44114 Kyrgyz Republic-GovernanceStructuralAdjustment Credit (Credit No. 3756-KG). Release of Third Tranche-Full Compliance. Tranche ReleaseDocument Background 1. This memorandum summarizes the progress made under the Governance Structural Adjustment Credit (GSAC) to the Kyrgyz Republic. IDA approved the SDR 14.7 million (US$ 20 million equivalent) Credit on 15 May 2003. The credit agreement was signed on 28 May 2003 and became effective on 30 July 2003. The credit was to be disbursed in three tranches o f SDR 3.675, 3.675 and 7.350 millions respectively. The first tranche was disbursedon effectiveness o f the Credit on 30 July 2003. The second tranche was originally planned for disbursement in mid 2004. However, there were delays in meeting some o f the critical conditions, which were increased by unstable political conditions in the Kyrgyz Republic following the fall of the previous government in March 2005. The tranche was eventually disbursed in May 2007. By this time most of the conditions for the third tranche had already been met. All conditions have now been met. The closing date of the Credit is June 30,2008. The GSAC supports the Government's program to strengthen the effectiveness of the State and improve governance. Its main objectives are: to improve the transparency and responsiveness o f the public sector and enhance the ability o f external stakeholders to hold it accountable and at the same time increase efficiency, effectiveness of the public sector. To achieve these objectives, the GSAC is supporting reforms aimed at (i)improving personal accountability o f political officials and civil servants and enhancing the effectiveness o f the civil service; (ii)improving service delivery in the health and education sectors; (iii)streamlining the structure o f Government ministries and agencies. (iv) strengthening voice and participation by improving public access to official information; (iv) improving the interaction between regulatory agencies and business enterprises; (v) strengthening public expenditure management (vi) improving transparency, value for money and accountability in public procurement. 3. The reform program supported by the GSAC is intended to increase the ability o f citizens, civil society and the private sector to demand improvements in State performance, and at the same time to strengthen core competencies, including particularly public expenditure management, within the public sector. The reforms also provide a basis for gradually increasing the professionalism and capacity o f the civil service, and more widely to improve governance and reduce corruption in the Kyrgyz Republic, so as to enhance the ability of the State to pursue the development and growth objectives o f the Country Development Strategy (CDS). 4. The importance o f improved governance for economic development is a central theme o f the CDS for 2007-2010 (the country's PRSP). The CDS identifies pervasive corruption, as one o f the key constraints to development in the past and a major cause o f the revolution o f March 2005. It recognizes that corruption and weak governance stem from state capture by interest groups, the absence o f effective checks and balances on executive power, and lack o f clearly defined responsibilities at the center o f government. The CDS recognizes that improving governance requires a merit-based professional civil service as a stepping stone to forging transparency and efficiency in public administration. Inthis respect some solid advances have been made by the authorities over the last two years, supportedby the GSAC program, as discussed below. 5. While reducing corruption in the Kyrgyz public sector will continue to require sustained, long-term efforts on many fronts, the reforms supported by GSAC are contributing to this objective in several ways. Some o f the reforms supported, such as publication o f declarations o f incomes and assets and the introduction of competitive appointments to the civil service, have a direct anti-corruption objective. Others address the problem indirectly through systemic institutional reforms that increase transparency and accountability. For instance, increased awareness of State activities and relevant rules and regulations enables external stakeholders to demand higher standards of integrity from public officials. Similarly, reduced discretion and informality in budget execution resulting from modernizationof treasury operations; strengthening of internal control and external audit functions; and increased transparency in the procurement process diminishes opportunities for fraud and corruption in public expenditure management. Finally, the elimination of financing mechanisms (Special Means Accounts) that create perverse incentivesfor regulatoryagencies to harass businesses in order to increase their hnding, will both improve the business environmentand the transparency and efficiency ofpublicresourcemanagement. 6. Central to the reform of governance in the Kyrgyz Republic has been the reform o f Civil Service procedures, and the based on the introduction of a new Civil Service Law, creating a Civil Service Agency. The law was approved in June 2004, and the Civil Service Agency established in October 2004. The law was substantively compliant with the original intent, although in Parliament amendments were introduced that potentially weakened the independence of the Civil Service Agency and strengthened the relative powers o f ministers. For this reason the law was initially deemedunsatisfactoryto IDA and changes were requested. Giventhese concerns on the amendments to the agreed draft of the law, there was an extensive dialogue with the authorities that resulted in significant progress in implementing the law (particularly as regards merit based appointments, the responsibilityo f the Civil Service Agency rather than Ministersfor personnelmatters).Inthe light of the progress made in implementingthe law it was recognizedthat changes by parliament would add little value to its impact, given that the law as approved by parliament did comply substantivelywith that envisaged under the second tranche conditions. Since the release of the Second Tranche'in May 2007, the Civil Service Law implementation of the law has strengthened and allowed a greater institutionalizationofpersonnelpolicieswithin the Civil Service(see below for more details). 7. The key outstandingcondition for the implementationo f the Third Tranche conditions concerned the implementationof the Country Procurement Assessment Report (CPAR) Action Plan of December 2002. The main outstandingissue was the full implementationof the law Public Procurement Law, particularly as regards the participation of the State Agency for Public Procurement and Material Reserves (SAPPMR) in all procurements, through the issue of licenses to procuring entities in contraventiono f the Law. In October 2007, The Ministry of Finance issued an order rescindingthe requirement for local treasuries to require permits from the procurement agency. The procurement agency also issued orders in January, formally prohibiting the issue of permits and at the end of February 2008 the SAPPMR confirmed this order. With these confirmations it was agreed that the CPARAction Plan hadbeen fully implemented. Macroeconomic framework 8. The Kyrgyz Republic's economic performance has strengthened significantly in recent years, notwithstandingdifficult political circumstances, and the authoritieshave establisheda good recordof implementation of successive PRGF-supportedprograms since 2001. In February 2005, the IMF approved a new 3-year PRGF arrangement to support the Kyrgyz Republic's economic program.The ExecutiveBoardo f IMF has completed the sixth and final reviewof the Kyrgyz Republic'seconomic performanceunder PRGF arrangement inMay 22, 2008. As a result, the objectives of the authorities' economic programsupported under PRGF have been largely met. Growth has rebounded (averaging 5 percent annually over the last five years) and become broader-based, and poverty rates have fallen. Recent developments in 2008 show continuation of solid growth (6.1% in Q1) although slower than in2007. A prudentfiscal policy has beenmaintainedwith the fiscal deficit eliminatedin2007 (for the 2 first time since independence). This fiscal stance, combined with economic growth and Paris Club support, have ledto an impressivereductioninthe country's debt burden(from 104% of GDP in 2003 to 62% in 2007). While inflation remained low until2007, the Kyrgyz Republic has sufferedfrom the effects of worldwide food and energy price inflation, resulting in inflation of 20% in 2007. Inflation continues to be high in2008 with 6.1% CPI increaseinthe first three months.Thoughcurrent account deficit was high (estimated 6.5% of GDP in 2007) the balance of payments remained strong with international reserves growing to record high. Authorities experience difficulties in adequate recordingof remittancesand re-exportsof shuttle traders that lead to significant errors and omissions inthe balanceofpayments 2003 2004 2005 2006 2007 Real GDP growth (%) 7.0 7.0 -0.2 3.1 8.2 GDP per capita (dollars) 384.0 436.0 478.0 550.0 718.0 Inflation CPI (%, Dec/Dec) 5.6 2.8 4.9 5.1 20.1 Exchangerate(som/US$, average) 43.7 42.7 41.0 40.2 37.3 Realeffectiveexchangerate(2000=100, + =appreciation) 100.7 96.0 95.1 93.5 104.0 Unemployment(%) 9.9 8.5 8.1 9.3 11.5 Investment(%of GDP) 11.8 14.5 14.3 23.0 25.2 Current account balance(%of GDP) -2.2 1.3 -1.2 -6.5 -6.5 Gross international reserves (mln US$,end period) 389.0 565.0 612.0 817.0 1177.0 MerchandiseTerms of Trade (2000=100) 120.0 116.0 131.0 121.0 Primarybalance(%of GDP) -3.2 -2.1 -2.3 -1.7 0.6 FiscalBalance -4.7 -4.0 -3.8 -3.1 0.0 Publicdebt / GDP (%) 102.9 94.1 84.0 72.8 57.4 ExternalDebt (%GDP) 104.4 94.7 82.2 76.5 62.0 RecentDevelopments in governance reforms 9. When the GSAC reform program began in 2003, it was initiated by a government which had officially recognized in its National Poverty Reduction Strategy that good governance and reducing corruptionwere keyto development and povertyreduction. 10..In many areas reforms to the legal framework were adopted with the purpose of improving governance. For example, new laws and regulationsto simplify licenses and reduce inspectionswere adopted. In2003, a law to decentralizefinancingto local governments was approved. In2004, laws to reformthe Civil Serviceand to require the declarationof incomes and assets of high state officials were approved (see discussionbelow). Many technical reforms to the budget processto improvethe transparency and efficiencyof the budgetwere also adopted. 11. During this period a clear pattern emerged. Technical reforms (particularly in the area of public finance, and the health sector), although slow, were gradually adopted. On the other hand, wider governance reforms would often only be introducedinto the legal framework or by the creation of a new institution with an unclear mandate. Capacity and willingness to follow through and ensure implementation of those wider reforms was low. Survey data indicated that governance was deterioratingand corruption intensifying. 12. The proliferation of new laws and institutions gave the impression of institutional development. However, behindthe commonfailure to implementmany laws and reforms, state institutionsand the rule of law was weakening and endemic corruption was growing, particularly among the close associates o f the Presidentand his family. This led to increasingpopular discontent with the regime 3 for the failure o f the state to deliver many basic services and at the clearly observable corruption which accompaniedany interactionwith state officials. 13. The disputed parliamentary elections o f February and March 2005 provided a catalyst for this discontent. As a result a non-violent "Tulip Revolution" occurred in March 2005 in which the previous President and Government were overthrown. These changes opened up possibilities for significant reforms, and the new authorities indicated their commitment to transparency and good governance. These intentions have been supported by some reform constituencies within the authorities on the one side, and pushed, from the other side, by a civil society that has become much more active and demanding. 14. The origins o f the revolution meant that the rhetoric o f the fight against corruption became one o f the principal priorities of the new government. However the effect of the revolution was initially to fragment state power further. Since the revolution, continued political tensions within the government, and between the government and parliament have slowed progress, and at times threatened to paralyze decision-making, Duringthe period o f almost three years o f political instability following the revolution, major changes to the constitution were approved on at least three occasions, and during 2007 there were a number o f changes of Prime Minister and Government. 15. Finally the parliamentary elections in December 2007, based on the Constitution approved in October 2007 by referendum, represented a watershed in the country's political development post following the 2005 political events. There is now a greater degree of consolidation of political power, and this i s manifested in a greater degree of stability throughout the senior echelons of government leadership. Senior Government officials and leaders now have a more stable political environment, enablingthem address longer term economic development issues. In addition the Government has repeated the commitments o f the first post-revolutionary government to improving governance. Progressin Implementingthe Reform Agenda 16. As can be seen from the overview o f recent developments progress in governance reforms was uneven and difficult. The governance reform agenda supported by GSAC covered a large number o f areas which included: civil service reforms, transparency in income and assets o f senior officials, reform o f external audit and the chamber o f accounts, public finance reforms to ensure a comprehensive and transparent budgetary process, and the elimination o f the funding o f institutions through special means accounts, reforms to public procurement and reforms to the financing of health and education, so as to ensure an efficient use of resources and improve service delivery. 17. Three o f the reform areas (Civil Service, Declaration o f Income and Assets, and Chamber o f Accounts) required the development o f significant legislation and implementation regulations. It became clear that ownership and understandingo f the reforms in each o f these areas was weak. Inthe case o f the civil service reform the principal idea was to remove the patronage o f ministers and their appointees in designating civil servants, introduce merit and rule based appointment and promotion, ensure that professional civil servants have security o f tenure, and are not subject to dismissal following political changes. With respect to the Chamber o f Accounts, the main idea was to reform the COA from being an organization concerned with exercising a control function and punishing violations (and wide scope for rent seeking) to establish a modern external audit and accountability function. 18. Progress in developing the legal framework for all three major legal initiatives (Law on Civil Service, Law on Declaration o f Income and Assets, Law on the Chamber o f Accounts) was therefore slow, and required constant debate duringthe first year following the approval o f GSAC, as the application 4 o f the principles enshrined in the GSAC program in these areas was had not been internalizedat the time that the GSAC programwas agreed. 19. At the same time, the government made considerable progress in a number of reforms in public expenditure management under the GSAC. Budgetary functions were consolidated under the Economic Policy Council in 2004, an action plan to bring all extra-budgetary funds under the Treasury was developed and implementedduring2004, and regulationsrequiringthe replacement of special means funding for agencies that had regulatory responsibilities with direct budget funding were implementedfrom January 2005. Finally at the end of 2006, the Ministry of Financedeveloped and approved a new budget classification based on GFS 2001 standards, which provides a solid basis for transparent and coherent budget formulationand execution. 20. In addition, the government has made steady progress in improving other areas of Public Financial Management, including the introduction of the basic elements of the Medium Terms Budget Framework, improvement of comprehensiveness of the budget and its presentation (again all measures supportedunder the GSAC program). The Ministry ofFinance elaboratedand approved, on the basis ofa PEFA assessment, a PublicFinanceReformactionplanofJanuary 2006. 21, In the area of health financing reforms a Single Payer Law was enacted in 2003 which took away responsibility for health financing from Rayon and Oblast financial departments to the Republic budget in 2005. The effect (together with other reforms in the health sector) has been to increase the proportion of resources dedicated to primary health care as well shift resources within the health sector from hospitalfinancingto direct patientcare from so that the latter increased as a proportionof total healthspending from 16.4percent in 2000 to 36.6 percent in 2004. 22. Thus progress, though slower than originally envisaged, was steady and visible. By May 2004 the Government had draftedacceptableversions o f the Law on Chamber of Accounts, which in fact went further than the narrow conditionality of GSAC, the Law on Civil Service and the Law on the Declarationo f Income and Assets. The three lawswere approvedby ParliamentinJune 2004. 23. At the same time the Government moved ahead in establishingthe Civil Service Agency to manage and develop the required procedures for a rule based system of appointments and dismissals, a separationof political appointees from career civil servants, and inparticularthe establishment of the position of State Secretaries to head the permanent civil service in all ministries. Thus substantial progress at a technicaland institutionallevelwas beingmade. 24. Shortly after the establishment o f the Civil Service Agency, however, a close relative of the then President Akaev was appointed as State Secretary of the Civil Service Agency. The Bank team argued that this action demonstrated a lack of commitment and understandingo f the reformsand was a clear breach of the overall program. This situation was only rectified following the Revolution in March2005. 25. Then, in the immediate aftermath of the revolution there was considerable turnover of posts and appointments outside due process. The Civil Service Agency did attempt to oppose these appointments, sometimes successfully, but both in the parliament and much of the Presidential administrationthere was active hostility to the Civil Service Reform, precisely because it hadmade it more difficult to make arbitrary appointments. Conflicts broke out between State Secretaries and ministers, as some State Secretaries tried to safeguardthe institutional integrity oftheir ministries. 26. The Bank emphasizedthe need for the highest authoritiesto show full public support for the reform process and the institutionsand leadership in stopping appointments outside due process in the civil 5 service.To increase compliancewith the Civil Service Law on the recommendationof the Bankteam monitoringmechanismwere put inplace. When monitoringbegan at the end of 2005, at least halfof appointments were beingmade outside of due process. By the end of 2006, virtually all appointments were being made through due process. It was also clear that a culture was developing in which the new institutional arrangements were accepted by the authorities, and in which the Civil Service Agency was now able to exercise its authorityto ensure due process in appointments and dismissals. 27. Duringthe lastyear and a halfthe Civil Service Agency has strengthenedits role in safeguarding the institutional framework for civil service appointments. There has been significant progress towards improvingthe system of appointments and the CSA continues to monitor and report on the numbers of appointments beingmade throughdue process, which since the end o f 2006 have been consistently close to 100 percent, the CSA recognizes that the quality o f competitions requires significant improvementto ensurereal transparency and objectivityinthe process.As a result it has establisheda new TestingCenter to reducepersonalinterfacewith candidates for postsand hence pressureto select unqualifiedcandidates. 28. There are signs of growing understandingof the importance of civil service reforms at the highest levels o f the government. In a recent speech (May 23) to ministers and state secretaries, President Bakiev underlined the importance of having the effective and efficient civil service as a factor of economic growth and particularly the importance of further development of the institution of state secretaries and meritocratic principles in appointments, as well as the need for havingmore effective civil service wage structureas the mainprinciplesofmoderncivil service. 29. Recognizingthat work supportedby the GSAC credit is only the beginningof a processthat will take decades to fully benefitthe Kyrgyz Republic, it is thejudgment of the team that despite the imperfect legal framework, actual implementation of the reforms has been taking place, that there has been effective compliance with the program and that although progress had been slow, it is now sustainable. ProgressAgainst Third Tranche Release Criteria Condition 1. The Borrower has achieved satisfactory progress in the implementationof a new law referred to in paragraph 1 of Section Iof this Schedule 2, includingpublishingof income and assets declarations of highstate officials in the executive, judicial and legislative branchesofthe Stateand their close family members. 30. The condition has been met. The law was adopted in August 2004. The law provides a comprehensive definition of close family members and the income and assets to be declared. Although approved 2004, it was not effectively implemented until early 2006. There was initially great reluctance to publish the declarations of parliamentary deputies and ministers. Since March 2006, the declarationshave been published in the mass media and the internet, and compliance in submittingdeclarationshas reachedover 95 percent of eligible officials. Since the law was approved, the Civil Service Agency, as the body responsiblefor its implementation,has successfullyconducted four declarationcampaigns.The declarationsof incomes and assets have become institutionalized. Condition2. Declarationsof incomeand assets of all civil servants have been made available to the publicaccordingto the amended Civil ServiceLaw. 3 1. The condition has been met. The law provides for civil servants to declare their income and assets and for these to be available to state bodies. Records of the declarations of incomes and assets are heldby the Civil Service Agency and are availableto the public on request. 6 Condition3. Amendments, satisfactoryto the Association, have been introducedto the Law on Guarantees and Freedom of Access to Information, to enhance access of the public to official information, to strengthen the right of individuals to appeal against denials of requests for information, and to provide a mechanism for monitoring of state bodies' compliancewith the provisionsofthis Law. 32. This condition has been met. At the end o f 2006 the Law on access to public information was adopted, giving civil society the right to obtain a wide range of information regarding government activities at both central and local levels. The Law was drafted by a Working Group, which included representatives from the government and civil society. After the law was approved, several NGOs, initiated series of activities aimed ad education different types of civil society groups on how to demand and use public information.Thus, Alliance "For Budget Transparency", (a network of non- government organizations)alongwith some otherNGOs andprojectsdevelopedprograms to improve the transparency and effectiveness of state and local budgets in Kyrgyzstan, by involving citizens in the budgetprocess. Condition 4. The Borrower has successfully implemented a set of legislative and other measures, satisfactory to the Association, to ensure that fees from issue of licenses, permits, certificatesand other similar requirementsplacedon economic activities, and fines resulting from inspectionsare directedonly to the State budgetand not creditedto the SpecialMeans Accounts of regulatory agencies, with the exceptionof SEA and SCA, and that regulatory agencies are providedcompensatoryfundingthroughthe State budget. 33. This condition has been met. A Governmental Decree of October 30, 2004 "On phased transmission of spending units and agencies to full budgetary financing" required spending units obtaining resources from the issue of permits and licenses and fines to have these included in the State Budget. From January 1, 2005 the these incomes have been included in the revenue of the republican budget through transit accounts of regional treasury offices. The financing of these agencies was replaced with budget allocations relatedto the cost of service provision.In addition an interagency commission including department representatives of the Ministry of finance, Antimonopoly commissionand line ministries and agencies has beenestablishedto monitorspending units' special accounts and define the list of those that should be directly included into the state budget. Condition5. A draft budgetfor FY2005, providing: (i)moretransparent presentationof the policyprioritiesfinanced by the budget; (ii) sectoralceilingsfor two consecutive years, based on the medium term budget framework; and (iii)an integrated presentationof recurrent and investmentexpenditures,has been presentedto the Parliament. 34. This condition has been met. In each budget since 2005 the budget presentation has improved and become more transparent. MTBF indicative ceilings have been presented as has a coherent presentationof recurrent and investment expenditures. The 2008 Budget presentation benefitedfrom introductionof the following features: (i)it was based on the new budget classification (compatible with GFS 2001), which was elaborated in such a way that gave more flexibility to the line ministries at the stage o f budget preparation (Le. reducing the number of line items) and requiring a fully synchronized planningprocess for recurrentand capitalbudgets as well as theirjoint presentation; (ii) the presentation included informationon budget executionfor two previousyears (by ministries)and indicative budget ceilings for next two years (derived from MTBF). These additions give more informationfor the parliamentand other involvedpartiesinmakingdecisions to approve the budget. 7 Condition6. The Borrowerhascompleted the transfer of all extra-budgetaryaccounts,with the exception of the SocialFund, intothe Treasury GeneralLedger. 35. The condition has been met. The government has consolidated its resources under the umbrella of the Treasury system. An inventory o f all special means accounts (comprised o f fees collected by state bodies for specific services rendering) was conducted, and all special means accounts found operating outside the Treasury were transferred into the Treasury General Ledger. 36. As a result o f inventory o f all extra-budgetary funds, the Government prepared an action plan on transferring those funds into the Treasury system, which has been successfully implemented (by April 2005). The extra-budgetary funds o f the following public entities have been included into the Treasury system: State Committee on State Property Management, State Fund o f Economic Development, State Commission on Public Procurement and Material Reserves, Special Funds under the Prime Minister's Office and Presidential Administration, and Fundfor Ecology under Ministry o f Emergency Situations. Condition 7. The Borrower has achieved satisfactory progressin the implementation of the action plan for phasing out off-sets and non-cashtransactions in the State budget and Social Fund. 37. The condition has been met. An initial action plan was introduced by the Ministry o f Finance in April 2004 cancelling operations under the scheme "Repayable financing on spending units debt offset for production, works and services". The order was effectively implemented by the Ministry o f Finance from June 2006, when offset operations ceased. Similarly the Social Fund has reduced non- cash operations to insignificant levels. Condition 8. The CPARactionplan has beensuccessfullyimplemented. 38. The condition has been met. All key actions of the CPAR action plan have been implemented. These include: Extendthe scope o f the PPL to all enterprises with at least 50 percent state ownership; Procuring entities to complete SCPPMR prescribed procurement plan after budget approval and to update it regularly; Remove restriction on participation in tendering because o f nationality; Supplement the PPL through the inclusion o f appropriate procedures for selection o f consultants; Reinstate the publication o f the Public Procurement Bulletin; Train staff o f procuring entities in preparing clear technical specifications; Bid submissiodopening deadline to be extended formally in writing and only sufficiently inadvance o fthe deadline. 39. The main outstanding issue was the full implementation o f the law Public Procurement Law, particularly as regards the participation o f the State Agency for Public Procurement and Material Reserves (SAPPMR) in all procurements, through the issue o f licenses to procuring entities in contravention o f the Law. In October 2007, The Ministry o f Finance issued an order rescinding the requirement for local treasuries to require permits from the procurement agency. The procurement agency also issued orders in January, formally prohibiting the issue o f permits and at the end o f February 2008 the SAPPMR confirmed this order. With these confirmations the CPAR Action Plan had been fully implemented. Condition 9. The Borrower has achieved satisfactory progress in the implementationof a capitation-based formula for calculating categorical grants in the health and education sectors. 8 40. The condition has been met. The condition was aimed at creating a basis for more transparent and equitable allocation of budget resources from the central level to health and education institutions, and improving quality o f their services. A Government working group assisted by a local consultancy developed the methodology for the calculation o f the costs o f minimum basic packages inthe health and education sectors, as well as the formulae for categoricalgrants inearly 2005. 41. At the time the education sector did not meet the minimum pre-conditions for the grants to be both equitable and offer incentives to greater efficiency. Thus, prior to the introduction o f categorical grants in education a clear re-definition o f the responsibilities for the delivery o f education services is required, together with the removal o f nationally mandated staffing norms. It was therefore agreed that there should be no decree on the formula for categorical grants in education until the necessary preconditions had been met. However, the methodology for the calculation o f minimum standards in education was approved and was to be used as benchmark against which the Government would report on actual allocations made. A new system o f decentralized financing for local governments was introduced with the 2007 budget allowing the introduction o f revised financing arrangements including per capita financing as part o f a wider education reform. 42. In the last three months the government issues decrees formally establishing a new financial system in education sector, based on several pilots conducted in education sector and results of the Rural Education project. The main principles o f new financial mechanisms in education sector are to ensure the transparent and equal budget allocations for education institutes among regions by means of introduction of minimal standards for this sector through calculating per capita expenses for educational institutions. The new mechanisms fix share o f local contribution (ail -okmotu budgets) at the level o f 2006, and stipulate that the difference between minimumstandard and local contribution should be covered by categorical grants to be provided from Republican budget. From now on, the categorical grants will be used to ensure that minimum education needs are funded, compare to funding only teachers' salaries previously. On March 19, 2008 the decree #91 was issued to approve methodology and formula for categorical grants for education. On April 14, 2008 the decree ## 146 was issued approving minimum standards o f budget financing o f secondary education. 43. At the same time, in 2005 as part o f the health reforms, the Government transferred all health institutions under the Republican budget jurisdiction, and categorical grants as one element o f health sector financing was no longer relevant, nevertheless the changes achieved the effect o f the capitation based formula. Thus the condition has been fulfilled. Condition 10. The Civil Service ManagementAgency has been established by the Borrower and is fully operational with staff, resources and terms of reference satisfactory to the Association. 44, The condition has been met. During the last year and a half the Civil Service Agency has strengthened its role in safeguarding the institutional framework for civil service appointments. It i s fully staffed and actively working to safeguard the integrity o f the Civil Service. There has been significant progress towards improvingthe system of appointments and the CSA continues to monitor and report on the numbers o f appointments being made through due process, which since the end o f 2006 have been consistently close to 100 percent, the CSA recognizes that the quality o f competitions requires significant improvement to ensure real transparency and objectivity inthe process. Condition 11. The Borrower has achieved satisfactory progress in the implementationof recommendations of functional reviews of central and local levels of MH,ME, MLSP, MJ and their affiliatedagencies. 9 45. The conditionhas been met. Functional reviews o f four ministries (Education, Health, Labor and Social Protection and Justice) were carried out. However following the reviews major reorganizations o f government structures have taken place since November 2005 and in many cases the recommendations of the functional reviews are obsolete. Some o f the recommendations o f the Functional Reviews were included in the reorganization, and therefore this condition has been fulfilled as far as is possible. Overallconclusion 46. The GSAC program was probably overambitious in the political and institutional conditions prevailing in the Kyrgyz Republic. Thus progress was much slower than originally envisaged. Nevertheless there i s little doubt that substantial progress has been made on the governance reform agenda, and continues to be made. All the third tranche conditions have been fulfilled and have laid the basis for continued governance reforms inthe Kyrgyz Republic. It is therefore recommendedthat . the thirdtranche be released. 10