Document ofThe World Bank

Report No: 23712 EC

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED TECHNICAL ASSISTANCE LOAN

IN THE AMOUNT OF US$13.86 MILLION

TO THE

REPUBLIC OF ECUADOR

FORA

EC PUBLIC SECTOR FINANCIAL MANAGEMENT

February 25, 2002

Poverty Reduction and Economic Management UnitBolivia, Ecuador and Peru Country Management UnitLatin America and Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 2002)

Currency Unit = US$ Dollars

FISCAL YEARJanuary I -- December 31

ABBREVIATIONS AND ACRONYMS

CPAR Country Procurement Assessment Report

GOE Govemment of Ecuador

MEF Ministry of Economy and Finances

SIGEF Integrated System of Management and Financial Information

IFMS Integrated Financial Management System

ICT Information and Communication Technology

LAC Latin America and the Caribbean

PREM Povery Reduction and Economy Management

MOSTAMod ernization of the State Technical Assistance

CAS Country Assistance Strategy

CGE Contralor General del Estado

AME Asociacion de Municipalidades del Ecuador

IESS Instituto Ecuadoreano de Seguro Social

CONAM Consejo Nacional de Modemizacion del Estado

Vice President: David De Ferranti, LCRVPCountry Manager/Director: Isabel Guerrero

Sector Manager/Director: Emesto MayTask Team Leader/Task Manager: Paul Sisk

ECUADOREC PUBLIC SECTOR FINANCIAL MANAGEMENT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 23. Sector issues to be addressed by the project and strategic choices 4

C. Project Description Summary

1. Project components 52. Key policy and institutional reforms supported by the project 123. Benefits and target population 124. Institutional and implementation arrangements 12

D. Project Rationale

1. Project alternatives considered and reasons for rejection 142. Major related projects financed by the Bank and other development agencies 153. Lessons learned and reflected in the project design 184. Indications of borrower commitment and ownership 195. Value added of Bank support in this project 19

E. Summary Project Analysis

1. Economic 192. Financial 193. Technical 204. Institutional 205. Environmental 206. Social 217. Safeguard Policies 22

F. Sustainability and Risks

1. Sustainability 22

2. Critical risks 243. Possible controversial aspects 25

G. Main Conditions

1. Effectiveness Condition 252. Other 25

H. Readiness for Implementation 25

I. Compliance with Bank Policies 26

Annexes

Annex 1: Project Design Summary 27Annex 2: Detailed Project Description 31Annex 3: Estimated Project Costs 37Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 38Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 39Annex 6: Procurement and Disbursement Arrangements 40Annex 7: Project Processing Schedule 51Annex 8: Documents in the Project File 52Annex 9: Statement of Loans and Credits 53Annex 10: Country at a Glance 55Annex 11: Project Implementation Plan 56

MAP(S)

ECUADOREC Public Sector Financial Management

Project Appraisal Document

Latin America and Caribbean RegionLCSPR

Date: February 22, 2002 Team Leader: Paul Edwin SiskCountry Manager/Director: Isabel M. Guerrero Sector Manager/Director: Emesto MayProject ID: P074218 Sector(s): BF - Public Financial ManagementLending Instrument: Technical Assistance Loan (TAL) Theme(s):

Poverty Targeted Intervention: N

Program Financing Data[X] Loan [ ] Credit [ ] Grant [ Guarantee [ Other:

For Loans/Credits/Others:Loan Currency: United States DollarAmount (US$m): $13.86

Borrower Rationale for Choice of Loan Terms Available on File: 0 Yes

Proposed Terms (IBRD): Fixed-Spread Loan (FSL)Grace period (years): 5 Years to maturity: 20Commitment fee: 0.85% - 0.75% Front end fee (FEF) on Bank loan: 1.00%

Payment for FEF: Capitalize from Loan Proceeds

Initial choice of Interest-rate basis:

Type of repayment schedule:[X] Fixed at Commitment, with the following repayment method (choose one):[ ], Linked to Disbursement

Financing Plan (US$m): Source Local Foreign TotalBORROWER 3.90 1.08 4.98IBRD 9.36 4.50 13.86Total: 13.26 5.58 18.84

Borrower: GOVERNMENT OF ECUADORResponsible agency: MINISTRY OF ECONOMY AND FINANCEIng. Carlos Julio Emmanuel, MinistroAddress: Av. 10 de Agosto y Jorge WashingtonQuito, EcuadorContact Person: Maria Dolores Cevallos, Advisor to the Vice Minister of FinanceTel: 2906893 Fax: 2906598 Email: mdcevallos@minfm.gov.ec

Estimated disbursements ( Bank FY/US$m):FY 2003 2004 2005

Annual 7.19 4.34 2.33Cumulative 7.19 11.53 13.86

Project implementation period: 3.0 yearsExpected effectiveness date: 03/31/2002 Expected closing date: 09/30/2005

OCS PAD FcmL F. MEAT. DATA

A. Project Development Objective

1. Project development objective: (see Annex 1)

Improved effectiveness and transparency in financial management in the general governmentsector. Contribute to better governance through greater transparency attained by the independentverification of the integrity of government financial reporting.

2. Key performance indicators: (see Annex 1)

Progress towards program objectives and their evaluation upon completion will be measured bythe achievement and quality of the following: (i) the timeliness and comprehensiveness of budgetand financial reporting from the non-financial general government sector, (ii) the extent to whichthere is application of an Integrated Treasury System (IFMS) within the general governmentsector, (iii) the portion of public financial statement reports subject to the Controller's opinion,and (iv) the effectiveness of cash management within the general government sector.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 15419 Date of latest CAS discussion: 03/25/97

The Bank Group Program, presented in the June 2000 update, will focus in the short term on: (i)Protecting the Poor and Setting the Basis for Human Development and Poverty Reduction; and(ii) Restoring Macro-financial and Growth Recovery for Poverty Reduction. Under the latter, theBank will support improvements in fiscal and public sector management. The proposed operationsupports the Government's program to modernize public sector financial management.

The project aims to support the sustainability of socioeconomic development through i)investment in integrated financial management systems which will improve the efficiency andeffectiveness of the use of public sector financial resources, and ii) support to ensure the diffusionof financial information on the public sector. There will also be independent verification ofintegrity, which will contribute to the transparency and accountability of the public sector.

2. Main sector issues and Government strategy:

Since the early 1990's, successive administrations have worked to modernize public expenditurecontrol and accountability in resource management. On the basis of the 1992 Public Budget Lawand the 1993 Modernization of the State (MOS) Law - with the support of the World Bank'sMOSTA project - the authorities have been developing modern systems for the management andcontrol of public finances. They have recently drafted two new pieces of key enabling legislationin this area: the Public Finance Control Law (Ley Organica de Control, Fiscalizacion y Auditoria),which is awaiting debate second reading in Congress; and the Public Financial Management Law(Ley Organica de Gestion Financiera del Estado), which is yet to be sent by the Executive toCongress. The Control Law will end the ex-ante control by the Auditor-General (ContraloriaGeneral del Estado-CGE) and will eliminate the functional duplication of the Ministry ofEconomy and Finance and the CGE on the issuance of accounting standards. The law makes eachentity responsible for its internal control and places accounting standard setting under the joint

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jurisdiction of the Ministry of Economy and Finance and the CGE. The Financial ManagementLaw, on the other hand, will apply the principle of centralized standard setting and decentralizedoperations, enabling the various agencies to assume direct responsibility for their own institutionalfinancial management.

The Government views modemization of public financial management as crucial to aligningexpenditure more closely with policy priorities. In particular, this would be to manage expenditurewithin social and poverty reduction programs, something which is reflected in the StructuralAdjustment Loan. This loan supports (a) improvement of the institutional framework forexpenditure management, (b) decentralization of the budget function, and (c) improvement ofexpenditure control - specifically advancing the implementation of the recently developedIntegrated Financial Management System (Sistema Integrado de Gestion Financiera-SIGEF).

The Bank has been deeply involved in reform in Ecuador since the early 1990's and, with theMOSTA project Loan 3822-EC, was the only external financier of the principle initiative in statemodernization. This operation closed in March 2001 with the official transfer of the IntegratedFinancial Management System (SIGEF) by the project, which was managed under CONAM, tothe Ministry of Economy and Finance. Other MOSTA achievements in the area of financialmanagement include the draft laws on Control and Financial Management, the successfulimplementation of a debt management system (SIGADE), the building of budgets around inputfrom the spending agencies under MEF guidelines, and the creation of a personnel data base forthe civil service. The Structural Adjustment Loan approved by the Bank in May 2000 isconditional, implying the continuation of the modernization of public sector financial management,and specifically the implementation of the new legal framework, extension of the SIGEF and theabsorption of the SIGEF into the MEF. SIGEF is mandatory for the whole of the non-financialgeneral government sector; SIGEF management tools have been installed and are being used in22 central government entities: the central units of all Ministries, the Presidency, Vice Presidency,the Office of the Auditor General, the Electoral Tribunal and in 62 Provincial Offices of the lineministries. The Ministry of Economy and Finance has established an office to coordinate thefinancial management system in the public sector, and the transfer of the SIGEF management tothe MEF is complete.

The proposed operation supports the Government's program to modernize public sector financialmanagement. Specifically, it would (i) consolidate reforms in financial management and control,(ii) install and fully implement an integrated financial management system, and (iii) develop andstrengthen the CGE's audit capacity. SIGEF is now used at 3 levels in the Central Government:(i) SIGEF Institutional - in most spending agencies to control budget execution, perform treasuryledger accounting, and for cash management, ii) SIGEF Global- in the MEF Sub-Secretary ofBudgets to track approved budgets and changes to these, and iii) SIGEF Treasury - in the MEFSub-Secretary of Treasury for the preparation of Treasury statements (sources and application offunds) and to control monthly cash programming. However, while SIGEF is working in eachinstance, it has not reached its coverage potential in terms of percentage of budget processedwithin it, or within the applications of administrative processes that can and should be integrated.Furthermore, key processes in SIGEF Global have not been completed (e.g. consolidation ofbudgets or execution by sector, recording of execution against approved budgets in SIGEF

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Global), since these were planned for the last half-year of the MOSTA but not completed becausestaff members were reassigned to support budget development in SIGEF.

3. Sector issues to be addressed by the project and strategic choices:

The project will help Ecuador address the weak administrative capacity of the public sector andimprove governance at both national and sub-national levels. Country performance in these areas,which are considered high priorities by both the Government and the Bank, has been poor.

SIGEF will provide the timely, reliable and relevant financial information, which is anindispensable element of strong administrative capacity. The paucity of information for decisionmaking is acutely felt in line ministries, as well as in the area of control. Here, efforts aredissipated in looking at the different parts of the public sector, since no reliable, comprehensiveinformation allows for risk evaluation or control review planning for the system as a whole.

SIGEF, through ex-post analysis performed by the MEF Sector Analyst of the SIGEFINSTITUTIONAL reports, will provide the means to verify that the use of funds by individualadministrative units is in line with authorized Budget uses and the cash programs approved by theTreasury. SIGEF will also provide the means to record and report any non-treasury revenues andtheir uses at spending agency level.

It is recognized that good governance is essential to development; accountability (legal, political,and financial) as a key element of good governance compels a state to focus on results and reporton its performance. Corruption is a symptom of poor governance, and Ecuador recognizes theproblem of corruption in the public sector and has given high priority to combating corruption.Accountability, which combats corruption, is only possible with transparency in the financialoperations of the government. The project contributes to transparency by developing financialcontrol and reporting capacity, as well as by contributing to the capacity for independentverification of the integrity of the government reports by the Supreme Audit Institution(Contraloria).

While a tool for effective financial management was developed within the framework of MOSTA(SIGEF), its implementation and effective application in the targeted-, and indeed minimum-,scope public sector entities is yet to be carried-out. SIGEF 's array of applications and itscoverage of final external transactions are yet to be completed and processed. Its edits must beextended down through the 22 central administrative entities where it is now operating, and thecapacity to consolidate infornation within sectors, as well as for the entire central administration,must be fully completed and applied. In its current state, Ecuador's public sector does not furnishstakeholders with the transparency of their operations (a requirement in the process ofaccountability). Of equal relevance to two of the expected outcomes of effective public sectorexpenditure management (assigning resources to strategic goals and achieving efficiency,economy and effectiveness) is the paucity of financial information available to line ministries.Lastly, the feeble state of financial management at the sub-national government level, for decisionmaking and for reporting of fund use, undermines both the reporting on the general governmentsector and the capacity of these entities to absorb the functions which may be marked fordecentralization. The Draft Report-Decentralization Reform Agenda in Ecuador (PREM World

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Bank, Fernando Rojas Task Manager, May 2001) presents the LAC lessons on decentralization,which show that decentralization can only come about after certain minimum requirements havebeen met; these minimum requirements having mainly to do with transparent financialmanagement. Minimum accounting, budgeting, reporting and control standards are necessarybefore the central government can change the role of direct service provider for planning,regulation, supervision and evaluation.

In addressing these concerns, the proposed operation chose to direct itself towards the need ofcomprehensive management information by completing and leveraging the current system. Thus,it would achieve its impact goals within the first year and then move on to the adoption of moresophisticated tools and ICT environments.

In what particularly concerns transparency in the public sector, by applying the IFMS approach toas much of the general government sector as is practical, the operation will support thepreparation of timely, comprehensive and reliable financial reports and, by capacity building in theContraloria, independent verification will be provided on the government's reports. Formanagement informnation, the implementation of the complete suite of SIGEF applications willensure that all of an entity's information is processed and available in real time. The sub-nationalgovernments will have an instrument that ensures their compliance with the legislativerequirements on financial administration reporting, provides them with the necessary operatinginformation and permits the MEF to compile comprehensive general government sector reportsand establish the financial position of the overall public sector.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

Indicative Bank- % ofComponent Sector Costs % of financing Bank-

. (US$M) Total (US$M) financingConsolidation of SIGEF 3.19 16.9 2.55 18.4Expansion of Coverage of SIGEF 6.58 34.9 5.02 36.2Upgrade SIGEF's Technological Base 4.53 24.0 3.23 23.3Develop Audit Capacity 1.03 5.5 0.82 5.9Establish Organizational and 0.42 2.2 0.34 2.5Functional SupportAdministration and Evaluation 2.95 15.7 1.76 12.7

Total Project Costs 18.70 99.3 13.72 99.0

Front-end fee 0.14 0.7 0.14 1.0Total Financing Required 18.84 100.0 13.86 100.0

The reliability of SIGEF Institutional can be inferred from its performance in the 84 administrativeunits where it has been running for the whole of fiscal year 2001, without any performanceproblems. The Bank's evaluation of the products in the last supervision mission by the MOSTA

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SIGEF component corroborates this conclusion. Similarly, SIGEF has shown itself effectivewithin the Treasury by aiding MEF to control expenditures.

Given the advances in the acceptance of the integrated treasury (IFMS) system tool - SIGEF - thetraining in the MEF and spending agencies, plus the proven reliability and effectiveness of thesystem, five thrusts would be made under the proposed operation. These would be to consolidatethe advances made to date, extend the SIGEF to more entities, improve the SIGEF technologybase, develop capacity in the CGE for auditing the comprehensive financial statements of thegeneral government sector, and to ensure the requisite legal, organizational and functional supportfor the integrated Treasury (IFMS) approach. While Bank financing is estimated at 75%, it shouldbe noted that, of the on-going expenditures for consultant costs - development, maintenance andsupport - the Bank's share declines over the life of the project (to 60% in year 3).

Implementation Targets For Components 1 and 2

2001 2002 2003 2004Central AdministrationMinisterial Head Quarters 22Provincial Branch Offices 62 49 34

Affiated Entities 3 4Autonomous Entities 4 2Sectional Governments 25% 25% 12%

An organizational map of the Central Government's line ministries with affiliated andautonomous entities with an indication of the status of SIGEF implementation by the end of 2002is in the Project files.

Component 1 - Consolidation of SIGEF I (US$ M 3.19)

Foremost in outputs is the culmination of the SIGEF IFMS tool, which is already running its coresubsystems in the central offices of all the ministries. However, it provides neither the means foreffective consolidation of incurred budget expenditure and the financial position for the centralauthorities of any sector, nor does it yet provide the spending ministries with the full complementof its ancillary systems (the management information module is not parameterized in mostagencies and the inventory module has not been implemented).

This component is comprised of the following sub-components:

i) Completion of the programming, testing and implementation of SIGEF GLOBAL.

Given the mandate to provide operational decentralization, SIGEF recognizes the autonomyof each Administrative Unit and supports this with separate budget and accounting records.However, these must be consolidated by Institution and Sector, as well as for the centralgovernment administration and, eventually, for the general government sector. SIGEF GLOBAL

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will provide the means for consolidation. The component relates to all activities in developingconsolidation applications and supporting users in the submission of these reports. SIGEF outputfiles for consolidation may be set to report at different levels of budget aggregation: from themost detailed (i.e. item and expense classification within activity) to totals by group within eachactivity. The approach set by MEF for the 2001 consolidation was to aggregate by group, so asnot to appear to encroach upon the line ministries' operational independence. The outputs for2002 will be modified to meet the consolidation reporting demands, which may includeconsolidation by item.

ii) Completion of the implementation support in Central Ministries for all modules.

Key SIGEF modules are yet to be implemented; user support in use of core subsystemsmust intensify to achieve the acceptance, sustained use and full benefit of the tool. Thesub-component will comprise user support, training in the effective use of core and ancillarysubsystems, and on-going support to central administration installations.

iii) The provincial offices of the line ministries

These transactions represent a significant portion of social sector spending, although much ofit is booked against budget on the strength of transfer requests or on the strength ofdocumentation rendered long after the fact. These units are given the same administrative capacityas the central ministries and, as such, transactions originating at the provincial level will beprocessed with all the edits offered by SIGEF and those available for consolidation at any level.

Component 2 - Expansion of Coverage: SIGEF Institutional (US$ M 6.58)

SIGEF is in use at the central offices of all the line ministries and must now cascade down throughthe public sector to the following levels:

i) Autonomous bodies and entities affiliated with line ministries (IESS, Public Universities). Theserepresent the significant uses of public funds and are the providers of key services that can beexecuted efficiently only where effective financial management is in place. Reengineering ofprocesses, followed by implementation of the systems, are the sub-components activities.

ii) The objective of this sub-component is to support financial management within the sectionalgovernments. At the individual level, this would be through the attainment of the basic outcomesof public expenditure management, with respect to the performance of the municipality. At thejoint level, this would be through contributing to these outcomes in the general government sectorby providing the central authorities, and all interested parties, with timely, reliable reports on theuse of public sector resources and the financial position of the sub-national sector.

A three pronged approach for the improvement of financial management within the municipalitieshas evolved from the analysis of the existing state of compliance with financial administrationlegislation, the strengths of the municipalities and the objectives set out under this component.

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The broad range of size and capacity in the 215 municipalities in Ecuador is evident from thefollowing table, which classifies the municipalities by the amount of budget resources transferredfrom the central administration during the period 1 January - 31 August 2001. It can be seen thatthe 51 largest municipalities represent 66% of the use of resources, the next 63 amounting to20%, while the last 101 municipalities represent only 14%.

Municipalities

Classification by No of Amount of % of TotalPopulation Municipalities Expenditures

01/01 to 08/31>500,000 2 $ 59,000,000 24

100,000 < 500,000 18 $ 61,000,000 2550,000 < 100,000 31 $ 43,000,000 1720,000 -<50,000 63 $ 29,000,000 20

Sub Total 114 $ 192,000,000 86< 20,000 101 $ 56,000,000 14

Total 215 $ 246,000,000 100

Some large municipalities have developed ad hoc IFMS, Quito uses SIGEF, while 72 are runningPROGFIM which was developed by the Association of Municipalities (AME), in collaborationwith the Contraloria. The package is comprised of modules for administration, accounting,budgeting, and banks. Although none of the versions fully incorporates the provisions of the latestnorms on financial reporting, (Ministry of Economy and Finance Ministerial Resolution 182), allversions apply the current budget categories. The project will support the implementation ofSIGEF in the large municipalities, develope a limited version for smaller ones, and supportconsolidation of reporting from all systems operating in municipalities. Under this approach thesub-component is made up of 5 activities:

1. To organize and process, through the use of SIGEF Global, the aggregation of thesub-national sector. This is to be for use by AME, CONCOPE and others who are analyzing theperformance and financial position of this sector as well as for consolidation by MEF in order todetermine the general government sector budget and financial situation.

2. Implementation of SIGEF in 35 of the 51 largest municipalities (66% of municipalexpenditures) that consider it advantageous to convert from their current system to SIGEF. Thetraining of users, the installation and on-going support of the application, as well as thecontribution of the minimum requisite equipment to operate SIGEF will be provided by theproject.

3. To develope a SIGEF Institutional version for implementation in smaller municipalities.

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4. Tp develope procedures for the conversion of outputs to permit their aggregation andsubsequent consolidation by SIGEF GLOBAL.

5. To support municipalities, through the regional offices of AME to comply with internaland external financial management needs. In each regional office, the AME-fmanced informationtechnology specialist will support the municipalities in the maintenance of the systems base for theapplication. A public sector financial management specialist will support the municipalitiesthrough training in public sector legislation. This specialist will also work with the municipalitiesto develop procedures for timely monitoring and follow-up compliance with mandatory reporting.

The instruments to be applied in this component are the inter-institutional agreements for theinstallation and use of SIGEF and the inter-institutional agreement with AME. The outputs andperformance indicators applicable to the sub-component are the percentages of municipalresources reported to MEF on time and which are included in the periodic aggregation andconsolidation report.

Component 3 - Upgrade of SIGEF's Technological Base (US $ M 4.53)

The output sought in this component is to keep SIGEF current and viable, taking advantage of therapid technological changes which the IT and the telecommunications industries are undergoing.This will be achieved through the establishment of a public data network and by convertingselected SIGEF services to Web-based technology.

Public Data Network: The maintenance and support of the distributed databases is greatlyfacilitated and made economical through a real-time connection with the SIGEF technical supportunit. Updates of new versions and user support in informatics demand constant communicationbetween the Administrative Units and the SIGEF support unit. These will be greatly enhanced byreal-time communications, as will the periodic transmission of results and daily requests for fundsbetween the units and the Treasury, and information on the movement in the T accounts of theexecuting units. This capacity will also permit the centralization of processing: either in a clientserver arrangement for the line ministries in Quito, or in 3 tiers - as the appropriate versions areavailable. Hence, equipment investment and the quality and timeliness of the financial informationwould be optimized. The provision of telecommunications capacity in MEF, and the connection toa MEF Web site via Internet, will facilitate access to public sector financial information by thewidest possible audience.

This component will finance the study of alternatives to real-time communications with theentities in Quito, the main provincial centers and, finally, outlying areas. This component will alsofinance the fees from private sector telecommunications service providers and the relatedequipment for the connection that are not implied in the providers conditions.

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Conversion to Web based technology: The client-server architecture of SIGEF does not facilitateits extension to all the entities with budget autonomy, of which there are approximately 3000. Ifthe autonomy of these units is to be supported and their administration rendered efficient andintegrated with other similar units, then their transactions must be processed by a reliable systemthat ensures the integrity of data and the reliability of its results, which may be made available todesignated users in real time. This component will develop a Web-based SIGEF to run centrally inMEF, or in some host provider, and will permit use by any unit with access to the Public DataNetwork. The PPF studied this component to evaluate alternative approaches to obtaining theWeb version: through the programming of applications specifically for the Web, conversion toolsapplied to the existing programs or masks to simulate Web technology. The evaluation concludedthat the tools (languages) for rewriting the applications are evolving; the standard is JAVA, but itis being challenged by C#. Knowing which will prevail and choosing this will be important inensuring future support. Similarly, there is limited experience with application development foradministrative systems in these languages and there is no expertise in the local market; conversiontools are simply not available. The evaluation saw no disadvantage in the operation efficiency ofthe system in the third alternative, i.e. creating gateways to the current version of the applicationsthrough the use of Browsers. The evaluation concluded that risks would be minimized by thisapproach, which is used by leading commercial Application Service Providers such as CORIO andACCPAC-International, and that the project should use known gateway applications such asFORMS SERVER or METAFRAME.

Timing for completion of the two components is intertwined with and dependent on upgrades oftelecommunication capacity by the communications service providers. The conversion to aWeb-based version of SIGEF will begin with the incorporation of accounting entities not currentlyrunning SIGEF. The version will be available by July 2003 and this will be preceded by thedevelopment of a public data network. The use of the public data network will coincide with theinstallation of the necessary equipment and the hiring of the external communications services.The Quito entities of the Central Government will have access to the public data network by theend of 2002, as will the Provincial Offices which are currently running SIGEF. The balance of thecentral government will be able to come aboard as they install the current client server SIGEF andcommunication services expand to the respective accounting entity. Three hundred and thirty-five(335) points, comprising 85% of the central government administration expenditures, will beconnected by the end of 2002. All accounting entities with access to the Public Data Network willalso have access to the network and be able to process through SIGEF once the Web version isavailable (July 20003).

The development of the public data network and the installation in MEF of hardware andsoftware to support the Web version will be used to operate two Web sites ( SIGEF and MEF)which will be constructed and operated by the Project Unit. The SIGEF Web site will addressboth users and targeted users of the SIGEF system. The site will afford users with a link to a database of operating and legal regulations on public sector finances, a link to upload data to MEF,and access to limited updates. Non-user entities will access the data base of regulation andpromotional material on SIGEF. The MEF Web site will provide links to SIGEF but, more,importantly, will afford the public access to information on public sector budget and finances.

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Component 4 - Building External Financial Audit Capacity (US$ M 1.03)

The introduction of SIGEF into the Central Administration demands firstly that CGE be able toaudit through the SIGEF, i.e. to determine the integrity of data and the reliability of outputsprocessed in the SIGEF IT environment. Secondly, it offers an opportunity for the CGE toaccomplish its control objectives more effectively and efficiently by employing computer-assistedaudit techniques which are applied to the whole of Central Administration, while considering thisgroup of financial transactions as one part of the annual external financial audit. This componentis comprised of equipment support for the CGE, training in the operation of SIGEF and aco-sourcing arrangement with a private audit firm to train them, through practice, in the use ofcomputer-assisted audit techniques.

Component 5 - Ensuring Organizational and Functional Support for the IFMS Approach(US$ M .42)

Public sector financial management reform involves changes in financial administration legislation,the organization of financial functions and how these are carried-out. The IFMS concept isapplied in the context of the overall framework for government fiscal management, which is madeup of macroeconomic forecasting and management, budget preparation and tax administration.The IFMS must be designed and applied in a manner that facilitates the interaction of these areas.Similarly, there are ancillary systems (those that provide only a portion of the administration of atransaction) and linked systems (those that administer all parts of a transactions, but areindependent of SIGEF) that need to be coordinated with the development of the IFMS. Theregulatory framework must provide the control structure, account classifications and reportingrequirements - all of which are affected by and affect the development and application of theIFMS. This framework has largely been developed, but must be put in place and fully understoodand applied. The component includes all of the support in process reengineering across the centraladministration, the review of distribution of duties and their decentralization, advice to theMinistry of Finance on IFMS, and the preparation of norms and regulations for emerging financialadministration legislation.

The project must provide the framework and voice for the IFMS approach to gain its widerunderstanding and application; the component will also comprise the organization ofdissemination of the SIGEF concept and training at the highest levels of all sectors, as well as fullydocumenting SIGEF developments in terms of conceptual and procedural manuals to support theprocesses implied in the SIGEF approach.

Component 6 - Project Administration and Evaluation (US$ M 2.95)

This component will support project management, monitoring, supervision and impact evaluationat the different levels of the system. It comprises both the PIU expenses for financial andprocurement management and processing, as well as the cost of providing the installations forproject personnel, in addition to project coordination and quality control. Of the total PIU costs,the financial and administrative management of the project is effectively and directly absorbed into

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the mainstream structure of the Ministry of Finance and Economy through the 100% financing ofthese functions.

2. Key policy and institutional reforms supported by the project:

Covered in part B.3.

3. Benefits and target population:

The project would benefit all Ecuadorians; the capacity of the public sector entities to control anddisclose their performance would specifically benefit all users of public services, taxpayers, electedofficials and stakeholders in general. The direct beneficiaries are the entities that will implementSIGEF and use its output to manage their affairs. In the national government these would be theCentral Administration, subordinate entities and autonomous entities, but not state enterprises.The local governments that implement SIGEF would benefit directly from the strengthening of thelocal capacity to manage finances and demonstrate their transparency and financial managementcapacity to expand resources under their responsibility. MEF would be better informed about thegeneral government sector in Ecuador as sub-national governments present more complete,accurate and reliable financial reports. Creditors of the state should benefit from theseimprovements over both the uses of funding and from improved information on the generalfinancial position of the public sector.

4. Institutional and implementation arrangements:

Implementation period - 3.0 years

Executing agencies. The Project Implementing Unit, which was created by Ministerial ResolutionNo 098 of April 5, 2001, reports to the Under Secretary of Finances in MEF and coordinates itswork with the Public Finance System Coordinating Unit. This Unit will carry out the project inaccordance with an operational manual which is satisfactory to IBRD. Key instruments for theexecution of the project would be: (i) annual operating plans to be used by both the PIU in theMEF, Contraloria and AME in their respective participation in the execution of the project, and(ii) institutional strengthening agreements that would bind all agencies and key municipalities tothe obtaining of agreed upon results with respect to the implementation of SIGEF. TheContraloria General del Estado (CGE) will carry out the execution of the Contraloria component,under the supervision of the Ministry of Economy and Finance and under terms and conditionswhich are to be approved by IBRD.

Project Coordination. Project coordination is the responsibility of the PIU located in the MEF,and will coordinate its activities with the Directors-General within the MEF (Budget, Accounting,Treasury and Public Credit) and with the Contralor, as regarding Component 4. The projectwould use an operational manual that covers all aspects of project implementation, including butnot limited to organizational and management structures, supervision and evaluation mechanisms.While CGE will execute the Contraloria component and many departments in the generalgovernment sector will participate in implementation, all administration of the project will becarried out directly by the PIU in the MEF.

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Procurement. The procurement of works, goods and consultant services would be carried out inaccordance with IBRD's Guidelines for Procurement (dated January 1995, revised January andAugust, 1996, September 1997 and January, 1999), and with the Guidelines for Selection andEmployment of Consultants (January 1997, revised September 1997 and January 1999), as well aswith the provisions stipulated in the Credit Agreement. These procedures would be detailed inTable A of Annex 6 of the PAD. The supervision of procurement and hiring processes would bethe responsibility of the Project Unit in the Ministry of Economy and Finance. The specificprocedures would be detailed in the Operational Manual and would include the use of StandardBidding Documents, previously approved by IBRD for each procurement method to be used.

Accounting and Financial Reports. The administrative arrangements and organizationalstructure of the administrative area for this operation within the PIU in MEF are identical to thosesuccessfully utilized in the PIU within CONAM for the implementation of MOSTA Credit3822-EC. The arranagements comprise an organizational structure of an Administrative Managerwho will oversee accounting and treasury operations, 2 staff, and procurement, with 2 staffmembers. For the purposes of carrying out the project, a Special Account, in US Dollars, wouldbe opened and maintained at the Central Bank of Ecuador on terms and conditions satisfactory toIBRD. Deposits into and replenishments of the special account, up to the authorized allocationsset out in the Disbursement Letter, would be made on the basis of Applications for Withdrawals(Form 1903) accompanied by supporting and other documentation as specified in theDisbursement Handbook. Additionally, the Project Unit would produce quarterly FinancialMonitoring Reports. The Financial Management Specialist for Ecuador conducted a review ofthe accounting, controls over disbursements and resources, planning and budgeting, as well as thelevel of administrative staff in the PIU; the report appears in Annex 6.

Audit Arrangements. An independent external auditing firm, satisfactory to IBRD, would behired to perform annual audits of the project. All the transactions are carried out by the PIU in theMEF, where all records would be maintained and documentary support would be kept. IBRDGuidelines would be used by the external auditors. Audit reports would be presented to IBRD nolater than six months after the closing date of the previous fiscal year. The MOSTA project, whichcontained the predecessor component, complied fully with Bank audit requirements.

Monitoring and Evaluation Arrangements. Monitoring of project execution would beundertaken by the PIU. The Bank would participate in monitoring project implementation throughperiodic supervision missions. The PIU would provide the Bank with an annual work plan no laterthan October 31st of the preceding year, starting in 2002. The PIU would provide the Bank withthe 2002 work plan as a condition of effectiveness. Semi-annual reviews of the project would becarried out, the first not later than February 28 of each year, and the second not later than August31 st, starting in 2003. A mid-term review would be conducted by August 2003 to assess progresstowards meeting agreed targets and to identify additional technical support as needed.Semi-annual progress reports would be presented to the bank no later than 30 days after theconclusion of each calendar semester, starting in 2002.

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D. Project Rationale

1. Project alternatives considered and reasons for rejection:

i) To develop a new system under the SIMAFAL conceptual approach which has been applied byBolivia, Guatemala and other countries in the region. Recent practice in IFMSs has supported thecentralization of all accounting and treasury operations into units of the Ministry of Finance. Theyare given automated controls over budget and effectively change the role of the line ministryfinancial personnel from recording and effecting transactions to that of analysis and interpretationof the reports generated by the centralized system. SIGEF runs physically in the line ministries andpublic sector entities. It was designed to delegate responsibilities over the use of their budgetedresources to the executing agencies that are accountable for their results. This concentration couldadd efficiency in producing consolidated information, simplify cash concentration and relieve theentities of the accounting and treasury responsibilities; however, it would raise objections from thevery community SIGEF intends to benefit: the public sector entities. Similarly, an analysis of howSIGEF contributes to the three outcomes of public sector management indicates that its approach,combined with the use of the current Treasury operations, does support all three outcomes:macro-economic stability, aligning budget resources with government's strategic priorities andachieving economy, efficiency and effectiveness in the use of public funds. As such, any delay indeploying this tool, by investing in a fundamental redesigning, would add little to the outcomesand obstruct the attainment of reliable and timely reporting on public sector financial operations.In any case, the conversion to a Web-based version will provide the means to centralizeprocessing.

ii) To incorporate procurement into the design. The Government plans for procurement reform,which were elaborated in conjunction with the Bank and are described in the CountryProcurement Assessment Report (CPAR-2000), include, among other actions: i. the review,aiming at consolidating, the existing laws and regulations; ii. the creation of an agency whoseterms reference would comprise policy formulation, updating of regulations, providing for andcoordinate the implementation of a system for electronic procurement, records administration,staff training programs and accreditation and, possibly, including a dispute resolution mechanismfor procurement; iii. the formulation and gradual implementation of government electronicprocurement. Since the CPAR there have been initiatives in consolidating procurement laws(codification of the public procurement law, Feb 2001) as well as the discussion of related issuesin the civil society (USAID sponsored studies and discussions carried out by the CivicCommission for the Control of Corruption, report of Dec. 2001). However, a more vigorouspursuit of procurement reform suffered from the absence of an agency of the Government with aclear mandate to promote, coordinate and implement procurement reforms. To fill this gap theGovernment, with the assistance of the InterAmerican Development Bank, is carrying out studiesfor the creation of a Provisional Secretariat under the General Secretariat of the Presidency, whichwill be in charge of procurement reform. It is expected that these studies will be completed inMay 2002 and that the Provisional Secretariat will be created after that. In the preparation of thePublic Sector Financial Management Project the Bank proposed to the General Secretariat acomponent of $ 500,000 to provide resources for technical assistance for the creation and initialfunctioning of the Provisional Secretariat as well as for the hiring of consultants to assist in the

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review of procurement legislation in order to propose a detailed plan of action for theconsolidation and modernization of legislation, devising a detailed plan for the implementation ofelectronic procurement which would include the passing of enabling legislation to allow for theGovernment to start the implementation of electronic procurement, and the implementation of thefirst stages of this plan (aimed at having as a minimum a web page for the advertising of theGovernment procurement). The General Secretariat concluded, however, that this componentoverlapped with the IDB undertaking and declined to include the component.

iii) Limit the application of SIGEF to national government entities. While there are advantages todeveloping a new customized system for municipalities the costs and delay implied could beavoided by supporting the implementation of SIGEF in large municipalities and installed amodified version in the smaller municipalities. There are, however, enormous benefits in providingthe sub-national governments with a standard system whose reliability, compliance and supportare guaranteed by the agency responsible for public sector financial management (the Ministry ofFinance). Furthermore, SIGEF, through experience with its application in the municipality ofQuito, has been proven to be useful and applicable to municipalities. The project will support theinstallation of SIGEF in all large municipalities, representing 67% of total municipal expendituresand a simpler version for smaller municipalities.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).Bank projects - MOSTA (ICR in progress). In 1994 the Bank approvedan operation (MOSTA project Loan No 3822) which supported the GOE's modernizationstrategy. One pillar of this was the strengthening of controls over public finances whiledecentralizing certain key financial management responsibilities. The accomplishments of thePublic Financial Management and Control component that are pertinent to budgeting, accountingand treasury as presented in the draft ICR are as follows:

a) Budget and Treasury system. Although the mid-term budget process has not yet beenapplied, the other objectives of this sub-component have been largely achieved. This means thatan integrated structure is now being employed, a system of budget execution has been developedand is now operating and being applied through the cash management and disbursement programwhich is concentrated in the National Treasury. The budget control tool (a module of SIGEF I)has likewise been installed and is functioning in the central ministries, covering 84% of CentralAdministration expenditures.

b) Accounting. The Ministry of Finance is now responsible for setting financial administrationregulations. Within the central offices of the Ministries the project has developed and deployed anintegrated accounting system, with Treasury and Budget controls based on a uniform plan ofaccounts.

The conclusion of the Integrated Financial Management System (SIGEF) sub-component of theMOSTA project, as reflected in the review by the Bank IT consultant Vicente Lopez, may besummarized as follows:

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SIGEF Institutional has been installed and is operating in 82 Administrative Units, serving 650users; the SIGEF Treasury and SIGEF GLOBAL (budgeting module) are also operating. Thesystem has user documentation and is supported by a centralized HELP unit. SIGEF's approachhas now been applied to 84% of central administration's public expenditure; it can and should beapplied to the entire public sector.

One vital product of SIGEF GLOBAL is that the consolidation of budget execution andaccounting. This, however, was not completed in MOSTA, since staffing planned for this wasreassigned to assist with the development of the 2001 Pro Forma. The related modules are to becompleted under the PPF of the proposed operation and supported throughout the project.

In the summary (PDO and Implementation Progress) and other ratings, the project was rated assatisfactory.

Bank Projects- Ecuador SAL

This operation supports structural reforms in three areas: public sector, financial sector, and socialsector. The public sector reforms include the modernization of financial management. Theproposed PSFM TA loan was developed under the principles supported in the SAL; it willsupport decentralization of financial management, extend SIGEF throughout the generalgovernment sector, ensure its operational efficiency and enhance the technological base forSIGEF. The SAL's conditions include the passage of the financial administration reform lawswhich support the implementation of SIGEF and strengthen MEF's overseeing of public sectorfinancial management.

Other Development Agencies (IDB-planned)

IDB is preparing two operations to support Public Sector Financial Management: the InstitutionalStrengthening of the Ministry of Finance and an operation to support decentralization. The MEFInstitutional Strengthening objectives support the consolidation of the fiscal sector in Ecuadorthrough improvements in the Public Investment System which complement the strengths in theFinancial Management System to be enhanced by the proposed operation. The development of theconcept of SIGEF II considered the scope of the Public Investment component of the MEFInstitutional Strengthening so that no overlap would exist in the design of the projects. TheDecentralization Operation components have not yet been decided but they will support thedevelopment of institutional capacity in sub-national governments, extending perhaps to financialmanagement capacity. Co-ordination between the two operations in sub-national governmentswill be monitored by MEF.

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r | | Latest SupervisionSector Issue Project (PSR) Ratings

l ____________ __________ (Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)Public Sector Management Adjustment Moderization of the State TA S S

ProjectOther development agenciesIP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

A. International Lessons

The project design reflects the lessons learned from experiences in developing and implementingIntegrated Financial Management Systems in the region. It also seeks to keep its ends in focuswhile adapting to local demands, assigning high priority to early outputs, which impact ontransparency in the Ecuadorian Public Sector.

The key lessons in the region (Integrated Financial Management in Latin America as of 1995,Implementing Integrated Financial Management Systems as Institutional Reform and The Caseof Guatemala 's SIAF) and how they have been considered may be summarized as follows:

1) The implementation of an IFMS must result in more efficient, effective and economicgovernment financial management. Results count; benefits should be shown early and publicized.

The proposed operation is driven by the goals of presenting line management and centralauthorities with the tools for infonned decision making which would contribute to efficiency,effectiveness and economy. The operation's first priority is to replace the missing links in the firstIFMS operation systems, so that concrete a comprehensive budget and financial statements will beavailable in the first year.

2) The active support and leadership of top government officials and politicians is crucial tocarrying out reforms and providing the appropriate legal framework.

The Minister of Economy and Finance has assigned the highest priority to this undertaking. Hehas also provided leadership within the Government, in addition to necessary logistical support,coordination and human resources. The supporting legal framework will be provided bylegislation which is now ready for Congress. The implementation of the Project's products issupported by conditions of the SAL.

3) Technical leadership at various levels, effective project management and coordination must bekept in place. Building an ever-expanding range of MEF-linked technical personnel, with therequisite technical skills to handle change and deal with the new paradigm, is also required.

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The Project Unit has been established and is adequately staffed. The MEF has a coordinating unit,and the line ministries have over 600 staff working with the products and advancingimplementation. The operation will consider an International Consultant in the conceptual area tosupport the attainment of goals.

4) Prior to implementation, a sector-wide strategy that is definite, integrated, interrelated andinteractive needs to be developed.

The Government's strategy for modernization of the public sector contains the elements offinancial management in the general government sector and the legal framework for financialadministration. The proposed operation supports the implementation of the necessary tools tosupport this strategy.

B. Lessons from the SIGEF component of MOSTA

Information Technology lessons from the first operation arose in the following areas:

Client Server. The current version of the IFMS was developed in Client Server, which wasappropriate for major spending centers in the general government sector and was well supportedby the tools available at the time. The proposed operation will develop a version to run onWeb-based technologies, which will permit real-time processing of consolidated information andextend coverage to virtually all administrative units.

System Documentation. The quality control review underway in the PPF has highlighted theneed to improve system and user documentation. Quality assurance procedures are beingconsidered in the proposed operation in order to address this situation.

Outsourcing of development. No development was outsourced during the first operation. Theproposed operation plans to outsource the development of major applications to private sectorsuppliers with specific experience, where available.

In the conceptual area, the following was considered in the design of SIGEF 11:

Conceptual leadership. The importance of having world class expertise in the conceptual area ofthe IFMS project will be addressed by including an international consultant to support theconsolidation of the IFMS approach.

Consolidation of information. The critical importance of providing consolidated information isaddressed first, in order of progress of the new operation. Consideration of the needs of all users,including the preparation of the IMF reports on Government Financial Statistics and sectorreports, will also be addressed in the first year of the project.

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4. Indications of borrower commitment and ownership:

The Government's priorities expressed in the update to the CAS, and those reflected in the SAL,support their commitment to this specific area. The MEF has created a unit to coordinate with thePIU. Staff in MEF's mainstream departments have also been designated to coordinate andimplement SIGEF. In the line ministries and entities, over 600 staff are now working with SIGEF.

5. Value added of Bank support in this project:

The Bank has acquired knowledge on issues affecting public sector reform and can draw fromworldwide experience and its comparative advantage in the areas of governance, statemodernization, rule of law, decentralization, and integrated financial management systems wherethe Bank has played a catalytic role as a disseminator of information. In the region, the Bank hasled initiatives in Integrated Financial Management Systems in Argentina, Bolivia and Guatemala.Bank staff are experienced in researching and analyzing approaches to the design andimplementation of Integrated Financial Management Systems, as well as being expert in assessingthe effectiveness of financial management in the public sector.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR= % (see Annex 4)O Cost effectiveness* Other (specify)As a technical assistance project, it does not lend itself to standard financial analysis. However,the operation is expected to have a positive fiscal impact. The efficiency gains witnessed in otherintegrated financial management projects should arise in the areas of effectiveness of managementand in the by-products of greater transparency.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)The phasing out of Bank support in the on-going operations provided by the project has beenaddressed by encouraging the Government to absorb 100% of the administrative costs implied insupporting operations. These costs would be liberated upon completion of the project in order toabsorb the on-going telecommunications service costs and periodic equipment upgrades andtechnical support. It is foreseen that line ministries would upkeep their capacity, given theconcrete and pertinent support they will be deriving from the project outputs.

Fiscal Impact:

See Section E 1 - Economic.

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3. Technical:

The proposed operation relies on proven technology and presently has a successful team in place.The technology for the development components is made up of the ORACLE tools used in thedevelopment of SIGEF INSTITUTIONAL. These have now been proven in operations over 2001and in SIGEF GLOBAL with the preparation of the 2002 Pro Forma. The Web conversion willemploy the approach used by Applications Service Providers with proven Gateway tools. Theteam of conceptual and informatics consultants proposed for the project has participated in theMOSTA components of the Public Financial Management and Control Program, of which theBudget System, Government Accounting and Treasury products were all considered highlysatisfactory in the draft ICR. The Project will consider all the experience of other IFMS projectsin the region where the emerging tools are being applied, notably Bolivia and, more recently,Nicaragua.

4. Institutional:

4.1 Executing agencies:

The Ministry of Economy and Finance will provide the administration, supervision, and guidancefor all components of the project. It will carry out the execution of the consolidation andexpansion of coverage, and the conversion to real-time processing components in cooperationwith the line ministries and sub-national governments. In the latter case, it will be supported bythe AME and CONCOPE. The audit component will be executed under the CGR, supported bythe PIU in MEF.

4.2 Project management:

A Project Implementing Unit that reports to the Vice Minister of Finance will provide both theoverall co-ordination of all project components and will interface with CGR and beneficiaries,providing routine management in the execution of all components, from the CGR through to theaudit technical coordinator in the PIU.

4.3 Procurement issues:

An assessment of the procurement capacity of the Project Implementing Unit was carried out by aBank's Procurement Specialist. Conclusions of this assessment are shown in Annex 6.

4.4 Financial management issues:

An assessment of the financial management capacity for the Project Implementing Unit wascarried out by a Bank's Financial Management Specialist. Conclusions of this assessment areshown in Annex 6.

5. Environmental: Environmental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

N/A

5.2 What are the main features of the EMP and are they adequate?N/A

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5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

N/A5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

N/A

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

N/A

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

Accountable and transparent governance is directly targeted by the project through improvedfinancial reporting at all levels of the general government sector. Similarly, improved managementinformation in the spending ministries will impact on the efficiency of the delivery of services.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The project creates collaboration between public sector entities, in that it is the Ministry ofFinance's endorsement and continuation of a CONAM initiative: the MOSTA project. The rectororganizations for financial management in the public sector, the Ministry of Economy andFinance, and the Contraloria General del Estado participated in the design and implementation ofthe project. The CGE has communicated its commitment to operate through SIGEF and willencourage its application and develop their capacity to audit through SIGEF. The line ministriesof the central administration were the first beneficiaries of the SIGEF, developed under MOSTA,and will now take full advantage of the projects products. SIGEF has incorporated criticalfunctions, such as payroll, and will support the line ministries in fulfilling their legal duty to reporton their operations. The sub-national governments participated in the design of the proposedoperation through the discussions between MEF and AME. The individual sub-nationalgovernments will participate in its implementation.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

The project is a financial management systems project, therefore no collaboration withCivil Society is necessary.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The social objectives will be achieved through improved reporting, which drives bothaccountability (and thus, governance) and efficiency. The project's key indicators will monitorprogress towards improved reporting.

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6.5 How will the project monitor performance in terms of social development outcomes?

The specific targets for producing comprehensive general government sector reports and externalaudit opinions on comprehensive reports will serve as measurements of progress towards thesocial objectives of transparency. The percentage of general government sector expendituresprocessed through SIGEF will indicate progress towards efficiency and effectiveness of services.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes* NoCultural Property (OPN 11.03) 0 Yes * NoIndigenous Peoples (OD 4.20) 0 Yes 0 NoInvoluntary Resettlement (OP/BP 4.12) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes * NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

F. Sustainability and Risks

1. Sustainability:

The Ministry of Finance has put SIGEF into the mainstream through its use in the preparation ofthe fiscal year 2002 budget "pro forma" or estimate, its application in the Treasury as the meansto control cash resources and to report on Treasury position and movement, as well its installationin the line ministries. The sustainability of the project is reflected in the declining share of bankfunding for consultants over the life of the project. Nevertheless, the proposed operation faces thefollowing risks:

(1) Delays in or failure to pass financial administration legislation committed to the Ecuador SALand which supports the Ministry of Finance's authority over financial management within theentire public sector.

These provide uniformity in the accounting classifications, reporting routines and formats impliedin SIGEF. However, it has been noted that, while the definitive reform on the distribution ofauthority will emanate from the passage of pending financial administration legislation, the currentarrangements enacted through the Ecuadorian Economic Transformation Law provide theMinistry of Economy and Finance with unequivocal authority over the financial management of

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the non-financial public sector.

One should not, however, underestimate the importance of the passage of the Organic FinancialManagement Law and the Organic Control Law, which provide legislation dedicated to matters ofstate financial management operations, and on the control system to be applied through internaland external control functions. The project's risk is higher in the prevailing financial managementarrangements than it would be under the proposed legislation.

(2) Limited use of SIGEF. Effective application of SIGEF at the operating level of the CentralAdministration requires real-time processing for the various operating units, which in turndepends on the development of the telecommunications infrastructure. This development may notkeep pace with the project's timetable.

Recent advances in the supply of telecommunications services, however, is encouraging, theconstruction of infrastructure by the private sector and the entry of many service providersshould ensure the availability of telecommunication to the targeted sites within the deadlines set inthe project.

(3) Sub-national governments, as well as any of the public sector autonomous entities, may usetheir autonomy to resist the transparency implied in the application of SIGEF and, thus, limit ordivert its implementation by undermining its edits or its comprehensive application.

SIGEF's implementation is supported by current and proposed financial management legislation,although sanctions for non-compliance are lacking. On the other hand, the financial administrationlegislation supports the autonomy of the line ministries in addition to that of all public serviceagencies. The culture of independence from and animosity towards central treasury and budgetauthorities is being overcome through the results demonstrating the reliability and effectiveness ofSIGEF Institutional. Sanctions or coercion of any type would undermine the cooperativeapproach that has been responsible for the success in implementing SIGEF in all of the lineministries and the four autonomous agencies during 2001. Positive incentives include the technicalsupport for running the administrative systems of any entity using SIGEF, the timely and reliablecoordinating of treasury and budget operations through SIGEF and, once the public data networkis in place, economizing on hardware and processing costs.

(4) Conversion to Web-based technology means the use of new and developing tools, which arenot well supported in Ecuador and are new to the project team.In the evaluation of approaches,weight will be assigned to the practice followed by commercial application service providers inconverting successful applications to Web versions which avoid or minimize the rewriting of thesein languages for the Web.

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveFailure to pass pending financial M Development of a strong partnership betweenadministration legislation. Reformers in the Ecuadorian Government,

Bank and other stakeholdersLack of the Government continued interest M A permanent dialogue with the MEF to illustratein the application of IFMS approach in the successes of the IFMS approach in thethe financial management of the general region.government sector.New decentralization policies weaken M Ensure that the GOE and sub-nationalrather than reinforce the commitment to governments understand that access to Credit istransparency and efficiency in Financial predicated on an adequate financial control.Management of the sub-national Emphasize donor coordination.governments.Telecommunications infrastructure made N Intensive Bank supervision for timely reaction ifavailable through the private sector does conditions are not present and input from Banknot keep pace with project project in preparation on improvingimplementation. performance in the telecommunications sectorCGE does not assign the requisite priority M Extreme clarity with the Implementing Agencyin its overall duties to arrive at an opinion on the objective of the component and closeon the comprehensive financial supervision of progress.statements.From Components to OutputsHuman resources not available in a N Maintain dialogue to minimize the rotation oftimely manner, and high rotation of key Ministry personnel and maintain high technicalpersonnel in beneficiary entities. standards for staffing of financial positions in

the entities and emphasize the need to maintainthe team now in place under the PPF .

Inadequate local management in the M From the outset, emphasize the critical role thatentities that undertake to implement entity management teams have in implementingSIGEF or lack of support for SIGEF in and using SIGEF.these.Unavailability of firms to undertake M Intensive Bank supervision for timely reaction ifcontract. conditions are not present.CGE does not commit staff of appropriate N Intensive Bank supervision for timely reaction ifqualifications, adequate counterpart conditions are not present.funds.Unavailability of a firm with requisite N Intensive Bank supervision for timely reaction ifskills and availability in-situ. conditions are not present.

Overall Risk Rating M

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Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

G. Main Loan Conditions

1. Effectiveness Condition

Approval by the Bank of the final Operational Manual.Presentation of Annual Work Plan - 2002CGE Agreement and the AME Agreement shall been executed and delivered by the parties theretoBorrower shall have furnished evidence, satisfactory to the Bank, of the completion of theProcurement Strengthening Action Plan.

2. Other [classify according to covenant types used in the Legal Agreements.]

SIGEF shall have the Procurement Module, of the project administrative systemsoperational no later than December 2002* SIGEF shall maintain an organizational structure of the Project Management Unit, a basisfor its function, autonomy and staffing satisfactory to the Bank composed according to Annex 11.* SIGEF shall prepare and furnish to the Bank on a semi-annual basis a Progress Reportintegrating the results of the monitoring and evaluation activities, based on the progress achievedincluding a detailed list of the Project's indicators.* Not later than six months after the Closing Date, SIGEF shall prepare and furnish to theBank a report on the execution of the Project, its cost and the benefits derived and to be derivedfrom it, as well as a plan for the future operation of the Project. This report shall be object of anexchange of views with the Bank.* During the first semester of every year of Project's execution SIGEF shall haveindependent auditors submit a complete audit report under terms of reference approved by theBank.* By no later than October 31st of each year, until completion of the Project, SIGEF shallfurnish to the bank for its approval, an annual operating plan for the implementation of the projectduring the following calendar of each year. This plan shall include: (i) main activities; (ii) abudget estimate and costs; (iii) indicators.* The Borrower shall perform semiannual reviews with the Bank for each year, not laterthan August 31 st and December 31 st of each year. The corresponding reports should be presentedto the Bank no later than 30 days after the conclusion of each calendar semester.* A mid term review should be conducted by August 31 st 2003 to assess progress towardsmeeting agreed targets and to identify additional technical support as needed.* Implementation Agreements among participating entities and the GoE shall be signed

H. Readiness for Implementation

II 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

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2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

rD 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Paul Edwvvin Sisk Ernesta M.ay el M. GuerreroTeam Leader Sector Manager/Director Country ManagerlDirector

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Annex 1: Project Design Summary

ECUADOR: EC Public Sector Financial Management

Key Performance Data Collection StrategyHierarchy of Objectives Indicators Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)

Restoring and sustaining - Consolidation of new Government Reports Macroeconomic stability.macroeconomic stability institutional frameworkthrough improving fiscal for financial management Approved Legislation Commitment toand public sector and control and improved transparency and the usemanagement. public sector financial of the budget to achieve

management systems and positive public sectorprocesses. outcomes.

- Meeting deficit targets

- Optimization in cashmanagement

- Transparency in use ofpublic funds

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:

Improved effectiveness Timely comprehensive Quarterly MEF budget Government's willingnessand transparency in budget and financial execution reports and and capacity tofinancial management in statements for different financial statements. implement MEF'sthe general government levels of the public priorities.sector. sector.Contribute to better Opinions of the Auditor Reports on the CGR and Interest of the CGR ingovernance through General ( CGR) on the the quality assessment of assigning prioritygreater transparency comprehensive reports of these in Bank necessary to arrive at anattained by the the general government evaluations. opinion on theindependent verification sector comprehensive reports.of integrity ofgovernments financialreporting.

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KeyPerformance Data Collection StrategyHierarchy of Objectives Indicators . Critical Assumptions

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:

General: Supervision Passage of Financialmissions, review of Management Legislation.requests for Bankno-objections and reviewof MEF reports

Government continued1. Full complement of 1. Application of all 1. Coverage of interest in the applicationIFMS subsystems running financial management administrative units and of IFMS approach in theand the general sub-systems in SIGEF entities the general financial management ofgovernment sector with the corresponding government sector the general governmentconsolidation process consolidation of reports running SIGEF. sector.fully operational. on the general

government sector.2. SIGEF capturing 2. Percenage of General 2. Review of New decentralization90% of all transactions in government sector consolidation process in policies reinforce - andthe Central operations processed in MEF for the Central not weaken- theAdministration, and SIGEF: Administration and for commitment torunning in at least 35 of 90% of the Centarl the sub-national transparency andthe 50 major Admin by 2003 governments to efficiency in financialmunicipalities. 62% of Municipal by determine % of reports management of the

2004. from spending agencies sub-nationalthat are generated in governments.SIGEF.

3. SIGEF available in 3. User access to 3. Periodic review of TelecommunicationWeb based technology SIGEF through the progress by Bank infrastructure madeand accessible through Internet. Stakeholder available through thethe public data network. access to public sector private sector to keep

financial reports through pace with projectthe Internet. implementation

4. Independent 4. Publication of an 4. Periodic review of CGE assigns the requisiteverification of Treasury opinion by the CGE on progress by Bank priority in its overallStatements and the Treasury and Central duties to arriving at anyConsolidated Budget and Administration Financial opinion in theFinancial Statements of Statements. comprehensive financialthe General Government statements.Sector

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Key Performance Data Collection StrategyHierarchy of Objectives Indicators . Critical Assumptions

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)I. Consolidation of US$ M 3.19 Disbursement Report and * Human resourcesSIGEF semi-annual progress available in a timely

reports. manner.* Low rotation of keypersonnel.* Medium to highcommitment by mayors.

1. 1 Complete suite of 1I.1 Number of Modulesmodules. in Use1.2 Complete and Production of timelyconsolidation application consolidated statements1.3 User Support Number of Entities using

SIGEF:Provincial BranchOffices: 49 in 2002, 83 by2003

1.4 Rector unit capacity Number of Entities usingbuilding in IFMS SIGEFconcepts and application1.5 Implementation in 1.5 Percentage of Central Adequate localCentral Administration Administration management in theentities below the transactions processed in entities that undertake toMinisterial office level SIFEG: 90% by 2003 implement SIGEF.

II Expansion of Coverage US$ M 6.58SIGEF Institutional

2.1 Implementation in 2.1 Number of entitiesAutonomous and with SIGEF:Dependent agencies. Affliated Entities: 3 by

2002, 7 by 2003,Autonomous Entities: 4by 2002, 8 by 2003 and10 by 2004

2.2 Implementation in 2.2 Percentage of Continued support insub-national governments municipal expenditures entities for Financial

consolidated and reporte: Management policies of25% by 2002, 50% by Ministry of Finance.2003, 62% by 2004

III. Upgrade SIGEF's US $ M 4.53

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Technological Base3.1 Convert system to Availability of web Availability of firms toWeb based technology version undertake contract3.2 Complete design for Availability of public datareal -time connections networkand contract servicesIV. Develop External US$ M 1.03Financial Audit Capacityin the CGE.4.1 Equip CGE for Implementation of SIGEF CGE commits staff ofon-line access to SIGEF in CGE appropriateprocessing. qualifications, adequate

counterpart funds.4.2 Train CGE in SIGEF Audit opinion on

comprehensive reports:Treasury of 2002 in 2003Central GovernmentBudget and FinancialStatement of 2003 in2004

4.3 Work with Application of CATT in Availability of a firm withco-sourcing to apply government audits. requisite skills andCAAT to financial audits availability in-situof comprehensivestatements.V. Ensure US$ M .42organizational andfunctional support forIFMS approach.5.1 Advice to MEF SIGEF conceptual Government continued

documentation approved interest in the application5.2 Preparation of of IFMS approach in the

Regulations Regulations issued financial management ofthe general governmentsector

VI Project Administrationand Evaluation. US $ M 2.95

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Annex 2: Detailed Project DescriptionECUADOR: EC Public Sector Financial Management

It is recognized that good governance is essential to development; accountability (legal, political,and financial) as a key element of good governance compels a state to focus on results and reporton its performance. Corruption is a symptom of poor governance; Ecuador recognizes theproblem of corruption in the public sector and has given high priority to combating corruption.Accountability, which combats corruption, is only possible with transparency in the financialoperations of the government. Since the early 1990's, successive administrations have worked tomodernize public expenditure control and accountability in resource management. On the basis ofthe 1992 Public Budget Law and the 1993 Modernization of the State (MOS) Law theauthorities have been developing modern systems for the management and control of publicfinances. They have recently drafted two new pieces of key enabling legislation in this area: thePublic Finance Control Law (Ley Organica de Control, Fiscalizacion y Auditoria), which has beenawaiting debate in Congress since February 2000; and the Public Financial Management Law (LeyOrganica de Gestion Financiera del Estado), which is yet to be submitted to Congress. TheControl Law will end the ex-ante control by the Auditor-General (Contraloria General delEstado-CGE) and will eliminate the functional duplication of the Ministry of Economy andFinance and the CGE on the issuance of accounting standards. The law makes each entityresponsible for its internal control and places accounting standard setting under the jointjurisdiction of the Ministry of Economy and Finance and the CGE. The Financial ManagementLaw, on the other hand, will apply the principle of centralized standard setting and decentralizedoperations, enabling the various agencies to assume direct responsibility for their own institutionalfinancial management. The Law will set principals and methods to regulate the public sectorfinancial management system, the programming and execution of public investment, as well asestablishing fiscal policy standards. The Government views modernization of public financialmanagement as crucial to aligning expenditure more closely with policy priorities; in particular, inmanaging expenditure within social and poverty reduction programs, something which is reflectedin the Structural Adjustment Loan.

The proposed operation supports the Government's program to modernize public sector financialmanagement. This loan supports: (a) improvement of the institutional framework for expendituremanagement, (b) decentralization of the budget function, and (c) improvement of expenditurecontrol - specifically advancing the implementation of the recently developed Integrated FinancialManagement System (Sistema Integrado de Gestion Financiera-SIGEF). Specifically, it would (i)consolidate reforns in financial management and control, (ii) install and fully implement anintegrated financial management system, and (iii) develop and strengthen the CGE's auditcapacity.

The project will help Ecuador address the weak administrative capacity of the public sector andimprove governance at both national and sub-national levels. Country performance in these areas,which are considered high priorities by both the Government and the Bank, has been poor. SIGEFwill provide the timely, reliable and relevant financial information, which is an indispensableelement of strong administrative capacity. The paucity of information for decision making isacutely felt in line ministries, as well as in the area of control. Here, efforts are dissipated inlooking at the different parts of the public sector, since no reliable, comprehensive information

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allows for risk evaluation or control review planning for the system as a whole. SIGEF, throughex-post analysis performed by the MEF Sector Analyst of the SIGEF Institutional reports, willprovide the means to verify that the use of funds by individual administrative units is in line withauthorized Budget uses and the cash programs approved by the Treasury. SIGEF will alsoprovide the means to record and report any non-treasury revenues and their uses at spendingagency level.

The project contributes to transparency by developing financial control and reporting capacity, aswell as by contributing to the capacity for independent verification of the integrity of thegovernment reports by the Supreme Audit Institution (Contraloria). In what particularly concernstransparency in the public sector, by applying the IFMS approach to as much of the public sectoras is practical, the operation will support the preparation of timely, comprehensive and reliablefinancial reports and, by capacity building in the Contraloria, independent verification will beprovided on the government's reports. For management information, the implementation of thecomplete suite of SIGEF applications will ensure that all of an entity's information is processedand available in real time. The sub-national governments will have an instrument that ensures theircompliance with the legislative requirements on financial administration reporting, provides themwith the necessary operating information and permits the MEF to compile comprehensive generalgovernment sector reports and establishs the financial position of the overall public sector.

SIGEF is now used at 3 levels in the Central Government: (i) SIGEF Institutional - in mostspending agencies to control budget execution, perform treasury ledger accounting, and for cashmanagement, ii) SIGEF Global- in the MEF Sub-Secretary of Budgets to track approved budgetsand changes to these, and iii) SIGEF Treasury - in the MEF Sub-Secretary of Treasury for thepreparation of Treasury statements (sources and application of funds) and to control monthly cashprogramming. While SIFEG is an effective tool for financial management its implementation andeffective application in the targeted-, and indeed minimum-, scope public sector entities is yet tobe carried-out. SIGEF 's array of applications and its coverage of final external transactions areyet to be completed and processed. Its edits must be extended down through the 22 centraladministrative entities where it is now operating, and the capacity to consolidate informationwithin sectors, as well as for the entire central administration, must be fully completed andapplied. In its current state, Ecuador's public sector does not furnish stakeholders with thetransparency of their operations (a requisite in the process of accountability). Of equal relevanceto two of the expected outcomes of effective public sector expenditure management (assigningresources to strategic goals and achieving efficiency, economy and effectiveness) is the paucity offinancial information available to line ministries. Lastly, the feeble state of financial management atthe sub-national government level, for decision making and for reporting of fund use, underrninesboth the reporting on the general govenmment sector and the capacity of these entities to absorbthe functions which may be marked for decentralization. In addressing these concems, theproposed operation chose to complete and leverage the current system. Thus, it would achieve itsimpact goals within the first year and then move on to the adoption of more sophisticated toolsand ICT environments.

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By Component:

Project Component I - US$3.19 million

Consolidation of SIGEF I

Foremost in outputs is the culmination of the SIGEF IFMS tool, which is already running its coresubsystems in the central offices of all the ministries. However, it provides neither the means foreffective consolidation of incurred budget expenditure and the financial position for the centralauthorities of any sector, nor does it yet provide the spending ministries with the full complementof its ancillary systems (the management information module is not parameterized in mostagencies and the inventory module has not been implemented).

This component is comprised of the following sub-components:

i) Completion of the programming, testing and implementation of SIGEF GLOBAL.

Given the mandate to provide operational decentralization, SIGEF recognizes the autonomyof each Administrative Unit and supports this with separate budget and accounting records.However, these must be consolidated by Institution and Sector, as well as for the centralgovernment administration, and, eventually, for the general government sector. SIGEF GLOBALwill provide the means for consolidation. The component relates to all activities in developingconsolidation applications and supporting users in the submission of these reports. SIGEF outputfiles for consolidation may be set to report at different levels of budget aggregation: from themost detailed (i.e. item and expense classification within activity) to totals by group within eachactivity. The approach set by MEF for the 2001 consolidation was to aggregate by group, so asnot to appear to encroach upon the line ministries' operational independence. The outputs for2002 will be modified to meet the consolidation reporting demands, which may includeconsolidation by item.

ii) Completion of the implementation support in Central Ministries for all modules.

Key SIGEF modules are yet to be implemented; user support in use of core subsystems mustintensify to achieve the acceptance, sustained use and full benefit of the tool. The sub-componentwill comprise user support, training in the effective use of core and ancillary subsystems, andon-going support to central administration installations.

iii) The provincial offices of the line ministries.

These transactions represent a significant portion of social sector spending, although much ofit is booked against budget on the strength of transfer requests or on the strength ofdocumentation rendered long after the fact. These units are given the same administrative capacityas the central ministries and, as such, transactions originating at the provincial level will beprocessed with all the edits offered by SIGEF and those available for consolidation at any level.

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Project Component 2 - US$6.58 million

Expansion of Coverage: SIGEF Institutional

SIGEF is in use at the central offices of all the line ministries and must now cascade down throughthe public sector to the following levels:

i) Autonomous bodies and entities affiliated with line ministries (IESS, Universities). Theserepresent the significant uses of public funds and are the providers of key services that can beexecuted efficiently only where effective financial management is in place. Reengineering ofprocesses, followed by implementation of the systems, are the sub-components activities.

ii) The objective of this sub-component is to support financial management within themunicipalities. At the individual level, this would be through the attainment of the basic outcomesof public expenditure management, with respect to the performance of the municipality. At thejoint level, this would be through contributing to these outcomes in the general government sectorby providing the central authorities, and all interested parties, with timely, reliable reports on theuse of public sector resources and the financial position of the sub-national sector.

A three pronged approach for the improvement of financial management within the municipalitieshas evolved from the analysis of the existing state of compliance with financial administrationlegislation, the strengths of the municipalities and the objectives set out under this component.

The broad range of size and capacity in the 215 municipalities in Ecuador is such that 51 largestmunicipalities represent 66% of the use of resources, the next 63 amounting to 20%, while thelast 101 municipalities represent only 14%.

This sub-component is divided into three areas. The first is the developing of standard formats forthe submission of budget and accounting reports that are independent of the system in which theyare generated, thus offering the consolidation of the sub-national sector through the GeneralAccounting Office in MEF. Next is the installation of SIGEF in 35 of the 51 largest municipalitieswhere a system upgrade would be advantageous and is requested by the municipality. The Projectwill develope a version of SIGEF Institutional for smaller municipalities and develope proceduresfor the conversion of outputs to permit their aggregation and subsequent consolidation by SIGEFGlobal.

The outputs and performance indicators applicable to the sub-component are the percentages ofmunicipal resources reported to MEF on time and which are included in the periodic aggregationand consolidation report.

Project Component 3 - US$ 4.53 millionUpgrade of SIGEF's Technological BaseThe output sought in this component is to keep SIGEF current and viable, taking advantage of therapid technological changes which the IT and the telecommunications industries are undergoing.

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This will be achieved through the establishment of a public data network and by convertingselected SIGEF services to web-based technology.

Public Data Network: The maintenance and support of the distributed databases is greatlyfacilitated and made economical through a real-time connection with the SIGEF technical supportunit. Updates of new versions and user support in informatics demand constant communicationbetween the Administrative Units and the SIGEF support unit. These will be greatly enhanced byreal-time communications, as will the periodic transmission of results and daily requests for fundsbetween the units and the Treasury, and infornation on the movement in the T accounts of theexecuting units. This capacity will also permit the centralization of processing: either in a clientserver arrangement for the line ministries in Quito, or in 3 tiers - as the appropriate versions areavailable. Hence, equipment investment and the quality and timeliness of the financial informationwould be optimized. The provision of telecommunications capacity in MEF, and the connection toa MEF Web site via Internet, will facilitate access to public sector financial information by thewidest possible audience.

Conversion to Web based technology: The client-server architecture of SIGEF does not facilitateits extension to all the entities with budget autonomy, of which there are approximately 3000. Ifthe autonomy of these units is to be supported and their administration rendered efficient andintegrated with other similar units, then their transactions must be processed by a reliable systemthat ensures the integrity of data and the reliability of its results, which may be made available todesignated users in real time. This component will develop a Web-based SIGEF to run centrally inMEF, or in some host provider, and will permit use by any unit with access to the Public DataNetwork.

Timing for completion of the two components is intertwined with and dependent on upgrades oftelecommunication capacity by the communications service providers. The conversion to aWeb-based version of SIGEF will begin with the incorporation of accounting entities not currentlyrunning SIGEF. The version will be available by July 2003 and this will be preceded by thedevelopment of a public data network. The use of the public data network will coincide with theinstallation of the necessary equipment and the hiring of the external communications services.The Quito entities of the Central Government will have access to the public data network by theend of 2002, as will the Provincial Offices which are currently running SIGEF. The balance of thecentral government will be able to come aboard as they install the current client server SIGEF andcommunication services expand to the respective accounting entity. Three hundred and thirty-five(335) points, comprising 85% of the central government administration expenditures, will beconnected by the end of 2002. All accounting entities with access to the Public Data Network willalso have access to the network and be able to process through SIGEF once the Web version isavailable (July 20003).

Project Component 4 - US$1.03 millionThe introduction of SIGEF into the Central Administration demands, firstly, that CGE be able toaudit through the SIGEF, i.e. to determine the integrity of data and the reliability of outputsprocessed in the SIGEF IT environment. Secondly, it offers an opportunity for the CGE toaccomplish its control objectives more effectively and efficiently by employing computer-assistedaudit techniques which are applied to the whole of Central Administration, while considering this

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group of financial transactions as one part of the annual external financial audit. This componentcomprises equipment support for the CGE, training in the operation of SIGEF and a co-sourcingarrangement with a private audit firm to train auditors, through practice, in the use ofcomputer-assisted audit techniques.

Project Component 5 - US$0.42 millionEnsuring Organizational and Functional Support for the IFMS Approach

Public sector financial management reform involves changes in financial administration legislation,the organization of financial functions and how these are carried-out. The IFMS concept isapplied in the context of the overall framework for government fiscal management, which is madeup of macroeconomic forecasting and management, budget preparation and tax administration.The IFMS must be designed and applied in a manner that facilitates the interaction of these areas.Similarly, there are ancillary systems (those that provide only a portion of the administration of atransaction) and linked systems (those that administer all parts of a transactions, but areindependent of SIGEF) that need to be coordinated with the development of the IFMS. Theregulatory framework must provide the control structure, account classifications and reportingrequirements - all of which are affected by and affect the development and application of theIFMS. This framework has largely been developed, but must be put in place and fully understoodand applied. The component includes all of the support in process reengineering across the centraladministration, the review of distribution of duties and their decentralization, advice to theMinistry of Finance on IFMS, and the preparation of norms and regulations for emerging financialadministration legislation.

Project Component 6 - US$2.95 millionProject Administration and EvaluationThis component will support project management, monitoring, supervision and impact evaluationat the different levels of the system. It comprises both the PIU expenses for financial andprocurement management and processing, as well as the cost of providing the installations forproject personnel, in addition to project coordination and quality control. Of the total PIU costs,the financial and administrative management of the project is effectively and directly absorbed intothe mainstream structure of the Ministry of Finance and Economy through the 100% financing ofthese functions.

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Annex 3: Estimated Project Costs

ECUADOR: EC Public Sector Financial Management

Local Foreign TotalProject Cost By Component US $million US $million US $million

Consolidation of SIGEF 3.19 0.00 3.19Expansion del SIGEF 3.34 3.24 6.58Upgrade of SIGEF's Technological Base 2.87 1.66 4.53Building External Financial Audit Capacity 0.70 0.33 1.03Ensuring Organizational and Funcional Support for SIGEF 0.28 0.14 0.42Project Administration 2.88 0.07 2.95Total Baseline Cost 13.26 5.44 18.70

Physical Contingencies 0.00 0.00 0.00Price Contingencies 0.00 0.00 0.00

Total Project Costs' 13.26 5.44 18.70Front-end fee 0.14 0.14

Total Financing Required 13.26 5.58 18.84

Local Foreign TotalProject Cost By Category US $million US $million US $million

Goods 1.64 5.17 6.81Works 0.00 0.00 0.00Services 6.22 0.27 6.49Training 0.68 0.00 0.68Operating Costs 3.20 0.00 3.20PPF 1.52 0.00 1.52

Total Project Costs 13.26 5.44 18.70Front-end fee 0.14 0.14

Total Financing Required 13.26 5.58 18.84

Identifiable taxes and duties are 0 (US$ni) and the total project cost, net of taxes, is 18.84 (US$m). Therefore, the project cost sharing ratio is 73.57% oftotal project cost net of taxes.

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Annex 4: Cost Effectiveness

ECUADOR: EC Public Sector Financial Management

Proiect Costs. Total project costs are estimated at US$M 18.84, of which US$M 13.86 would be financedby the IBRD and US$M 4.98 would be financed by the Borrower.

Proiect Benefits. As a technical assistance project it does not lend itself to standard financial analysis;however, the operation is expected to have a postive fiscal impact. Efficiency gains will arise from themore reliable and timely management information on budget execution at the spending unit level and onfinancial position of the Central Government at the level of the Ministry of Finance and Economy. Gainswill also accrue from the transparency in the financial operations of the government through greateraccess to credit and wider confidence in the administration of public funds.

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Annex 5: Financial Summary

ECUADOR: EC Public Sector Financial Management

Years EndingIMPLEMENTATION PERIOD

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Total FinancingRequiredProject CostsInvestment Costs 7.7 4.8 3.8 0.0 0.0 0.0 0.0Recurrent Costs 1.1 1.1 1.3 0.0 0.0 0.0 0.0

Total Project Costs 8.8 5.9 5.1 0.0 0.0 0.0 0.0Front-end fee 0.1 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 8.9 5.9 5.1 0.0 0.0 0.0 0.0

FinancingIBRD/IDA 7.2 4.3 2.3 0.0 0.0 0.0 0.0Government 1.8 1.6 1.6 0.0 0.0 0.0 0.0

Central 1.8 1.6 1.6 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 9.0 5.9 3.9 0.0 0.0 0.0 0.0

OPERATIONAL PERIOD| Year I Year2 2 Year3 I Year4 I Year5 | Year6 6 Year 7

Total FinancingRequiredProject Costs

Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0

,Total Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FinancingIBRD/IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Main assumptions:

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Annex 6: Procurement and Disbursement Arrangements

ECUADOR: EC Public Sector Financial Management

Procurement

All procurement of goods and works under the Project would be carried out in accordance withthe "Guidelines-Procurement under IBRD Loans and IDA Credits" published in January 1995(revised in January and August 1996, September 1997, and January 1999. Consultants would beemployed in accordance with the "Guidelines- Selection and Employment of Consultants byWorld Bank Borrowers, published in January 1997 (revised in September 1997 and January andSeptember 1999), and the provisions stipulated in the Loan Agreement.

Procurement Methods

The following paragraphs provide information on the methods to be used for procurement ofgoods, hiring of consultant services and training under the Project. This information is alsosummarized in Tables A, Al and B. The Project is not envisaged to finance civil works. Projectimplementation will be carried out following annual implementation and procurement plans, whichin turn will be used to update the procurement processes.

Goods

The Project would finance contracts for the purchase of information equipment and software andother with an aggregate estimated cost of US$6.81 million. Contracts for packages ofequipment and software estimated to exceed US$200.000 equivalent per bid would be awardedon the basis of ICB procedures. Contracts estimated to cost less than US$200.000 equivalent maybe procured under NCB procedures acceptable to the Bank. Contracts for goods estimated tocost less than US$50.000 equivalent for miscellaneous equipment and consumables may beprocured following shopping procedures in accordance with paragraphs 3.5 and 3.6 of theGuidelines. (please, see Table A)

Consultant Services

The Project would finance technical assistance and capacity building to help implement the fiveProject components and Project management, including PIU consultants and international experts.Consulting firms would be selected following Quality and Cost Based Selection processes, inaccordance with Section II of the Consultant Guidelines with one contract selected on the basison Least Cost in accordance with section III of the Consultant Guidelines. The procurement planincludes six contracts to be entered with consulting firms, with an aggregate value of US$830thousand. The rest, US$5.6 million would finance local consultants. This amount includes anestimated US$3.0 million to finance extension of contracts of consultants with existing contractsunder the PPF. The rest will finance contracts selected according to Chapter V of theGuidelines.(please, see Table Al)

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Operating Costs

The expenditures under this category will help finance an estimated US$ .98 million of salaries ofsupport staff of the PIU, utility services and consumables, US$ 553 thousand for travel expensesand US$ 1.665 million to cover payments for transmission services- to be contracted by ICB.

Procurement Capacity Assessment

A Project implementation unit- PIU- within the Ministry of Economy and Finance will beresponsible for Project implementation. The PIU will be headed by a General and a TechnicalCoordinator, and will include two sub-units: budget and accounting and administration, trainingand procurement. PIU's personnel, in general terms, is acquainted with Bank procedures, butdoes not include in its staff a procurement specialist. Procurement management systems need alsoimprovement. The Borrower tentatively agreed on the following procurement strengthening plan,including:

(a) the appointment of a full-time procurement specialist in March 2002;

(b) the establishment of a procurement management system for the Project, prior to December31, 2002;

(c) the completion of a Project Operational Manual, satisfactory to the Bank, prior to Loannegotiations;

(d) the completion of a detailed procurement plan for 2002, , prior to Appraisal;

(e) the carrying out of a Project Launch Seminar, in April 2002; and

(f) the inclusion of a procurement specialist in supervision missions, at least, once a year.

Prior Review Thresholds

All ICBs, the first two NCBs and the first two shopping taking place each year will be subjectto the Bank's prior review. In addition, prior review procedures will apply to all consultingcontracts estimated to cost more than US$100 thousand and awarded according to QCBSprocedures and all contracts with individual consultants estimated to cost more than US$50thousand. The prior review ratio is estimated at 45%. Any contract awarded on a sole-sourcebasis, assignments of a critical nature and amendments raising contract values above the saidthreshold would be subject to prior review.

Overall Procurement Risk Assessment

High.

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Frequency of Procurement Supervision in the Field

At least one every year including a procurement specialist and one mission for ex-post reviewof procurement during the second year of Project implementation.

Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 5.17 0.60 1.04 0.00 6.81

(4.14) (0.48) (0.83) (0.00) (5.45)

3. Services 0.00 0.00 6.49 0.00 6.49(0.00) (0.00) (4.75) (0.00) (4.75)

4. Training 0.00 0.00 0.68 0.00 0.68(0.00) (0.00) (0.40) (0.00) (0.40)

5. Front-end fee 0.00 0.00 0.14 0.00 0.14(0.00) (0.00) (0.14) (0.00) (0.14)

Operating Costs 0.00 0.00 3.20 0.00 3.20(0.00) (0.00) (1.92) (0.00) (1.92)

PPF 0.00 0.18 1.34 0.00 1.52(0.00) (0.14) (1.06) (0.00) (1.20)

Total 5.17 0.78 12.89 0.00 18.84

(4.14) (0.62) (9.10) (0.00) (13.86)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2'Includes civil works and goods to be procured through national shopping, consulting services, services of

contracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governmentunits.

Notes: numbers in each category and method of procurement represent investment on top and Bank financingbelow. Other includes: for goods US$200.000 for sole-source purchase of licences and US$ 840,000 for purchasesby shopping; US$ for training expenses which do not include trainers fees; under operating costs, US$ .98 millionfor support staff in the implementation unit, utility services and consumables, US$ 553,000 for travel expenses andUS$1.665.000 to cover payments for transmision services.

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Table Al NotesNotes: the table does not include the amount of US$1.33 milion spent to finance individual consultants at the PPF stage. The amount of US$5.6 for

individual consultants indude US$ 3 million to finance extension of contracts of consultants who already worked at the PPF stage.The rest, will financedcontracts of consulants selected under the chapter V of the Bank procurement guidelines

Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selection MethodConsultant Services

Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total CostA. Flrms 0.80 0.00 0.00 0.06 0.00 0.00 0.00 0.86

(0.66) (0.00) (0.00) (0.05) (0.00) (0.00) (0.00) (0.71)B. Individuals 0.00 0.00 0.00 0.00 0.00 5.15 0.49 5.64

(0.00) (0.00) (0.00) (0.00) (0.00) (4.05) (0.00) (4.05)Total 0.80 0.00 0.00 0.06 0.00 5.15 0.49 6.50

(0.66) (0.00) (0.00) (0.05) (0.00) (4.05) (0.00) (4.76)1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Loan.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject toThreshold Procurement Prior Review

Expenditure Category (US$ thousands) Method (US$ millions)1. Works

2. Goods >200 ICB All<200 NCB First 2

<50 Shopping First 2 each year3. Services

Firms >100 QCBS All<100 Least Cost Only TORs

Indivuals >50 Chapter V All<50 Chapter V Only TORs

4. Miscellaneous .5. Miscellaneous6. Miscellaneous

Total value of contracts subject to prior review:

Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every 12 months (includes specialprocurement supervision for post-review/audits)

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)The proposed Bank loan would be disbursed over a period of three years, beginning the

last quarter of FY02 through the third quarter of FY05. The project is expected to be completedby March 31, 2005, and the project's Closing Date is September 30, 2005.

Consulting Services include contracts with individuals and firms to carry out: (i) technicalassistance and training in development and implementation of SIGEF, (ii) development of a Webversion of SIGEF, (iii) improving the legal and conceptual framework for its operation, (iv)development in the Contraloria and (v) project coordination and supervision. Training includesthe cost of trainers and trainees fees, rental of conferences rooms, per diem and transport oftrainees and materials and office supplies required for training activities. Operating Expendituresinclude expenditures for 3 undertakings: (i) basic and general services for the project supervision(office and equipment rental, materials and office supplies, utilities, building and equipmentmaintenance), (ii) rental and services fees for the operation of the data network used for thetransmission of financial information, and (iii) transportation and per diem costs for travel by theProject staff.

Table C: Allocation of Loan Proceeds

Expenditure Category Amount in US$million Financing PercentageConsulting Services 4.75 *established each yearTraining 0.40 60%Goods 5.45 80%Operating Costs and Services 1.92 *established each yearPPF 1.20

Total Project Costs 13.72Front-end fee 0.14

Total 13.86

* Financing percentages established each year in asfollows: Y1 95-5%o, Y2 80-20%o, Y3 60-40%** PPFRefinancing comes to $ 1.201,400*** Front End Fee comes to $138,600

Use of statements of expenditures (SOEs):

Disbursements would be made on the basis of full documentation for all expenditures undercontracts requiring prior review by IBRD and amendments to contracts raising the values of suchcontracts above the prior review limits. These contracts are: (i) all contracts for goods exceedingUS$ 200,000; (ii) all consultant and services contracts directly procured by MEF with anestimated contract amount of US$ 100,000 or more for firns and US$ 50,000 or more forindividuals.For all other expenditures, disbursements would be made against Statement ofExpenditures ( SOEs) for which supporting documents are to be held in MEF.

MEF will also prepare quarterly financial reports under the format agreed to with theBank. These reports would include a statement of source and application of funds, reports on the

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advance toward outputs specified in Annex I of the PAD and a report on the execution of theannual procurement plan.

Special account:Bank disbursements would be made into a Special Account opened at the Central Bank of

Ecuador, in accordance with Bank requirements. Supporting documentation for all eligibleproject expenditures would be maintained at SIGEF, and would be made available for review byBank staff and independent auditors.

FINANCIAL MANAGEMENT ASSESSMENT REPORT

1. Executuve SummaryThe objective of the financial management assessment was to deternine whether the entityimplementing the proposed Bank-financed project has acceptable financial managementarrangements. The assessment planning of the "Public Sector Financial ManagementProject - SIGEF (P074218)", was based on the review of the Project Concept Document -PCD, and it considered the high-risk rating of the Procurement Assessment; no CFAA wasavailable for input.

Proiect Financial Management Staffing and Oreanization.- A review of the organizationand staffing indicates that the project unit has adequate and qualified staff.

Post Name

General Coordinator Maria Dolores CevallosTechnical Advisor Eudoxia TelloTechnical Coordinator Madison CarrilloAdministrative Coordinator Sandra GavilanesFinancial Coordinator Mario GordonAccountant Susana CruzTreasurer Grace Luna

Adequacv of the financial mana2ement system

a) The Project Implementing Unit has in place the accounting integrated financialmanagement system (SIGEF), that comprises several modules that assist the accountingdepartment to prepare timely financial statements and record accurately the transactionscarried-out by the project. The inventory module of SIGEF is not used so an ad hoc fixed assetcontrol system is used in addition to SIGEF.

The Project Operational Manual is under preparation; however, the Project has in place basicpolicies and procedures for the development of the Project. Only minor weaknesses in internalcontrol are noted and all related action deemed necessary was already taken. Overall, thefinancial administration place is adequate.

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The integrated financial management system in place combined with the organization and staffing,the accounting policies and control procedures in place provide adequate support to operationsand control to provide reliable reporting.

b) The predecessor project (Mosta Loan No.3822) complied fully with its audit covenants.

c) The Project Implementing Unit agreed with the Bank to submit quarterly FMR's reports;the format and content of the reports was agreed during Appraisal and are to be immediatelyimplemented.

2. Summary Project Description

The project-implementing unit operates under the Ministry of Economy and Finance; it is aseparate administrative unit reporting to the Minister of Economy and Finance.

The Proiect.- On May 15, 2001 the International Bank for Reconstruction and Development(World Bank) and the Ministry of Economy and Finance, signed an Agreement-Letter (P074218)for the preparation of the Public Sector Financial Management Project - SIGEF.On April 5, 2001 the Project Implementing Unit was created through the Ministry of Economyand Finance Agreement No.098. This Unit is under the Ministry of Economy and Finance, itspurpose is to continue with the process of strengthening of public finances, within the frameworkof the administrative reforms that began the MOSTA Project in the Consejo Nacional deModernizaci6n del Estado (CONAM).

Financin2 the Proiect.- A PPF for US$1,330,500, financed by two sources of funds:US$1,000,000 from resources of IBRD and US$330,000 from counterparts, is under executionwith an authorized allocation of US$200,000. The proposed project is estimated at US$18.8million, US$13.86 IBRD and US$4.98 million counterpart funding.

Obiectives.- The Public Sector Financial Management Project - SIGEF (P074218) seeks thefollowing development objectives:

Improved effectiveness and transparency in financial management in the generalgovernment sector. Contribute to better governance through greater transparencyattained by the independent verification of integrity of governments financial reporting.

Pro2ress to date.- As of the date of the financial management assessment the Project hasexecuted 49% (US$649,669) , this amount is divided into: US$487,096 (resources from IBRD)and US$162,573 (local counterpart).

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3. Country IssuesA CFAA for Ecuador has not yet been carried out, one is planned for FY 03. The CAS andMOSTA ICR were reviewed to determine relevant financial management issues for Ecuador andthe weakness in government wide financial accountability arrangements were noted as well as theconcern of the MEF to address these through the modernization of the public sector. Specifically,the implementation of SIGEF has improved financial management both in the entities operatingthe system as well as the central authorities.

4. Risk Analysis

The experience of the staff in managing projects, the straight forward nature of the operations andthe well developed procedures imply a low inherent and control risk rating.

5. Strengths and weaknesses

During the financial management assessment, the accounting personnel of the Projectdemonstrated their experience in managing projects financed by the World Bank, (they worked atthe "MOSTA" Project). The accounting integrated financial management system - SIGEF givesthe necessary and basic tools to generate reliable financial information (trial balance, balancesheet, income statement, cash flow statement).

The integrated financial management system (SIGEF) issues the following financial reports: TrialBalance, Balance Sheet, Income Statement, Cash Flow Statement, Sources and Uses of FundsStatement, Accumulative Investment Statement (monthly). The system also generates accountingjournals and, expenditure vouchers. The system does not generate an Accumulative InvestmentStatement; these will be prepared for the project through manual additions of yearly financialstatments. Furthermore it does not allow adjustments when the accounting period is alreadyclosed; as such, manual entries are used to book any revelant adjusting entries. The followingobservations did arise and the relevant actions taken where deemed necessary.

Table D

Significant Weaknesses Resolution

Adequate Segrezation of Functions

a) The Administrative Coordinator is in charge a) Comment accepted, control of the

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of procurement of goods, (fixed assets, as web fixed asset sub ledger will be carried outof inventories), furthermore he is in charge of by the Accountant.physical inventories and keeps the detailedcontrol of fixed assets.

b) The Financial Coordinator is in charge of b) Given the size of the operation thiscalculating the employees salaries and effect weakness is accepted.payment.

Control and Mana2e of Cash and Bank

a) The project does not carry out surprise petty a) This policy will be included in thcash counts. operational manual.

b) The bank reconciliation is been done by b) Comment accepted, the accountant willTreasurer; this should be done by someone not prepare the bank reconciliation.responsible for custody of funds.

c) The project does not have a fidelity police for c) This policy will be adopted by the Project.personnel who have custody of cash.Control and Management of Fixed Assets

a) The project does not leave any supporting a) Comment accepted by the P1T1 and it wildocumentation of physical inventories counts. include this policy in the operational manual

b) Comment accepted by the PIU and theb) The Administrative Coordinator is in charge o accountant will carry - out the fixed asse

rocurement of goods, (fixed assets, as well as o internal control instead of the Administrativesupplies), and is in charge of physical inventories and Coordinator.keeping the fixed assets sub ledger.

Recognizing Expendituresa) The accounting basis will be made

a) The project applies the accrual basis; clear in the notes to the financialhowever, expenditures are recognized when reports.these are paid instead of when the service isreceived.

6. Implementing Entity

The Ministry of Economy and Finance, Agreement No.098 on April 5, 2001 created the ProjectImplementing Unit. This Unit is under the Ministry of Economy and Finance, and its purpose isto continue with the process of strengthening of public finances, within the framework of theadministrative reforms, process begun by the Consejo Nacional de Modernizaci6n del Estadothrough MOSTA Project.

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This Project Implementing Unit has its own budget, and is authorized to manage the human,material and financial sources originating with disbursements from IBRD and from the LocalCounterpart. Furthermore, the project-implementing unit will coordinate, organize, plan, controland assess the necessary procedures to strengthen and sustain the Public Sector FinancialManagement Project - SIGEF.

7. Funds Flow

The preparation of the Public Sector Financial Management Project - SIGEF has two sources offunds: US$1,330,500 (IBRD) and US$330.5 miles (Ministry of Economy). For this purpose thefollowing bank accounts were opened:* Special Account No.234189-20540500000000 at the Ecuador Central Bank, that isexclusively for disbursements from IBRD* TG Account (to manage transfers) No.01121468 opened at the Ecuador Central Bank,which is used to manage transfers from the special account and from the local party.* Account No.52005000086 opened at Produbanco Bank, and is utilized to dodisbursements to suppliers.

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Annex 7: Project Processing ScheduleECUADOR: EC Public Sector Financial Management

Project Schedule Planned ActualTime taken to prepare the project (months) 6 10First Bank mission (identification) 04/30/2001 04/30/2001Appraisal mission departure 01/14/2002 01/14/2002Negotiations 02/14/2002 02/18/2002Planned Date of Effectiveness 03/31/2002

Prepared by:

Paul Sisk

Preparation assistance:

Jorge Luis Archimbaud

Bank staff who worked on the project included:

Name SpecialityPaul Sisk FMS

Luis Gazoni Procurement Specialist

Emilio Rodriguez Procurement SpecialistJorge Luis Archimbaud Operational Analyst

David Varela Sr. Legal Counsel

Ronald E. Myers Lead PSM SpecialistJuan Navas-Sabater ITC SpecialistXiomara Morel FMS LOASandra Alborta Team Assistant

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Annex 8: Documents in the Project File*ECUADOR: EC Public Sector Financial Management

A. Project Implementation Plan

PIP ( Operating Plan with project desription, component description with outputs and performanceindicators, detailed action plans and budgets) reference SIGEF No 057-2002Organization Map of the Public Sector with an indication of SIGEF implementation status as of end of2002.

B. Bank Staff Assessments

Financial Management Assessment, Paul Sisk, FMS LCC6C; January 24, 2002Procurement Capacity Assessment, Emilio Rodriguez; December 14, 2001Implementation Completion Report- MOSTA Report No 22895Supervision of the Implementation of SIGEF, Vicente Lopez Trueba; March, 2001

C. Other

"Implementing Integrated Financial Management Systems as Institutional Reform- The Case ofGuatemala's SIAF- Draft"; March 27, 2000, Richard MooreGerencia Publica en el Ecuador, Quito, 2000; Francisco Silva GarciaGovernment Financial Management, IDB, 1997; Jose Mauro BrusaDraft Legislation of Financial Management Reform in Ecuador: Projecto de Ley Organica de GestionFinanciera del Estado, Proyecto de Ley Organica de Control, Fiscalizacion y Auditoria del Estado

*Including electronic files

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Annex 9: Statement of Loans and Credits

ECUADOR: EC Public Sector Financial Management

Difference between expectedand actual

Original Amount in US$ Millions disbursements

Project tD FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Frm Rev'dP007131 1997 AG RESEARCH 21.00 1.20 12.10 4.30 3.80

P007135 1998 AGRIC CENSUS &INFO 20.00 1.80 -0.10 10.00

P036056 1997 EC JUDICIAL REFORM 10.70 0.80 0.30

P039084 1998 EC HEALTH SERVICES M. 45.00 34.20 18.30

P070337 2000 EC SAL 151.50 80.00 80.00

P064045 2000 FIN SECTOR TA LN 10.00 8.80 4.20

P040086 1998 INDIGENOUS PEOPLES 25.00 3.80 2.80

P040106 1998 INTL TRADE/INTEGRATION 21.00 6.30 3.80

P063644 2002 POWER & COMM SECTORS MODD. 23.00 23.00 0.50

P039437 2002 RURAL PO/ERTY 25.20 25.20 0.00

P049924 2001 RURAL WATER SUPPLY & SANITATIO*N 32.00 30.60 .1.40

Total: 381.00 1.20 226.70 112.20 13.80

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ECUADORSTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1997 Agrocapital 3.5 0 0 0 3.5 0 0 01969/73177181/82/87 COFIEC 0 0 0 0 0 0 0 01998 Concessionaria 11.5 1.3 0 15 2.93 0.33 0 3.821999 FV Ecuacobre 4.69 0 4 0 4.69 0 4 01998 Favorita Fruit 8.89 5 0 0 8.89 5 0 01999 La Universal 8.2 0 5 0 8.2 0 5 01993 REYBANPAC 4.12 0 0 0 4.12 0 0 0

Total Portfolio: 40.9 6.3 9 15 32.33 5.33 9 3.82

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment:

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Annex 10: Country at a Glance

ECUADOR: EC Public Sector Financial ManagementLatin Lower-

POVERTY and SOCIAL America middle-Ecuador & Carib. Income Development diamond-

2000Population, mid-year (millions) 12.6 516 2,046 Life expectancyGNI per capita (Atlas method, US$) 1.210 3.680 1.140GNI (Atlas method, USS biltions) 15.3 1.895 2,327

Average annual growth, 1994-00

Population (%) 2.0 1.6 1.0 GNI GrossLabor forca (%) 3.1 2.3 1.3 peGpimr

Most recent estimate (latest year available, 1994400) capita enrollment

Povertv (% of population below national povertV line) 35Urban Dopulation (% of total population) 65 75 42Life expectancy at birth (years) 69 70 69Infant mortalitv (per 1,000 live births) 28 30 32Child malnutrition (% of children under 5) 9 11 Access to Improved water sourceAccess to an improved water source (% of population) 71 85 80Illiteracy (I% ofpopulation age 15+) 9 12 15 EcdorGross Primarv enrollment (% ofschool-age population) 127 113 114 cua

Male 134 116 Lower-middle-income groupFemale 119 114

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratios'

GDP (US$ billions) 11.7 10.7 19.0 13.6

Gross domestic investment/GDP 26.1 17.5 12.9 16.8 TradeExports of qoods and services/GOP 25.2 32.7 37.1 42.4Gross domestic savinas/GDP 25.9 22.9 - 24.2 28.4Gross national savinqs/GDP 21.1 15.1 20.3 29.4

Current account balance/GDP -4.5 -3.4 5.0 9.0 Domestic InvestmentInterest pavments/GDP 3.1 3.9 4.0 5.0 savingsTotal debt/GDP 51.1 113.3 76.4 104.7 avTotal debt service/exworts 42.5 33.0 25.5Present value ot debt/GDP 71.0Present value of debt/exports 208.6

Indebtedness1980-90 1990-00 1999 2000 2000-04

(average annual growth)GDP 2,0 1.8 -7.3 2.3 4.5 EcuadorGDP per capita -0.6 -0.3 -9.0 0.4 2.6 Lower-middte-incoms groupExports of ooods and services 5.4 4.1 -0.4 -0.2 5.9

STRUCTURE of the ECONOMY

1980 1990 1999 2000 Growth of Investment and GOP (%)(% of GDP)Agriculture 12.1 13.4 12.2 10.0 100Industrv 38.1 38.0 37.5 40.2 50

Manufacturing 17.7 19.4 21.3 16.9 0IServices 49.8 48.6 50.4 49.8 - . s as a, as as

Private consumption 59.6 68.5 65.5 62.1 .100General government consumption 14.5 8.6 10.4 9.5 GDI e GODPImports of goods and services 25.4 27.4 25.8 30.8

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(average annual growth)Aoriculture 4.4 1.7 -1.3 -5.3 o0Industrv 1.2 2.7 -3.7 4.9 20

Manufacturino 0.0 2.1 -7.2 5.2 o J_Services 1.7 1.3 -11.7 3.4 ° .5 B? 9 9j oo

Private consumption 19 13 -9.7 22 40

General qovernment consumption -1.4 -1.8 -15.5 -1.3 -60Gross domestic investment -3.8 -0.5 -52.9 48.0 Exports -* ImportsImoorts of goods and services -1.4 0.4 -39.0 18.7

Note: 2000 data are preliminary estimates.

The diamonds show four kev indicators In the countrv nn bold) compared with Its Income-group average, If data are missino. the diamond willbe incomplete.

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Additional Annex 11Impimentation Structure and Organizational Chart

ECUADOR: EC Public Sector Financial Management

Or2anization responsible for the Proiect: Ministry of Economy and Finance

Implementation Arrangements:

1. Executing agencies: The Ministry of Economy and Finance will provide the administration,supervision, and guidance for all components of the project. It will carry out the execution of theconsolidation and expansion of coverage, and the conversion to real-time processing componentsin cooperation with the line ministries and sub-national governments. In the latter case, it will besupported by the AME and CONCOPE. The audit component will be executed under the CGR,supported by the PIU in MEF.

2. Project management: A Project Implementing Unit that reports to the Vice Minister ofFinance will provide both the overall co-ordination of all project components and will interfacewith CGR and beneficiaries, providing routine management in the execution of all components,from the CGR through to the audit technical coordinator in the PIU.

3. Participatory Approach: The project creates collaboration between public sector entities,in that it is the Ministry of Finance's endorsement and continuation of a CONAM initiative: theMOSTA project. The rector organizations for financial management in the public sector, theMinistry of Economy and Finance, and the Contraloria General del Estado will participate in thedesign and implementation of the project. The CGE has communicated its commitment to operatethrough SIGEF and will encourage its application and develop their capacity to audit throughSIGEF. The line ministries of the central administration were the first beneficiaries of the SIGEF,developed under MOSTA, and will now take full advantage of the projects products. SIGEF hasincorporated critical functions, such as payroll, and will support the line ministries in fulfilling theirlegal duty to report on their operations. The sub-national governments participated in the designof the proposed operation through the discussions between MEF and AME. The individualsub-national governments will participate in its implementation.

4. Institutional Arrangements: The social objectives will be achieved through improvedreporting, which drives both accountability (and thus, governance) and efficiency. The project'skey indicators will monitor progress towards improved reporting.

Role of the Bank durin2 Proiect Implementation:The project will receive close support from the Task Manager from the Sub Regional Office of the Banklocated in Lima, Peru, as well as from the Ecuador Resident Mission in regards to project implementationand supervision.

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OMANAC NDAION DE LALNG D EJEWTORADEPROYECTODE

GESfcN DE LAS FNAAS PUCAS

m ~ ~ ~ ~ ~ ~ ~ ~ EWA DE

l~I E

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