The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) REPORT NO.: RES34819 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT APPROVED ON SEPTEMBER 20, 2017 TO KINGDOM OF BHUTAN GOVERNANCE SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Qimiao Fan Senior Global Practice Director: Deborah L. Wetzel Practice Manager/Manager: George Addo Larbi Task Team Leader: Savinay Grover The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) ABBREVIATIONS AND ACRONYMS BAS Bhutan Accounting Standard DRC Department of Revenue and Customs e-GP Electronic Government Procurement GoI Government of India GNHC Gross National Happiness Commission GST Goods and Services Tax IMF International Monetary Fund IFMIS Integrated Financial Management Information System IPSAS International Public-Sector Accounting Standards MDF Multi-Donor Fund NCB National Competitive Bidding PEFA Public Expenditure and Financial Accountability PEMS Public Expenditure Management System PFM Public Financial Management PFM-MDF Public Financial Management-Multi-Donor Fund RGoB Royal Government of Bhutan The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P162196 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 20-Sep-2017 31-Jan-2021 Organizations Borrower Responsible Agency KINGDOM OF BHUTAN Ministry of Finance, Department of Public Accounts Financing (in USD Million) FIN_SUMM_PUB_TBL SUMMARY Total Project Cost 4.00 Total Financing 0.00 Financing Gap 0.00 DETAILS -NewFin3 The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Project Development Objective (PDO) Original PDO The overall development objective of the project is to contribute to the improvement of the efficiency, accountability and transparency of PFM systems in Bhutan. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net TF Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A5549 20-Sep-2017 21-Sep-2017 21-Sep-2017 31-Jan-2021 4.00 1.15 2.85 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No Note to Task Teams: End of system generated content, document is editable from here. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status Bhutan continues to exhibit strong commitment to implementation of reforms for strengthening public financial management (PFM). The PFM Reform Strategy and Action Plan 2017, that was developed based on the findings of the Public Expenditure and Financial Accountability Assessment (PEFA) Report continues to be the roadmap for PFM reforms and Public Financial Management – Multi-Donor Fund (PFM-MDF) is its main vehicle for implementation. The key reforms on Goods and Services Tax (GST) implementation, procurement strengthening, improvement of budget report and International Public-Sector Accounting Standards (IPSAS) adoption largely remain on track. The reforms of strengthening of Integrated Financial Management Information System (IFMIS), internal audit and training would require additional efforts and focus. The need for restructuring the GST component, learning curve on procurement procedures and staff shortage contributed to slow start in implementation of the project. This was reflected in financial progress which was only Nu. 14.64 million (US$225,000) as against Nu. 78 million (US$1.1 million) advance provided. Nevertheless, the key consultancies on IPSAS and internal audit are in final stages of award and the other consultancies for Bhutanese Accounting Standards (BAS), GST and competency framework are also expected to be awarded between next three to six months. With these consultancies awarded, the project progress is expected to enhance further. For the Year 1, all three results-based project development indicators and seven out of the eleven intermediate indicators were achieved. The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) B. Rationale for Restructuring Given the substantial requirement to implement GST with estimated costs of more than US$10 million, the Royal Government of Bhutan (RGoB) approached various development partners to finance the GST implementation after the initiation of this project. Subsequently, the IMF committed to provide a resident advisor and technical assistance on various aspects, previously agreed to be supported by the PFM-MDF. The RGoB has also approached the Government of India (GoI) to finance the procurement of GST software. The response from GoI has been positive and GNHC is working on the proposal. This has now provided greater clarity for requirement for technical assistance under the PMF-MDF. With this development, the RGoB has prepared a broad financing plan of various sub-components for GST implementation from the PFM-MDF and involves adjustment from activities originally identified without affecting the overall allocation for the PFM-MDF component. The World Bank has been engaged in GST policy formulation from the beginning. For example, the World Bank supported the conceptualization of GST introduction in 2016. Also, GST is a key component of the Development Policy Credit series. Although the IMF committed to provide assistance on (a) preparation of the design document, (b) preparation of the draft law with explanatory note, (c) drafting GST and excise regulations, and other items originally planned to be supported by PMF MDF, the Ministry of Finance will make sure to regularly update the progress and seek Bank’s advices. II. DESCRIPTION OF PROPOSED CHANGES A. Description of proposed changes The RGoB sent a restructuring request to the World Bank on October 29, 2018. The revised set of activities to be supported under the project are provided in the following table. In summary, rather than financing Business Process Reengineering of the DRC, advising and drafting of GST and Excise laws and developing an IT Strategy, the PFM-MDF will finance consultancies for preparatory and supervision activities of GST implementation, drafting of GST legislation and regulation in Dzongkha and updating of the Micro Simulation Model. The PFM-MDF will also finance capacity building and exposure visits, office IT equipment, website for GST, internal and external outreach and hardware for GST automation. Current Eligible Expenditures Proposed Eligible Expenditures • Preparing the design document • Hardware for GST Automation • Preparing the draft law with explanatory note • Consultancies for preparatory and supervision • Consultations with stakeholders, including citizens activities of GST implementation and outreach at various stages • Consultancies for drafting of [local language • Drafting GST and Excise Regulations versions] GST legislation and regulation in • Capacity building and exposure visits Dzongkha and related internal and external • Business process and institutional review of the DRC outreach. • Developing the IT strategy for GST, • Capacity building and exposure visits • Hardware requirement for video conference, • Taxpayer outreach developing web site etc. and developing strategic and • Office automation for GST project office, website operational plan for GST implementation for GST • Supporting the updating of the Micro Simulation Model B. Revision in the Results Framework The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Existing Results Framework Cumulative Target Values Indicator Name Baseline YR1 YR2 YR3 YR4 End Target To be determined To be determined Report on Setting the legal and Cabinet approves the Draft GST by December by December Business operational No GST concept note legislation 2017, in 2017, in Process environment for legislation (framework) on GST approved by discussion with discussion with Improvement GST implementation introduction` the Cabinet RGoB RGoB submitted Improved efficiency of internal audit function - number of internal audit 109 125 150 175 200 200 engagements (auditable units)** annually Revised Results Framework Cumulative Target Values Indicator Name Baseline YR1 YR2 YR3 YR4 End Target Target: Cabinet approves the concept Draft GST note (framework) on Procurement Setting the legal and legislation GST introduction Document of IT Draft GST Bill GST introduced in operational No GST in approved by (same as before) system for submitted to Bhutan* environment for Bhutan the Cabinet Actual: Cabinet implementing GST parliament GST implementation for public approved concept approved consultation note on August 25, 2017 (achieved) Improved efficiency of internal audit function - number 109 125 150 175 200 200 of internal audit engagements annually *The end target achievement will also depend on the significant support being provided by IMF ** The revision is with regard to correction in indicator description to remove the word auditable units. The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Implementing Agency ✔ Project's Development Objectives ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Additional Financing Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK Project Development Objective Indicators PDO_IND_TABLE Enhanced controls in budget execution and disclosure of key fiscal information Unit of Measure: Text The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Indicator Type: Custom Baseline Actual (Current) End Target Action Enhanced controls in budget execution and 2016 PEFA Assessment disclosure of key fiscal (refer Annex 4 on Value information as No Change Summary of PEFA evidenced by Report 2016) improvement in PEFA scores Date 01-Sep-2017 31-Jan-2021 Reduced procurement cycle time through increase in percentage of contracts/bids invited through e-GP using national competitive bidding (NCB) , in selected MoE, MoF and MoWHS Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action 75% of bids invited 0% of bids invited through e-GP using through e-GP using NCB NCB and Value No Change Procurement cycle time: Procurement cycle 60 days time reduced by at least 5 days Date 01-Sep-2017 31-Jan-2021 Intermediate Indicators IO_IND_TABLE Enhanced contents in Budget Report consistent with international good practices including gender and climate change aspects Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Budget Report, consistent with Value N/A revised template No Change published on MoF website Date 01-Sep-2017 31-Jan-2021 Increased number of companies in compliance with BAS Phase I and II The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Unit of Measure: Number Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 49.00 No Change Date 01-Sep-2017 31-Jan-2021 Setting the legal and operational environment for GST implementation Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Cabinet approved concept note GST introduced in Value No GST legislation Revised (framework) on GST Bhutan introduction Date 01-Sep-2017 31-Jan-2021 Improvement in quality assurance process within internal audit function based on methodology of the IIA Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Repeat self- Baseline to be assessment indicates Value No Change established in year 1 improvement over baseline Date 01-Sep-2017 31-Jan-2021 Increased number of systems/thematic (performance or value for money) audits undertaken by Internal Audit - number of audits undertaken annually Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Value 1 5 No Change Date 01-Sep-2017 31-Jan-2021 Improved efficiency of internal audit function - number of internal audit engagements annually Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) Value 109 200 Revised Date 01-Sep-2017 31-Jan-2021 Improved presentation of National annual financial statements consistent with international standards Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action National annual National annual financial statements financial statements Value presented not in presented as per No Change accordance with Cash-IPSAS based international standards Bhutan standards Date 01-Sep-2017 31-Jan-2021 Public Procurement Bill approved by the Cabinet Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Public Procurement Value No Bill Bill approved by the No Change Cabinet Date 01-Sep-2017 30-Jan-2021 Strengthening of PEMS Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action PEMS strengthened Gaps in Payroll and with Payroll control, bank reconciliation bank reconciliation Value functionalities. No Change and commitment Commitment control control not present. functionalities. Date 01-Sep-2017 31-Jan-2021 PFM information systems integrated Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action The World Bank PFM-MDF FINANCED STRENGTHENING PUBLIC FINANCIAL MANAGEMENT PROJECT (P162196) PFM information Integration of PFM Value systems with minimum No Change information systems integration Date 01-Sep-2017 30-Jan-2021 OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Strengthening PFM Legal and Strengthening PFM Legal and 1.00 Revised 1.00 Institutional Framework Institutional Framework Strengthening Budget Strengthening Budget Execution 2.20 No Change Execution and Oversight 2.20 and Oversight Capacities Capacities Contingencies and unallocated 0.80 No Change Contingencies and unallocated 0.80 TOTAL 4.00 4.00 Note to Task Teams: End of system generated content, document is editable from here.