25%), Other public sector governance (25%) Financing (In USD Million) Total Project Cost: 4.00 Total Bank Financing: 4.00 Public Disclosure Copy Total Cofinancing: Financing Gap: 0.00 Financing Source Amount Borrower 0.00 International Bank for Reconstruction and Development 4.00 Total 4.00 Environmental C - Not Required Category: Is this a No Repeater project? B. Project Objectives The proposed development objective of this operation is to improve the allocation of public financial resources, enhance the efficiency and transparency of the government financial management systems, and tighten the control environment through: (i) Institutionalizing policy functions at MoF and improving macroeconomic programming and policy analysis to guide fiscal choices and facilitate the integration of planning and budgeting functions. (ii) Deepening ongoing reforms in the areas of debt analysis, debt recording and management, and debt operations. Public Disclosure Copy (iii) Increasing the efficiency and transparency of public expenditure management practices, and enhancing risk management within MoF to reduce waste and corruption. C. Project Description LFMR 2 is a US$2 to 4 million investment lending operation to continue supporting the GoL’s public financial management reform efforts. With support from the World Bank, MoF is currently developing several strategies and action plans to implement reforms activities. These are: (i) A PFM Reform Strategy (2013-2017) prepared by MoF’s PFM Reform Steering Committee, and expected to be approved by MoF in February 2013 ; (ii) A budget execution reforms strategy and implementation plan ; and (iii) A FMIS implementation strategy that is expected to be delivered and adopted in April 2013 after the approval of the PFM strategy. These strategy documents and action plans form the basis for the improvement of core PFM functions within the next five years. The current LFMR 2 Project is expected to support most of the key reform and change management activities. The operation builds on the existing EFMIS project and adopts the same modalities of engagement. After the successful implementation of the EFMIS project, MoF senior management has asked to maintain similar engagement framework in the upcoming project. As a result, the LFRM 2, a client executed project, is expected to finance technical assistance and training activities provided by international and local experts. These experts are expected to engage with different working groups of MoF staff on relevant topical reforms. These activities and experts will be coordinated by a dedicated Project Management Unit (PMU) located within MoF premises and financed by the loan proceeds. The technical counterpart for the PMU will be the PFM Reform Steering Committee, while the Minister and Director General will play a strategic guidance role. Furthermore, the World Bank team will play a supervisory and consultative role. It will monitor the project’s deliverables, provide no-objection on the various activities, and engage with MoF’s senior management, technical staff, PMU and hired experts; to advise on the direction and priorities of the reforms. Public Disclosure Copy The project will be structured into two broad complementary components. A Macro-fiscal Analysis and Public Debt Management component that focuses on building the policy functions at MoF. This component is divided into a macro-fiscal analysis sub-component and a debt management one. A Public Expenditure Management Component that focuses on reforms of various practices and processes within the budget cycle. This component is divided into three sub-components, expenditure programing and budget preparation reforms, budget execution, and internal control and internal audit. Component 1: Macro-Fiscal Analysis and Public Debt Management Sub-component 1.1: Macro-Fiscal Analysis The Macro-Fiscal Department (MFD) has gone a long way since it was formally established in March 2012. The team is in-place, being trained, producing reports and conducting basic macro- fiscal forecasting – a first to be carried out by ministry staff. This positive impetus has to be maintained to ensure sustainability. In fact, the development of a fully operational and effective MFD is a major endeavor that requires a long-term commitment from MoF. Despite the positive developments in such short period of time, the MFD remains a fragile experience. The progress recorded might be dissipated and the young team orphaned once the EFMIS project draws to a close in June 2013. The MFD team members have limited relevant experience and until a year ago were not exposed to macro-fiscal issues and empirical modeling. As such, on-the-job coaching by international experts complemented by a variety of training courses will Public Disclosure Copy make a large difference in the development and productivity of the team. The work that was initiated under EFMIS will require further and in-depth support to become sustainable. This is to be carried by the new proposed project. The envisioned activities under a future World Bank project aim to produce a well-trained team that is composed of dedicated individuals who are able to conduct empirical and policy-related analysis. The tools and instruments – such as the forecasting model - should also become more robust and detailed with the aim of supporting the senior leadership at the Ministry in their design of different PFM policies and measures. Sub-component 1.2: Public Debt Management With support from EFMIS project, the Public Debt Directorate (PDD) has finally been operational and is expected to engage on further debt management functions going forward. In accordance with Law 17 (2008) a PDD was established. As of end 2012, the PDD consists of a middle and back office. The main responsibility of the middle office is the preparation of a medium term debt management strategy, and monitoring and management of risks to the government debt. The main responsibility of the back office is debt recording, and initiation of payment son the debt. A front office function, responsible for implementing the debt management strategy, is being established, and debt management functions currently undertaken by the UNDP team, such as planning and issuance of Euro-bonds, are planned to be transfer red to PDD in 2013. While impressive progress has been made by PDD in a short period of time, it is still in its infancy when compared with a fully functioning debt management office. Therefore continued in-depth support is required. A debt management component of LFMR 2 would have as main objectives to (i) enable PDD to update the medium term debt management strategy annually, based on detailed Public Disclosure Copy analysis of cost and risk; (ii) strengthen debt management strategy implementation; (iii) increase transparency in debt management and establish an investor relations function; and (iv) expand the scope for debt management to include contingent assets and liabilities. Component 2: Public Expenditure Management Sub-component 2.1: Expenditure Programing an d Budget Preparation With support from EFMIS, important milestones for strengthening the budget preparation process in Lebanon have been introduced. Key deliverables have been produced notably (i) a modern draft budget law that aims to replace the outdated 1963 Public Accounting Law, and (ii) the introduction of the 2001 GFS classification system along with related line ministries application guidelines. As a result, the budget preparation process is expected to change considerably starting with the 2014 budget cycle, and further World Bank support will therefore be merited. LFMR 2 activities are built around these new changes. They aim to assist MoF in the implementation phase of these reforms. Additionally, gaps within the institutional framework of the budget preparation process need to be addressed. This framework, namely of the budget directorate, lack the human resources and the structure is not optimal to meet the requirements of the new budget law. The coordination model with line ministries is still defined by the previous framework. The budget preparation process, albeit more comprehensive than before, continues to face irregular practices such as treasury advances to ministries. Finally, the new law, yet to be tested, may warrant possible revisions to the implementation decrees as well as new preparation guidelines that are mapped to the new legislative Public Disclosure Copy framework. As such, additional reform measures are required to build on the previous successes with the aim of developing an optimal MoF organizational and governance model, with clear functions and processes, which is equipped with the required and trained human resources to prepare budgets along the new law and the GFS classification. The objective of the new measures is also to engage and support line ministries and government agencies to adopt the new system and work towards minimizing practice irregularities and widening the comprehensiveness of the budget. Sub-component 2.2: Budget Execution Important progress has been made in budget execution reforms during the first EFMIS project, notably on the review of legal and regulatory framework, improving cash planning and management functions, commitment control and monitoring, review and strengthening of accounting and reporting, capacity building, as well as the functional review of the IT systems. Major outputs of the EFMIS project include: (i) pilot implementation of the action plan in selected ministries for strengthening treasury management and cash management functions; (ii) the approval of new Public Ac counting Law and preparation of guidelines; (iii) the revision of the budg et classification in line with GFS 2001; (iv) strengthening the institutional capacity in cash management, commitment control, and accounting; (v) the IT audit of the MoF’s information systems and practices; and (vi) the development of the PFM reform strategy and FMIS implementation strategy. Despite all these developments, a number of challenges in the implementation of public expenditure reforms remain, including: (i) inefficient (or sometimes lack of) processes and procedures; (ii) Public Disclosure Copy inadequate capacity to implement budget execution reforms in line ministries; (iii) lack of information systems to support new functions; (iv) overstretched IT unit; and (v) insufficient integration between the various information system modules. The public expenditure management component of LFMR 2 project would therefore tackle these issues. Sub-component 2.3: Internal Control and Internal Audit LFMR 2 will also address accountability and oversight issues at the Government level, but starting with the internal accountability within MOF. The objective of this sub-component is to raise awareness of control and audits in the public sector; streamline and strengthen the internal control environment and procedures at MOF; and establish an internal audit function in compliance with international standards. The expected outcome is increased accountability and transparency of MOF operations, enhanced risk management, and availability of an independent and objective assurance of the efficiency and effectiveness of its internal controls, all of which will contribute to proper use of public funds and reducing waste and corruption. A phased approach will be followed for the implementation of this sub-component that ensures needed sequence and capacity of MOF to contribute to the activities and absorb the change brought. Reforms will be guided by experts on control and audit and benefit from consultation with the international, regional and local professional and academic society, in addition to relevant line ministries and governmental accountability and oversight institutions. This will not be limited to Lebanon only, but good and relevant practices will be identified throughout the world to bring a pragmatic lens to this important reform aspect. Public Disclosure Copy LFMR 2 project is expected to be appraised in the third quarter of 2013. D. Project location and salient physical characteristics relevant to the safeguard analysis (if known) E. Borrowers Institutional Capacity for Safeguard Policies F. Environmental and Social Safeguards Specialists on the Team II. SAFEGUARD POLICIES THAT MIGHT APPLY Safeguard Policies Triggered? Explanation (Optional) Environmental Assessment OP/ No BP 4.01 Natural Habitats OP/BP 4.04 No Forests OP/BP 4.36 No Pest Management OP 4.09 No Physical Cultural Resources OP/ No BP 4.11 Public Disclosure Copy Indigenous Peoples OP/BP 4.10 No Involuntary Resettlement OP/BP No 4.12 Safety of Dams OP/BP 4.37 No Projects on International No Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP No 7.60 III. SAFEGUARD PREPARATION PLAN A. Tentative target date for preparing the PAD Stage ISDS: 23-Jun-2013 B. Time frame for launching and completing the safeguard-related studies that may be needed. The specific studies and their timing1 should be specified in the PAD-stage ISDS: Not applicable. No safeguard-related studies are foreseen. IV. APPROVALS 1 Reminder: The Bank's Disclosure Policy requires that safeguard-related documents be disclosed before appraisal (i) at the InfoShop and (ii) in country, at publicly accessible locations and in a form and language that are accessible to potentially affected persons. Task Team Leader: Name: Wael Mansour Approved By: Public Disclosure Copy Regional Safeguards Name: Maged Mahmoud Hamed (RSA) Date: 25-Mar-2013 Coordinator: Sector Manager: Name: Guenter Heidenhof (SM) Date: 25-Mar-2013 Public Disclosure Copy