FEDERALGOVERNMENTOFSOMALIA’ … · 2019-01-21 · accounting and financial reporting The...

FEDERAL GOVERNMENT OF SOMALIA

PUBLIC FINANCIAL MANAGEMENT CAPACITY STRENGTHENING PROJECT II (P151492)

PROJECT PROGRESS REPORT

FOR THE QUARTER ENDED JUNE 2017

14 August 2017

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Contents I. INTRODUCTION ......................................................................................................................... 4

1.1 Background on PFM Reform ............................................................................................. 4

1.2 PFM 1 Project ...................................................................................................................... 4

1.3 PFM 2 Project Scope .......................................................................................................... 5

1.4 Project Funding by Component ........................................................................................ 7

1.5 Project Disbursements by Component as at end June 2017 ....................................... 7

1.6a Status of Quantitative Key Performance Indicators ....................................................... 8

1.6b Status of Threshold Key Performance Indicators ........................................................... 8

II. KEY ACTIVITIES AND DELIVERABLES DURING Q2 2017 ............................................ 10

Component 1: Revenue Mobilization, Planning and Budget Preparation ............................. 10

Tax policy gap analysis and revenue potential report with strategies and measures to close the gaps including tax policies ........................................................ 10

A unique Taxpayer Identification Number (TIN) to register and maintain taxpayers’ database .................................................................................................................................... 11

Taxpayer segmentation and developed tailor-made compliance strategies for each segment ........................................................................................................................... 12

Shift Custom duty from specific rates to ad valorem .................................................... 14

Status of achievement of the Project Deliverables ........................................................ 15

Component 2: Treasury Management, Budget Execution, Procurement, Accounting and Financial Reporting ....................................................................................................................... 17

Updating of the Treasury Accounting Procedures Manuals ....................................... 17

Support to Public Procurement and Concessions Legal, Regulatory and Institutional Management Reforms .................................................................................... 19

Operationalization of the Public Procurement, Concessions and Disposal Act .... 23

Somalia Financial Management Information System .................................................... 25

Component 3: Strengthening the Integrity Pillars ..................................................................... 26

Component 4: PFM Professionalization .................................................................................... 27

Component 5: PFM Reform Oversight, Coordination and Management .............................. 28

III. ISSUES, RISKS AND CHALLENGES .............................................................................. 29


Inadequate availability of data/information ...................................................................... 29

Inadequate capacity in terms of numbers and skills within the Directorate of Revenue .................................................................................................................................... 29

Security challenges due to militant attacks from extremist groups .......................... 29

Delay in project implementation due to delay in signing of contract and approval of the completed reports ....................................................................................................... 30

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Language relate challenges ................................................................................................. 30

Gaps identified in the context of the emerging reform priorities ............................... 30



Delay to recruit audit consultant ........................................................................................ 31


Insecurity .................................................................................................................................. 31

Late reporting .......................................................................................................................... 31

IV. PRIORITY ACTIVITIES FOR NEXT QUARTER PLAN .................................................. 32



Procurement ............................................................................................................................. 42

SFMIS ......................................................................................................................................... 43



V. ANNEXES .................................................................................................................................. 47

ANNEX 1: Financial Management Report for Quarter Ended June 2017 ............................ 48

STATEMENT OF PROJECT MANAGEMENT’S RESPONSIBILITIES ............................. 49

Funding summary .......................................................................................................................... 50

STATEMENT OF RECEIPTS AND PAYMENTS ........................ Error! Bookmark not defined.

STATEMENT OF FINANCIAL POSITION .................................. Error! Bookmark not defined.

STATEMENT OF BUDGET COMPARISON WITH ACTUALS Error! Bookmark not defined.

SOURCES AND USES OF FUNDS STATEMENT BY SUB - COMPONENTS (ACTIVITIES) ................................................................................... Error! Bookmark not defined.

NOTES TO THE FINANCIAL STATEMENTS ........................................................................ 51

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) ............................................ 53

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Error! Bookmark not defined.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Error! Bookmark not defined.

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I. INTRODUCTION 1.1 Background on PFM Reform 1. The Federal Government of Somalia’s (FGS) Executive, Legislature and the Presidency have all prioritized security, justice and PFM integrity at the top of the country’s development agenda. This is driven by improved security, regaining of political legitimacy, and need to build citizens’ confidence and relationship with Development Partners (DPs) that public funds will be managed in a transparent, equitable and accountable manner. In the area of PFM, the FGS undertook a self-assessment in 2013 and noted that long-term impactful reforms were yet to be undertaken. The Minister of Finance and Planning presented the PFM self-assessment report and proposed PFM strengthening initiative (2013-2016) to Development Partners on April 4 2013. 2. The self-assessment report revealed amongst other issues that budget execution and procurement processes lack adequate transparency and efficiency and that the existing PFM legal framework is inadequate and requires modernization. Human resource and logistics challenges are also a major issue. Combating these weaknesses has been the main thrust behind the PFM reforms strategy being implemented by FGS. 3. The PFM reform effort of the government is currently underpinned by the Somalia PFM Self-assessment report strategy with the following overall objective: “… to improve the efficiency and effectiveness of public financial management processes, and systems in order to provide timely, transparent and accurate financial information across the public sector to underpin policy formulation and inform Government decision making to support effective service delivery”.

4. The specific aims to be achieved by the strategy are;

i) Improve transparency and openness of the national budget process; ii) Enhance fiscal discipline through internal and external controls; iii) Focus public expenditure on priority areas of Government programs; iv) Enhance efficiency and effectiveness of public expenditures; and v) Strengthen overall financial management and accountability

1.2 PFM 1 Project 5. The World Bank in recognition of the government’s efforts in implementing PFM Reforms approved the Somalia Public Financial Management Capacity Strengthening Project (P146006 – TF16181) on 4th December 2013 at the tune of $4,500,000.00 and was completed by March 2016 and the final closure audit of the Project was conducted during the 3rd Quarter of 2016. No major issues were raised in respect of the project closure audit. This was followed by an Independent Completion Report (ICR) commissioned by the World Bank which was also completed during the 4th quarter of 2016 and the report was finalized and shared with the respective stakeholder.

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6. The Project development objective for PFMI was “to establish system for more transparent and accountable management and use of public funds in Somalia”. It was intended to catalyse the PFM reform action plan with the objective of laying the foundation for longer term reforms by strengthening controls around the basic Ministry of Finance and Planning functions. The Project had the following components geared to the strengthening of the governments PFM reform activities:

i) Component 1 – Public Financial Management Reform Oversight – This component supported the oversight and implementation structure in order to provide policy directions for strengthening the PFM systems and take periodic stock of progress by ensuring that key milestones in the PFM reform strategies are kept on track.

ii) Component 2 – Somalia Financial Management Information System (SFMIS) – This component supported the development, configuration and installation of a user friendly computerised financial management information system focusing on capturing budget, treasury functions, payroll, tax collection and financial reporting.

iii) Component 3 – Budgeting, Expenditure Controls, Procurement,

Accounting and Reporting - The objective of this component was to strengthen controls needed for fiscal discipline and promote transparency and accountability and by extension supports the evolving business processes for budgeting, commitment controls, procurement, internal controls, internal audit, accounting and reporting.

1.3 PFM 2 Project Scope 7. In cognisant of its strategic decision to be selective and focus on areas that build upon work already started under the PFM Capacity Strengthening Project 1 (P146006), the Bank gave approval for the second PFM Capacity Strengthening Project in July 2015. The Project is intended to consolidate the gains achieved under PFM 1 and to address the challenges relating to PFM 1 as well as complementing other ongoing planned PFM activities. 8. The overall Project Development Objective (PDO) is to establish institutional capacity for the management of public funds in Central Finance Agencies and targeted sectors. The project is structured around five components as shown below. PFM 2 Project Components Component Component

Objective Sub-Components

Component 1: Macro-fiscal policy formulation, revenue mobilization, planning

The objective of this component is to improve the realism of the budget and instill

Sub-component 1.1 - Introduction of Medium Term Fiscal Framework (MTFF), planning and budget preparation

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Component Component Objective

Sub-Components

and budget preparation

fiscal discipline Sub-component 1.2 - Tax policy, revenue mobilization and tax administration

Component 2: Treasury management, budget execution, procurement, accounting and financial reporting

The objective of this component is to strengthen controls needed for fiscal discipline and promote transparency and accountability.

Sub-component 2.1 - Treasury management and budget execution Sub-component 2.2 - Accounting and Financial Reporting Sub-component 2.3 - Concessions, procurement and contract management Sub-component 2.4 - Financial Management Information Systems (FMIS) Sub-component 2.5 - Records management Sub-component 2.6 ‘Mobile money’ transfer systems

Component 3: Strengthening the integrity pillars

The objective of this component is to strengthen key integrity pillars to hold government accountable for the use of public funds

Sub-component 3.1 - Foundations for Supreme Audit Institutions (SAI) Sub-component 3.2 - Planning, Finance and Public Accounts Committee (PAC) Sub-component 3.3 - Establishing the internal audit function

Component 4: PFM professionalization

The objective of this component is to build PFM competencies

None

Component 5: Project oversight, coordination and management

The objective of this component is to provide a structured approach to PFM institutional capacity strengthening

None

Component 6: Analytic and Advisory Services (Bank Executed)

The objective is to provide actionable PFM policy notes

Sub-component 6.1- Social Accountability and Open Government Data (OGD) Sub-component 6.2 - Governance/PFM Policy Notes

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1.4 Project Funding by Component The breakdown of the project funding by component is provided in the table below: Project Development Objective(s) The Project Development Objective is to establish and strengthen institutional capacity for the management of public funds in central finance agencies and targeted sectors. Components Component Name Indicative Cost (US$) Component 1: Revenue mobilization, planning and budget preparation

2,750,000.00

Component 2: Treasury management, budget execution, procurement, accounting and financial reporting

9,880,000.00

Component 3: Strengthening the integrity pillars 1,945,000.00 Component 4: Public financial management professionalization

1,000,000.00

Component 5: Public financial management reform oversight, coordination and management

2,925,000.00

Component 6: Demand-driven just-in-time support (JIT) (Bank Executed)

1,000,000.00

Unallocated 500,000.00 9. The implementation of the project started in July 2015, and has covered 24 months as at end of June 2017. It is set to close in June 2018 and thus now has 12 months remaining. The table below provides a summary of the project by components and their financial (disbursement) status as at end June 2017. 1.5 Project Disbursements by Component as at end June 2017

Component Name Budget ($ Million)

Disbursements as at 31/6/17

% disbursed

Undisbur-sed ($M)

1 Revenue mobilization, planning and budget preparation 2.75 0.59 21.3% 2.16

2 Treasury management, budget execution, procurement, accounting and financial reporting

9.88 2.99 30.3% 6.89

3 Strengthening the integrity pillars 1.95 0.09 4.6% 1.86

4 PFM professionalization 1.00 0.28 27.9% 0.72

5 PFM reform oversight, coordination and management 2.93 1.77 60.4% 1.16

6 JIT support (Bank Executed) 1.00 - - - Unallocated 0.50 - - -

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TOTAL 20.00 5.72 28.6% 14.28 1.6a Status of Quantitative Key Performance Indicators

Key performance indicators Base-line

2016 2017

Target Actual Target Jan-Jun

Actual

1 Reduced variance between actual and originally budgeted primary expenditure 45% 45% 24.4% 35% 27.7%

2 Time elapsed (in months) between end of period covered and submission of audit reports to the legislature

12 months

12 months

9 months

3 Increase in real terms of domestic revenue collection $95m $120m $112.66 $144m $60.67

4 Increased budget execution rate in targeted sectors 55% 60% 63.2% 65% 45.9%

5 Percentage of contracts using competitive procurement methods 0% 20% 30%

6 Percentage of expenditures represented by the government entities audited in total public expenditure

0% 50% 60%

7 Percentage of audit recommendations for which there is evidence of follow-up 0% 10% 20%

8 Number of students completing CIPFA certificate and diploma stages 0 30 53%

9 Number of students completing the ITCILO certificate and diploma stages 0 30 59%

1.6b Status of Threshold Key Performance Indicators

KPI Baseline 2016 2017

Target Status Target Status

Revenue mobilization strategy implemented

Ad hoc approach to revenue mobilization

Customs duties based on ad valorem

Not yet, to start applying ad valorem rates in FY2018

Unique Taxpayer Identification Numbers (TIN) introduced

Allocation of TINs has started, but not yet in use. To be flagged off in FY2018.

Improvement in coverage and classification of data in in-year budget reports

Only approved budget and actuals disclosed

Allow comparison to original budget

Achieved

Allow comparison to approved budget including suppleme-ntary and virement

On course to be achieved

Improvements in information contained in annual financial reports with regard to application of IPSAS

Revenue and Expenditure reports by organizational and economic classification

Coverage to include revenue; expenditure; financial assets; domestic

Achieved?

Donor funds under the control of the government included in the PFM CS


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KPI Baseline 2016 2017

Target Status Target Status arrears; and cash flow statement

Procurement, installation and commissioning of core banking and accounting systems with an added basic payment system

Banking operations manual with no written procedures and incomplete reports. Regional payment system non-existent

Gathering functional and technical requirements for core banking system and procurement of services for supply and implementation

Ongoing

Installation, commissioning and stabilization of core banking and accounting solution including the ICT infrastructure


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II. KEY ACTIVITIES AND DELIVERABLES DURING Q2 2017 Component 1: Revenue Mobilization, Planning and Budget Preparation 10. During April-June 2017, EY LLP continued executing the activities agreed upon in the approved inception report, under the consultancy in which EY LLP is contracted to provide technical support to revenue departments in the Ministry of Finance so as to enhance domestic revenue collection. Activities carried out in Q2 focused on the following:

• Tax policy gap analysis and revenue potential report with strategies and measures to close the gaps including tax policies

• A unique Taxpayer Identification Number (TIN) to register and maintain taxpayer’s database

• Taxpayer Segmentation with tailor-made compliance strategies for each taxpayer segment

• Shift Custom duty from specific rates to ad valorem 11. The consultant worked with senior officials in FGS, and to this effect two study missions were held in Mogadishu on 2nd - 7th May 2017, and on 11th - 16th June 2017 aimed at completing activities related to above deliverables. Below is a summary of completed work on Q2 deliverables: Tax policy gap analysis and revenue potential report with strategies and measures to close the gaps including tax policies 12. The Somalia tax revenue system is fairly nascent having resumed operations after the 2012 Constitution when the first post conflict budget was formulated for the 2012/13 financial year. The system has gaps in the following areas; legal framework, policy framework, organizational structure, human resource capacity and revenue performance. The consultant identified and diagnosed gaps in the tax system and developed measures that would assist to close the identified gaps so as enhance domestic revenue collection. The measures included the development of tax policy, law, strategy, organizational structure and staffing needs. 13. In formulating the measures to fill these gaps, EY studied international best practice and compared it with existing practices in selected case study countries and made inference to inform the recommended measures in each area of gap. Particular reference was made to successful reform of tax systems in post conflict countries to encourage Somalia to embark on the path of reforms at the earliest possible. Although the tax/revenue gap is not sufficiently timely or precise enough to set performance targets, it provides important information which can help Directorate of Revenue to understand its short term, medium term and long term performance and priorities. 14. The gap in tax revenue potential realization will be filled incrementally over the medium term as the Directorate of Revenue embarks on implementing the proposed tax reforms to close the more than 434% revenue gap estimated. The gap in the legal framework will be filled by the formulation of an overarching legislation on taxation to be enacted by the federal Parliament at the earliest possible. The main

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tax law will be complemented by a set of tax specific rules and regulations to be issued by the Minister for Finance without the need to have them enacted by Parliament which may lead to protracted delays. 15. The gap in the policy framework will be filled by the tax policy guidelines together with the proposed features of the main taxes which will form the basis for formulating the tax specific rules and regulations as proposed. The gap in the organizational structure will be filled by adopting the proposals for establishing a formal revenue authority. The proposed semi-autonomous revenue authority mirrors the existing practice in many of the countries in the region that have operating tax systems in place. The gap in human resource capacities will be filled incrementally along the proposals made to render the proposed revenue authority operational. A unique Taxpayer Identification Number (TIN) to register and maintain taxpayers’ database 16. Taxpayer registration and numbering is a critical feature that underpins tax administration in most countries. The aim of this deliverable was to develop a unique Taxpayer Identification Number (TIN) to register and maintain taxpayers’ database. TIN will improve processing of information originating from various taxpayers, administrating their registration and assignment of identification numbers, according to their taxable activities. Taxpayers’ registration will facilitate the collection of taxes, filing of returns and monitoring and evaluation of taxpayer activity. TIN can also be utilized for information sharing among government agencies (where permitted). 17. Development of a unique Taxpayer Identification Number (TIN) involved three main activities namely:

• Definition of TIN and its generation algorithm • Development of TIN introduction schedule • Documenting process and procedure for taxpayer registration • Development a TIN prototype that can be used for assigning and printing

TIN, and also maintaining taxpayers’ data base • Monitoring and facilitating TIN implementation

18. The current taxpayers’ registration process was assessed in terms of legal, operational and infrastructure highlighting the gaps that exists. Case studies were also reviewed focusing largely on post-conflict countries as well as regional countries with an aim of highlighting operationalization framework that need to be put in place to guide the taxpayer registration process. The case studies outline tasks and structures that the countries that have been studied have implemented to establish and streamline a continuous taxpayer identification and registration process. To this end, a process and structures that can be employed by the Federal Government of Somalia for taxpayer identification and registration was proposed. 19. The TIN structure is derived from an algorithm, tested and proven to be effective in creating a proper identification system for both personal and corporate taxpayers in Somalia. The proposed TIN structure is separated into four distinct sections—the taxpayer category (Personal or Corporate, represented by P and/or C), a zero, followed by a string of seven random numbers, and a random alphabet.

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This simple structure gives a cumulative ten character TIN that offers a wide range to cover the number of potential taxpayers to be registered in Somalia. 20. A reliable database of taxpayers must be maintained in an efficient manner. Due to the nature of manual systems being slow, prone to errors, not reproducible, inconsistent and insecure, the consultant proposed the adaptation of a computerized system, the Taxpayers Registration Prototype. This will serve to enhance the ease with which taxpayers are registered and mitigate the risks around data integrity. Following the generation of the TINs proposed, these will be loaded into a database for secure storage. The unique number will then be allocated automatically to a taxpayer through the proposed registration prototype. 21. Coupled with the TIN structure is a step-by-step process for implementation of the system and monitoring to ensure consistency, efficiency and effectiveness. This implementation plan highlights the essential tasks and resources that need to be invested in order to achieve maximum results and ensure sustainability of the entire process. Taxpayer segmentation and developed tailor-made compliance strategies for each segment 22. The objective of taxpayers’ segmentation is to enhance taxpayers’ management with an aim of improving tax compliance. Segmentation of taxpayers helps the tax authority to understand different behaviors and characteristics they exude. By segmenting taxpayers, compliance risks and mitigation measures for each segment are better understood. This then enhances taxpayers’ management as well as facilitates formulation of unique strategies that boost tax compliance in each taxpayer segment. Therefore, taxpayer segmentation and tax compliance strategies provide a systematic way of addressing compliance risks in a specific tax segment which then reduces tax revenue gap and leads to general improvement in the productivity of a country’s revenue system. 23. This deliverable involved undertaking the following main tasks:

• Identification of taxpayer segments and segmentation criteria • Definition of taxpayer segments • Formulation of compliance strategies which entails understanding,

profiling and prioritization of the compliance risks and developing measures (strategies) to address the risks identified

• Monitoring of the compliance strategies’ implementation results 24. There are two broad categories of taxpayers, that is, individuals (natural persons) and businesses. The segments in Somalia are aligned to these categories. The definition of individuals’ segmentation is done using the individual level of income and while for businesses, size, sector/industry and taxes paid criteria are used. In summary the segments created include:

• Individual taxpayers • Large taxpayers • Medium taxpayers • Small & Micro taxpayers • MDAs and Not-for profit organizations/taxpayers

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• Financial sector taxpayers • Telecommunication sector taxpayers • Energy sector taxpayers • Building and construction sector taxpayers • Import and export duty taxpayers

25. To accelerate operationalization of segment the following are the recommendations provided:

• Prioritize taxpayers’ registration and data collection for tax purposes • Collect business turnover and map them into segments • Issue a legal notice/memo or a ministerial decree on introduction of

taxpayer segments • Prioritize creation of LTO then the others to follow • Commence a taxpayer’s service unit that would be dedicated to offer

exceptional services to large taxpayers • Collaboration between the MoF, Ministry of Commerce, Ministry of

interior and other relevant Government Ministries, Departments and Agencies to increase and ease taxpayer identification and registration. As such, a proposal is to have licensing of businesses, societies and other organizations a pre-condition to registration for tax purposes.

26. The following broad activities will be necessary to successfully drive compliance strategy for Somalia:

• Initiate comprehensive tax policy reforms proposed in first deliverable on tax policy gap analysis

• Enact and implement the proposed overarching taxation law of Somalia (2017) to modernize tax administration

• Strengthen organizational, management and staff capabilities of Directorate of Revenue in all functional areas such as tax registration, filing, enforcement, auditing and taxpayer services

27. Proposed compliance strategies are based on the OECD compliance risk management model. Taxpayers pose various risks in a tax system depending with their behaviors and characteristics. Managing such risks is therefore a critical part of strategies that address non-compliance. Owing to the wide tax gaps resulting from existing compliance risks, the following overarching strategies will guide FGS in the efforts to seal the noted gaps and further drive towards better tax compliance:

• Progressively review and update tax laws • Develop a taxpayers’ charter detailing taxpayers’ rights and obligations

and tax administration rights and obligations • Develop, maintain and ensure integrity of taxpayer database • Initiate and deliver public education to boost tax compliance • Build capacity of revenue staff to perform core tax administration

functions • Facilitate timely filing, return processing and tax payment • Initiate and perform audit and risk analysis programs and ensure their

effectiveness • Reduce chances for evasion and avoidance through decentralization of

tax pay points

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28. Finally, for each segment defined, the consultant proposed the following broad compliance strategies:

• Registration of businesses • Creation of dedicated offices to serve • Promotion of voluntary compliance • Regular audits • Building staff capacity • Taxpayer education and assistance • Communication with taxpayers.

Shift Custom duty from specific rates to ad valorem 29. The objective of shifting customs duties from specific to ad valorem are twofold: 1) an ad valorem duty is generally considered fairer than the specific duty as it is based on transaction value therefore generating more revenue compared to specific rate which is based on quantity. 2) Ad valorem duty regime promotes operational efficiency since it is easy to apply locally and harmonize with other jurisdictions. 30. To address requirement of this deliverable the following activities were carried out:

• Review current status of customs taxes collected, on which goods/services, at what specific rates and challenges faced

• Estimation of the customs tax revenue gap by considering current collection yield under specific taxes and potential collection under ad valorem regime.

• Study of current Somali customs laws and administration to ascertains their adequacy and relevance in face of the proposed shift

• Study of customs duty practices from other countries that have implemented ad valorem tax regimes

• Review of customs documents received from FGS and third party customs reports for Somalia and

• Stakeholder engagement through interviews and workshops 31. The insights and information gathered from above informed development of ad valorem customs tax regime for Somalia as well as basis for recommendations on requirements for implementation of the proposed ad valorem duty regime. End of phase 1 report 32. The table below summarizes the status of achievement of the project deliverables as per the work plan: Key Deliverables completed Drafting of the deliverables is ongoing

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Status of achievement of the Project Deliverables General Deliverables Detailed Deliverables Status/Remarks Inception Report ► Inception meetings with

Client Completed

► Review of project documentation

► Collection and correlating necessary information and data

► Current situational analysis ► Final implementation plan

Tax policy gap analysis and revenue potential report with strategies & measures to close the gaps including Tax Policies

► Tax policy gap analysis (policy, law, strategy, organizational structure & staffing)

Completed

► Revenue gap analysis ► Assessment of current tax

administration ► Development of Tax Policies

with concrete measures

A unique Taxpayer Identification Number (TIN) register/database and design of all supporting workflow/process for maintaining database, Database will be in excel based or similar spreadsheet

► Definition of TIN and its generation algorithm

Completed

► Develop TIN introduction schedule

► Develop Taxpayer Identification Number (TIN) database

► Develop & monitor framework for TIN implementation

► Develop workflow/process for capturing and maintaining TIN

Taxpayer Segmentation with tailor-made compliance strategies for each taxpayer segment

► Definition of taxpayer segments and segmentation criteria

Completed

► Collection an analysis of current and potential taxpayers data

► Development of compliance strategies for each taxpayer segment

► Develop monitoring framework for implementation of compliance strategies

Shift Custom duty from specific rates to ad

► Review current status of customs taxes collected on

Comments on the Final draft report

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General Deliverables Detailed Deliverables Status/Remarks valorem goods/services, at what

specific rates and challenges faced.

were received from FGS. Consultant working to finalise the report. ► Design harmonized

commodity description and coding system, and propose ad valorem customs tax regime

► Technical advice on implementation of proposed ad valorem customs duty regime

End of phase 1 report

► Review Phase 1 implementation Deliverable is on

drafting stage. 50% of the work is complete.

► Documentation of lessons learnt

► Develop recommendations

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Component 2: Treasury Management, Budget Execution, Procurement, Accounting and Financial Reporting 33. The key accomplishments during April-June 2017 under this component came from three areas; (i) the updating of the treasury accounting procedures manuals and training of staff on IPSAS by a Consultant (Crown Agents), (ii) Technical assistance to the implementation of the SFMIS, and (iii) Strengthening the legal and institutional framework for public procurement through a consultancy by EY LLP. Updating of the Treasury Accounting Procedures Manuals 34. The Consultant fielded an international team that undertook the project inception mission in conjunction with the national counterparts from 11 to 15 April 2017. A second mission was undertaken in May 2017 to build on the inception phase activities. Whilst there was no visit to Mogadishu in June 2017, the team continued to work from their respective home countries in support of the project. 35. One of the key activities during 2017 Q2 was to reconfirm the baseline information on treasury management, and accounting and reporting systems based on the broader Public Finance Reform Strategy and Action Plan 2016-2020. The other key activities undertaken during the Q2 are provided below. Development of the Comprehensive Operating Procedures Manual (COPM) 36. Documentary reviews were undertaken which focused on (i) Financial and Accounting Procedures, 1961, as amended in 1971; (ii) Review of the Draft PFM Act; (iii) National Financial Procedures Manual, and (iv) Fiduciary Procedures Manual. The aim of the reviews was to ensure that the draft regulations developed under the project are in conformity with the draft PFM Act and that there is consistency between these key documents and the manuals. The documentary reviews for the manuals and regulations are extensive, and will continue in both Q3 and Q4. For each of these documents, the reviews highlight issues involved and apply the “best practice” principles while being mindful of the Somalia context. An outline of the outputs will be presented in the forthcoming deliverable review report. Process flow mapping 37. The team undertook first-hand “high level mapping” of all treasury systems with the intention of identifying which ones need to be re-engineered. The maps cover all current business processes (for revenues and expenditures) of the Treasury, in areas such as (i) Expenditure warrants (both for projects and non-project expenditures); (ii) Payment processing for different types of payments (goods and services, salaries, advances etc.) and different modes of payments (bank transfer, direct and cash); (iii) Revenue collection and consolidation into the consolidated fund; (iv) Advances of various natures with related processes for their settlement; (v) Expenditure refunds; and (vi) Donor revenues. A follow-up detailed process mapping exercise would be conducted in 2017 Q3.

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Interactions with ministries, departments and agencies (MDAs) 38. The team works on a day-to-day basis with the Office of the Accountant General while on the ground in Mogadishu, which is aimed at transferring skills to the Treasury Staff. In addition, it has had active interactions with other key stakeholders including the Central Bank of Somalia (CBS), Customs Department, the Ministry of Commerce (as a representative MDA) and the Ministry of Finance (as a line ministry). Treasury Single Account (TSA) 39. An inventory of all bank accounts was initiated to enumerate and determine who controls existing bank accounts in the CBS and the commercial banks. The initial findings indicate considerable inconsistencies between the CBS and the Accountant General’s systems. In addition, almost 60% of the accounts registered in the CBS are not controlled by the Accountant General, and the transactions in these accounts do not pass through the treasury systems. Cash management 40. The team commenced assessment of cash management practices including forecasting practices. This included mapping the revenue and expenditure process flows to determine the nature of transactions and how best to support cash flow forecasting. Terms of reference (ToR) of the Cash Management Committee (CMC) were reviewed, as well as supported the development of a ToR for the cash management unit. Accounting and reporting 41. The team reviewed core workflows to ensure they support effective and accurate accounting. This included confirming the nature of revenue and expenditure transactions by the FGS to determine how the chart of accounts needs to be modified as part of the steps towards IPSAS compliance. The annual year-end closing procedures and financial statement preparation by the Office of the Accountant General and MDAs will require documenting the workflow of collection, analysis, and filing of supporting documentation (in both electronic and hard copy). The project will also determine the accounting rules and procedures.

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Support to Public Procurement and Concessions Legal, Regulatory and Institutional Management Reforms 42. EY was contracted to undertake a consultancy aimed at supporting the Public Procurement and Concessions Legal, Regulatory and Institutional Management Reforms. The project is aimed at improving the national public procurement system in order to increase the confidence of the citizens, and the business community and the International Community in the public sector management by the Government. This project entails carrying out Technical Assistance work under five components; implemented in two phases. These are:

(i) Development of an enabling policy, legal and regulatory framework for public procurement;

(ii) Development of PPP policy and regulations and institutionalization of the PPP (concessions) legal framework;

(iii) Governance and Organization Structure that will deliver the mandate of the Procurement Authority;

(iv) Building institutional and management capacity; and

(v) Developing monitoring and oversight capacity. 43. The schedule below summarizes the scope of work and respective deliverables for which the consultant (EY) was contracted to undertake in this assignment. Scope of work

Enabling legal and

regulatory framework for Public Procurement

Concessions

Governance and Organizational structure for PPA

Del

iver

able

s

§ Draft Public procurement Policy and public procurement regulations

§ Draft PPP Policy and Regulations

§ Draft Public Procurement Authority Strategic Plan

§ Updated standard bidding documents (SBDs)

§ Concessions bidding documents

§ Draft Charter for the PPA Board

§ Guidance Notes for Procurement Processing

§ Concessions Technical Unit ToR

§ Technical Working Group ToR

§ Disposal bidding documents

§ PPP framework defined and put in place

§ Updated Organizational structure and Job descriptions

§ PPA setup

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Status of Quarter 2 Deliverables 44. All the quarter two deliverables are covered under Result Area 3 – Governance and Organizational structure that will deliver the mandate of the Procurement Authority. They include the following: (i) The roll out plan for setting up the Public Procurement Authority and other

procurement and concession institutions

(ii) Human Resource manual for the Public Procurement Authority 45. The above two deliverables were submitted to the FGS technical team for review and comments. An onsite validation was thereafter undertaken from 2-6 May 2017, which entailed having practical walkthrough sessions with the Procurement Unit team in the Ministry of Finance on the implementation of the developed documents. The purpose of the walkthrough sessions was to adequately equip the MOF procurement team with the knowledge and skills of using the developed documents which will enable them to be the lead agents of transferring the same knowledge and skills to other officers in the line Ministries. Status of achievement of the Project Deliverables 46. Table 1 below summarizes the status of achievement of the project deliverables as per the work plan: Key Deliverable completed Drafting of the deliverables is ongoing Deliverable not prepared Table 1: Status of achievement of the Project Deliverables General Deliverables Detailed Deliverables Status/Remarks

Result Area 1: Enabling Legal and Regulatory Framework for Public Procurement Draft public procurement Policy and public procurement regulations

Draft Public Procurement Policy

Draft Public Procurement Policy validated

Draft Public Procurement Regulations

Draft Regulations validated

Updated standard bidding documents

SBDs for Goods Draft SBD for Goods validated SBDs for Works Draft SBD for Works validated SBDs for Consultancies Draft SBD for Consultancies

validated SBDs for non-consultancy Services

Draft SBD for non-consultancy Services validated

Disposal bidding documents

Standard bidding documents for disposal goods or equipment

Draft Disposal bidding documents validated

21

General Deliverables Detailed Deliverables Status/Remarks

Result Area 2: Concessions Draft PPP Policy and Regulations

Draft PPP Policy Draft PPP Policy submitted for review and approval by the FGS technical team

Draft PPP Regulations Draft PPP Regulations submitted for review and approval

Concessions bidding documents

Standard Request for proposal for concessions

Draft Standard Request for Proposal for concessions submitted for review and approval

Standard concession agreement

Draft Standard Concession Agreement submitted for review and approval

Concessions Technical Unit ToR

Core Functions of the PPP Technical Unit

Draft Concessions Technical Unit ToR submitted for review and approval Core Staffing of the

Technical Unit and Reporting obligations

Result Area 3: Governance and Organizational Structure Draft Public Procurement Authority Strategic Plan

Draft Public Procurement Authority Strategic Plan

Draft Strategic Plan validated

Updated Organizational structure

High level Organisational Structure

Draft High level Organisational Structure validated

Departmental Organisational Structure

Draft Departmental Organisational Structure for the PPA validated

Draft Charter for the PPA Board

Draft Charter for the PPA Board

Draft Board Charter validated

PPA Job descriptions

Job Descriptions Manual Draft Job Descriptions Manual validated

PPA set up Roll out Plan/Operational Manual

Draft Roll-out Plan validated

Human Resource Manual Draft Human Resource Manual validated

Final Phase 1 Report Final Phase 1 Report that summarizes the achievements made in the first year and delivery of project outputs as per the work plan for Phase 1

The development of the Final Phase 1 Report is in progress.

Note: The Deliverables for Quarter 1 and 2 were completed and awaiting final validation by the FGS and World Bank. The final Stakeholder Validation workshop is programmed to take place in Q3. 47. The consultant received two comments on the deliverables submitted to the FGS team, and provided response as below:

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Comment 1: The roll-out plan seems quite similar to the strategic plan under the PPA (Implementation Plan). Can you clarify the difference is between the two and how important it is to separate them as two documents. Response: The Strategic Plan has been developed for the PPA while the roll –out plan presents activities to be undertaken to operationalize institutions stipulated in PPCDA, including PPA and CTU. Comment 2: Please ensure the Human Resource (HR) manual is simplified and easy to use and aligned to the FGS law. The HR manual has been developed in line with Law for the Civil Servants of the Government (Law No. 11). Also benchmarked some components of it such as recruitment process with the manuals for FGS projects including the Recruitment Manual for the Capacity Injection Mechanism (CIM).

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Operationalization of the Public Procurement, Concessions and Disposal Act

48. The National Procurement and Concession Counterpart (NPCC) in conjunction with EY have also provided support towards the operationalization of the procurement law which was enacted in August 2016. The support has entailed a review of the following:

(i) Drafted a Public Procurement Policy setting out the philosophical, socio-

economic and political rationale for the public procurement reforms;

(ii) Drafted regulations for public procurement, concessions and disposal

(iii) Developed operational documents to guide procurement and concession activities in line with the Act including Standard Bidding Documents for Goods, Services, Works and Consulting as well as Concession bidding documents;

(iv) Developed documents to guide the setting up of institutional and governance structures for implementation of the Act—which include the Public Procurement Authority (PPA) Draft Strategic Plan, its Board Charter, Organization Structures and Job Descriptions as well as the Roadmap for setting up the Authority.

49. The new law had been expected to become effective on 9 August 2017 (one year after its enactment as per Article 177 which stipulated the Act to come into force not later than 12 months after its enactment). However, this would not be achieved until the following benchmarks are realized:

(i) Appointment of the PPA Board of Directors and a Director (ii) Appointment of Members of the Independent Procurement Review Panel (iii) At least 12 Procurement Entities (ministries) starting with those with high

procurement budget to each establish a Procurement Committee and a Procurement Unit;

(iv) Decentralization of budgets of Federal Government MDAs

50. The NPCC has advised the MOF to seek for a postponement of the August 9th date of operationalizing the procurement law.

Capacity building 51. Phase 2 of the project will entail sensitization of the Act and the Regulations, comprehensive capacity building and on-the-job skills transfer to ensure the outputs from Phase 1 are well entrenched for complete operationalization of the Act. The NPCC continued supporting the Procurement Directorate in facilitating monthly in-house professional procurement training with different stakeholders involved in public procurement. The stakeholders trained include MDA’s Procurement officers, Members of the user departments, Members of the Contracts committee, Political leaders and civil society.

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Establishment of a Web Portal 52. The NPCC supported the Procurement Directorate in establishing a web portal. The goal of the Web Portal is to provide more transparency in government procurement and increase confidence in Public sector. Public access to tenders allows all citizens and vendors to download tenders providing equal opportunity. The Procurement Directorate started utilizing the portal by uploading some of the relevant documents, including the Public Procurement Act both in English and Somali and list of government awarded contracts. MDAs, PIUs and Donor Agents have also been requested to post tender opportunities, contract awards, pre-qualified lists on the web portal.

Procurement support being provided by PIU to various projects and MDAs 53. The NPCC supported the Procurement Directorate in concretizing procurement arrangements between the Procurement Directorate and ICT Sector Support Project. The arrangements included agreement for the PIU to train two procurement officers (e.g. in STEP) from the pool of 12 qualified Somali experts available and funded by the Ministry of Finance to support projects in procurement across Line Ministries.

25

Somalia Financial Management Information System 54. The SFMIS TA continued the incremental deployment approach to gradually develop and implement additional functions and reports to improve the Government’s financial controls and processes. The following features and modifications were deployed during the quarter:

(i) Updates to the Purchasing Module GRN (Goods Received Note): A hotfix for the GRN template and to provide further enhancements to the usability of the form

(ii) CBS Integration: Design and development of the communications protocols

(Web services) between SFMIS and the core banking application. Held weekly meetings with the vendor and CBS personnel to coordinate our activities.

(iii) PFM Project Mid Term Review

a. Provided support to the AG’s office for preparing for the mission including preparation of the presentation materials for the treasury component

b. Provided support to the AG’s office and the project team in the preparation of the concept note highlighting the FGS’s priorities and a summary of the accomplishments to date for the project

(iv) IMF SMP Mission (Last Review Mission for SMP 1) Nairobi May 15-19:

The mission focused on performance review under SMP 1 and design of the SMP 2

(v) SFMIS Revenue Collection Module Prototype (Visa fee Collection): In

support of the cabinet’s mandate to have the Ministry of Finance assume responsibility of all FGS revenue collections, designed a prototype and a streamlined revenue collection process for the collection of visa fees at the airport.

(vi) EY Tax Identification Number Script (TIN): Provided support to the MoF

Revenue team to review the design and implementation of the TIN and to ensure that the script can be integrated into the SFMIS

(vii) Crown Agents Treasury Component: Provided support to the AG’s office in

responding to the vendor’s questions about SFMIS and the payment process

(viii) Routine Support: • Provided support to the AG to complete end of quarter closing of the books

and reconciliation. • Provided support to the Ministry on the FGC project on public property

protection project • Provided support to the SMP team to produce the monthly reports and

respond to technical questions on the benchmarks and the financial reports

• Provided support to the EAFS team and the different PIU’s in correcting data entry errors

26

Component 3: Strengthening the Integrity Pillars There was no activity under this component during the quarter under review

27

Component 4: PFM Professionalization There was no activity under this component during the quarter under review

28

Component 5: PFM Reform Oversight, Coordination and Management Project Coordination Unit 55. The project implementation Unit headed by the PCU Coordinator and assisted by the Monitoring and Evaluation Officer and Communication Officer continues to coordinate the PFM Reform activities through the development and strengthening of collaboration with all Component Implementation Teams (CITs) including the supervision of the Subject Matter Experts (SMEs) and Technical Assistance Consultants working under various components of the project. The PCU in addition continues to monitor the implementation of various contracts in line with the work plan, implementation timelines and contractual agreements. As the focal point of the project, the PCU coordinator continues to serves as the key point of contact and liaison between the Ministry of Finance of the Federal Government of Somalia and the Bank and vice versa.

56. To ensure the smooth implementation of the project implementation activities, the project coordination office has throughout the project duration provided the required logistical and other support to local and international consultants engaged under the project managed under the PFMRCU. In terms of its oversight responsibilities, PCU has worked closely with the respective implementation units and consultants to ensure that all relevant reporting requirements including the submission of the respective quarterly reports (progress and IFR Reports) on timely basis and in format and content as in line with the respective projects’ financing agreement as well as coordinating the preparation and submission of other adhoc reports required by donors and development partners as and when such reports are requested. 57. During Q2, the Project Coordinator continued providing the day-to-day support encompassing preparation and monitoring of the project work plan, organizing ROC, TSC and CIT meetings, ensuring preparation of ToRs for activities due for procurement, liaising with donors, and ensuring preparation of project financial statements.

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III. ISSUES, RISKS AND CHALLENGES Component 1: Revenue Mobilization, Planning and Budget Preparation Inadequate availability of data/information 58. Due to prolonged civil war, most of legitimate institutions were destroyed and thus data collection was elusive. This means that adequate macro and micro economic data for conducting a robust estimation of revenue gap and potential was unavailable. It was therefore decided to use data by third party organizations, unpublished studies conducted in Somalia, use of expert opinion (views of experienced persons, optimize on local knowledge and Institutional memory) and best practices from selected countries. Inadequate capacity in terms of numbers and skills within the Directorate of Revenue 59. Most of the staff in the Directorate of Revenue have low skills while the slightly skilled are very few. This was a challenge in especially in contributing their views on improvement of revenue administration. A participatory approach was adopted in presenting the report findings and recommendations as part of transferring skills. When the implementation phases start, the consultant envisages to continue working with the existing staff to further transfer skills with the aim of ensuring a sustainable transformation of the revenue systems. Security challenges due to militant attacks from extremist groups 60. Somalia has made significant improvement in securing major towns from militant attacks including Mogadishu with the support of AMISOM. However, recently there have been incidences of such attacks targeting government offices and hotels frequented by government officials and foreigners. There have been three incidences of bomb explosions while our team was on ground and this led to a temporary disruption of our continuous ground support. The consultant is, however, cognizant of these security risks and the duty of care for our staff and contractors. The following mitigation measures were therefore put in place against such risks:

• All our deployment to Mogadishu are undertaken after comprehensive security assessment and clearance from our EY Local and Global Security & Risk team that also continuously monitor project team on the ground and provide security updates and advice;

• Movements in Mogadishu are restricted to the Ministry of Finance and select government offices which are all situated in a highly secured area of Villa Somalia;

• Staff are accommodated in a secure guest house with 24hr armed security, and located in secure area;

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• All the movements in Mogadishu including airport pick-up and drop are in armored vehicles (B6) with armed security escort;

• All staff are on an enhanced insurance that covers travel, medical and evacuation; and

• All staff are registered on the International SOS and have installed the application on their mobile devices through which they receive on the ground security updates and advice.

Delay in project implementation due to delay in signing of contract and approval of the completed reports 61. Consequences of delays in signing of contract in Quarter I did spill over into Quarter 2 affecting some activities that had been planned such as completion of shift Custom duty from specific rates to ad valorem and development of end of phase 1 report. There was also delays in approval of some deliverables such as report on a unique Taxpayer Identification Number (TIN) to register and maintain taxpayers’ database, and report on taxpayer Segmentation with tailor-made compliance strategies for each taxpayer segment. Final sign-off on both deliverables are still pending. Language relate challenges 62. Loss of meaning during translation of documents from Somalia to English has been a challenge. However, a local partner (HEFI) was utilized for this purpose. Gaps identified in the context of the emerging reform priorities

(i) Lack of stable legal framework that ensures proper administration and enforcement of taxes – Inhibits proper revenue gaps analysis

(ii) Lack of systems for compiling and disseminating data / statistics (iii) Current legislation do not assign revenue function and share to any level of

Government in Somalia (iv) Slow progress in the legislative process in Parliament (v) Unresolved stalemate in the relations between the FGS and the Member

States hinders the sharing of vital tax information and timely harmonization of the fiscal regimes of the two levels of government

(vi) Lack of comprehensive tax policy (vii) Limiting institutional set-up and “not fit for purpose” organizational structure (viii) Limited management and staffing capacity coupled with lack of HRM

strategy (ix) Lack of tax administration infrastructure, systems and functions and where

existing are very weak (x) Poor or/and lack of taxpayers’ services (xi) Slow commitment to normalize WCO Membership by FGS

31

Component 2: Treasury Management, Budget Execution, Procurement, Accounting and Financial Reporting No challenge was reported Component 3: Strengthening the Integrity Pillars Delay to recruit audit consultant 63. There has been a delay to recruit a firm to support the implementation of reform activities in the Office of the Auditor General. Component 5: PFM Reform Oversight, Coordination and Management Insecurity 64. Explosions and attacks on government employees have continued, in Mogadishu. This not only disrupts work and reform activities but presents risks of cost and time overruns in project implementation. Nonetheless there is hope that the new Government will work tooth and nail to improve security in the country. Late reporting 65. Timely submission of progress reports by some components continues to remain a challenge. The PFMRCU will hold a workshop on reporting for all component teams to sensitize them on the need for timely and comprehensive reporting.

32

IV. PRIORITY ACTIVITIES FOR NEXT QUARTER PLAN Component 1: Revenue Mobilization, Planning and Budget Preparation Planned activities for EY for the next quarter to complete Phase 1 are provided below: The following phase 1 actions are planned in next quarter; Deliverable Activities completed Action

required Delivery date

Shift Custom duty from specific rates to ad valorem

► Review current status of customs taxes collected on goods/services, at what specific rates and challenges faced.

► Design harmonized commodity description and coding system, and propose ad valorem customs tax regime

► Technical advice on implementation of proposed ad valorem customs duty regime

► Finalize and submit the Final report

► July 15, 2017

End of phase 1 report

► Review Phase 1 implementation

► Documentation of lessons learnt

► Develop recommendations

► Finalize, validate and submitted End of Phase 1 Report

► July 21, 2017

Planned activities for the phases 2 & 3 66. Project activities realignment and phasing was done at negotiation stage, implementation of project activities is therefore envisaged in line with the three phases. With phase 1 completed, the consultant will continue engaging with FGS to agree on likely kickoff date for phase 2 (scheduled to between July and December 2017) which entails performing the following tasks:

• Tax administration baseline assessment and develop tax administration performance improvement plan.

• Support implementation of Strategy to improve policy framework. Harmonisation of customs tariff between the Federal Government and members states.

• As-is and to-be “re-engineered” business processes report. • Tax administration training needs assessment and develop tax administration

staff training needs assessment (TNA) report with training and capacity building programme required.

33

67. On the other hand, phase 3 which is scheduled for January to June 2018 entails performing the following tasks:

• Develop tax education and awareness campaign strategies and support conducting tax education and awareness campaigns.

• Conduct training and capacity building including hands-on assistance on the Strategy/ improvement plan implementation, and training impact assessment report on staff training and capacity building.

• Assess ICT maturity& develop ICT competence diagnostic report with strategies to enable growth in utilization of ICT for tax administration and improvement.

• Development of necessary change management guidelines, conduction of change management training, and hands-on assistance during change management culture implementation.

• Review and document requirements for WCO membership, advice on procedures for entry to WCO and requirements and support FGS membership to the World Customs Organization (WCO).

68. The detailed deliverables and due dates of the next phases activities outlined above are provided in the table below: Planned activities for next phases GENERAL DELIVERABLES for PHASE 2

Detailed Activities Delivery Date

Baseline assessment report on tax administration performance with an improvement plan

Review of the legal framework and institutional set-up

End of Month 2 of commencement

Conduction of institutional, individual and change readiness capacity assessment Drafting strategy for tax administration performance and improvement plan Hands-on assistance on the Strategy/ improvement plan implementation

Report on harmonisation of customs tariff between the Federal Government and members states

Study deliverable 5 of phase 2 End of Month 3 of commencement Technical support in reviewing tariff

structure for Federal Government and member states Technical advice in harmonization of the tariff structure including harmonization guidelines

As-is and re-engineered business processes report

Identification of processes and their owners


Drafting as-is processes Drafting to-be processes

Tax administration staff training needs assessment (TNA) report

Identification and assessment of tax administration staff training needs


Development of training needs assessment (TNA) report

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End of Phase 2 Report

Develop and submit end of Phase 2 Report


GENERAL DELIVERABLES for PHASE 3

Detailed Activities Delivery Date

Communication strategy

Study deliverables of phase 1 and phase 2 End of Month 2 of

commencement Development of draft communication strategy

Tax education and awareness campaign report

Based on deliverables phase 1 & 2 develop tax education and awareness campaign strategies End of Month 5 of

commencement Support conducting tax education and awareness campaigns

Report on staff training and capacity building

Study and implement deliverable 4 of phase 2


Conduct training and capacity building including hands-on assistance on the Strategy/ improvement plan implementation Training impact assessment

ICT competence assessment report with strategies to enable growth in utilization of ICT to improve organizational performance

Assess ICT maturity End of Month 4 of commencement

Conduct focused reviews

Develop ICT competence diagnostic report with strategies to enable growth in utilization of ICT for tax administration and improvement

Change management report

Development of necessary change management guidelines base of Deliverables of phase 2


Identification of internal change agents Conduction of change management training Hands-on assistance during change management culture implementation

Report on support for FGS membership to the World Customs Organization (WCO)

Review and document requirements for WCO membership


Advise on procedures for entry to WCO and requirements

Project final report and project hand over

Develop and submit end of Final Project Report


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Component 2: Treasury Management, Budget Execution, Procurement, Accounting and Financial Reporting 69. Crown Agents plans in Q3 to focus on completing and submitting the review report covering all the six deliverables agreed in the inception report. It is planned that the submission of the review report will be followed by presentations to the client, and agreements that would directly support the business process re-engineering in 2017Q3. The detailed project work plan below (Table 1) will ensure that the project activities are relevant and consistent with the aspirations of the FGS. Table 2a: Comprehensive operating procedures manual work plan

Activities Details of activities Q2 Q3 Q4 Review and document the existing operational procedures and process flows (including SFMIS) on the ground along with legal framework and donor requirements/applicable benchmarks.

Review Financial and Accounting Procedures, 1961, as amended in 1971.

√

Review of the Draft PFM Act. √ Review National Financial Procedures Manual. √

Review Fiduciary Procedures Manual. √

Mapping current business processes of the Treasury: revenues and expenditures.

√

Obtain and review additional documents: The Constitution of the FRS Law 34 on the Magistrate Accounts Procurement Act Procurement Regulations Treasury Process Maps Treasury Circulars and Ministerial Orders.

√ √

Identify gaps, if any, and recommend improvements.

√

Re-engineer the business process by developing procedures for execution of each process and submission to Somalia Treasury for review and discussion.

√ √

Document revised/updated process flows with inter-linkages with regulatory framework clearly included.

√

Obtain approval of updated/revised procedures manual by the client

√

Table 1b: Financial regulations work plan

36

Activities Details of activities Q2 Q3 Q4 Review the current legal framework and the requirements of the PFM Law and its implication on operations.

Review the draft PFM Act paying closer attention to the highlighted parts where they specifically mention “regulations”

√

Outline issues in those sections highlighted in the Act √

Outline how “best practice” principles could help to address the issues identified

√

Discuss the best option for each issue identified √

Consolidation of existing circulars and orders via a central repository, such as the MOF intranet. Relevant circulars to be codified as part of a procedures manual, and to be made available from a central data repository. Determine the context and suitability for use of circulars, ministerial orders and regulations based on legal and regulatory framework for specific objectives.

√

Identify statutory provisions requiring implementation by financial regulations.

√

Prepare circulars and ministerial orders supporting implementation of relevant statutory/regulatory framework.

√

Prepare and discuss draft regulations with the client chapter-wise.

√

Submission of final draft after considering modifications as may be agreed.

√

Table 1c: Treasury single account work plan Activities Details of activities Q2 Q3 Q4 Review of TSA framework with reference to its alignment with reporting requirements, control environment, technological capabilities.

Review how TSA requirements have been provided for in the draft PFM Act.

√

Develop an inventory of √

37

Activities Details of activities Q2 Q3 Q4 existing treasury bank accounts1. Identify accounts and sources of public funds that are outside the purview of treasury.

√

Propose changes in chart of accounts, accounting process and procedures in SFMIS (if required).

Review and propose changes in Chart of Accounts, accounting process and procedures in SFMIS.

√

Prepare an inventory of existing bank accounts

√

Establish the periodicity of revenue sweeps, reporting and bank reconciliations.

√

Prepare circulars for enforcing TSA rules on identified bank accounts within the TSA framework.

√

Support TSA improvements, adapting to environment changes and modifications, since the establishment of TSA is evolving process.

√

1. Develop the TSA Concept Paper for the FGS.

2. Establish the periodicity of revenue sweeps, reporting and bank reconciliations.

3. Prepare a roadmap on closure of all MDA accounts outside the TSA and the full operationalization of those closed accounts under the TSA - thus enhancing the full implementation of one TSA as intended.

4. Prepare circulars for enforcing TSA rules on identified bank accounts within the TSA framework.

These activities will be implemented during and after Q2 andQ3

√

1 The CA Team has been told that this activity has been done, but will re-confirm it in the reviews. 2The loan total was 20,000,000 where 5,000,000 and 4,000,000 were allocated for Puntland and Somaliland respectively. 1,000,000 were also allocated for other activities by the Bank and 10 million is for FGS.

38

Activities Details of activities Q2 Q3 Q4 5. Support TSA

improvements, adapting to environment changes and modifications.

Table 1d: Cash management work plan Activities Details of activities Q2 Q3 Q4 Review current cash management practices, including reporting periodicity, dissemination of reports, data adequacy, legal or donor requirements.

Identify and confirm current cash management practices, report dissemination, data adequacy, legal, and donor requirements.

√

Identify sources and reliability of available data for cash planning and cash management.

√

Suitable changes to CoA for streamlining data capture.

√

Provide the modalities and TOR for the formation of the Cash Management Committee.

√

Develop templates for; (i) Annual cash plans,

including quarterly updates with actual progressive data

(ii) Weekly/daily cash report

√

Identify steps for populating cash management templates / reports with inter-linkages with SFMIS.

√

Training to identified and relevant counterparts – this will be an ongoing activity and counterparts will be concurrently involved during the development of the cash management framework.

√

Supporting Cash Management framework

√

Table 1e: Accounting procedures manual Activities Details of activities Q2 Q3 Q4 Review processes for completion of financial

1. Review of the financial statements for the last 3 √

39

Activities Details of activities Q2 Q3 Q4 transactions of different natures and economic activity.

years (2014, 2015, and 2016).

2. Reviewing roles in the Office of the Accountant General and comment on staff duties (appropriately segregated to lower the chances of error or fraud)

(Out of scope of CA‘s TOR)

√

3. Review core workflows to ensure they support effective and accurate accounting (will be done as part of process mapping)

√

4. Document workflows, roles and responsibilities (financial transaction processes)

√

5. Identify skills and personal development needs of staff that are critically needed to support performance.

(Out of scope of CA‘s TOR, will need additional resources in phase 2)

√

6. Validate consistency of Chart of Accounts with Government Finance Statistics Manual (GFSM-2014) (CA will review the functionality in the IFMIs. Will be done in the last Q4)

√

7. Design and implement an electronic and paper document filing system to meet needs of reformed revenue and expenditure system to ensure completeness and availability of documents and records, access controls, and ensure that changes to records are recorded and result in an audit trail. (Document retention policy will be

√

40

Activities Details of activities Q2 Q3 Q4 addressed)

8. Develop accounting policy that establishes principles for government accounting, relevant for the current complexity of government accounting (Will form part of COPM and AP in Q3)

√

9. IMF SMP reporting package: develop template reports, report configuration in SFMIS, defined workflows with clear roles and responsibilities, and calendar for production and delivery. (Will be recommended to be done, in Phase 2)

√

10. Design a financial procedures support function in the Office of the Accountant General to provide on-going support to MDAs. (Out of scope of CA‘s TOR)

√

11. Establish workflows for submission of regular financial reporting, internal and external, from MDAs to the Accountant General, and within the AG office, define roles in MDAs for those responsible for financial reporting, and document procedures in a manual.

√

12. Develop workflows within the Office of the Accountant General to validate, analyse, query and consolidate MDA reporting, including roles and responsibilities in the Office of the Accountant General for the collection, review and analysis of interim financial

√

41

Activities Details of activities Q2 Q3 Q4 information from MDAs, and document procedures in the reporting manual.

Map identified processes establishing required validations and internal control checks.

√

Design various accounting forms and voucher templates for use in each activity/process.

√

Design and document the procedure for completion of each activity.

√

Submission of draft procedures for each accounting process to client for review and discussion.

√

Approval of the draft procedures in accordance with agreements reached.

√

Table 1f: Fixed asset management policy Activities Details of activities Q2 Q3 Q4 Understand fixed assets and categories in use or anticipated for use in future.

Review Financial and Accounting Procedures, 1961, as amended in 1971.

√

Review Draft PFM Act. √

Review Fiduciary Procedures Manual.

√

Assign codes to asset segments for capturing data in asset register.

√

Prepare policies for management of assets, based on following: a. Asset Categories (Roads,

Building, Infrastructure, Rolling stock,

b. Asset value, classification and asset records

c. Asset life d. Safeguarding of assets e. Periodicity of maintenance

(Preventive, Scheduled and Contingent maintenance)

f. Asset replacement g. Disposal of assets.

√

42

Table 1g: Risk analysis of the treasury management, budget execution and accounting and reporting component Risk Before risk

treatment / mitigation

Risk treatment/mitigation After risk treatment / mitigation

Like

lihoo

d

Impa

ct

Stat

us

(Transfer, Treat, Tolerate, Terminate)

Like

lihoo

d

Impa

ct

Stat

us

Contributions of the different units within the MoF do not come on time and in appropriate form to support the COPM and the Financial Regulations

2 3 6 Treat Identify the relevant departments; sensitise officials from the relevant departments; secure ministerial support

1 3 3

Treasury Circulars and Ministerial Orders are not available

2 2 4 Treat/Tolerate Identify alternative sources for the documents

1 3 3

The draft PFM Act does not support best practice

2 3 6 Treat Review and communicate changes

2 3 6

No stakeholder buy-in for the reforms (especially the TSA)

3 3 9 Treat Institute a communication mechanism with the PFM Coordination Unit; secure ministerial support

2 3 6

Confidential information on bank accounts is not disclosed by the MDAs

3 3 9 Treat Triangulate the sources of information; secure ministerial support

There is inadequate capacity within FGS to support the project

3 3 9 Treat/Tolerate Develop implementation support through working with the EAFS staff; develop CMU staff in the MDAs; develop training programme

1 3 3

1 = low, 2 = medium, 3 = high; status = likelihood x impact; status: 1-3 =low; 4-6=medium; 7-9=high Procurement 70. The planned activities for EY for Q3 will be to carry out wrap up activities for the Phase 1 project implementation including facilitating the final Phase 1 validation workshop and develop the Final Phase 1 Report (refer to inception report). 71. Action Plan for the NPCC in the coming months entails the following;

Action Detailed Activities Duration 1. Appointment of the

PPA Board of Directors and a Director (Article 38)

Procurement Director and PS to nominate the nine (9) members of the Board and make recommendation to the Minister.

Sep 2017 to – Jan 2018

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Action Detailed Activities Duration The Minister shall present the list of

members to Council of Ministers for vetting and Approval for the President’s appointment.

2. Appointment of

members of Independent Procurement Review Panel (Article 50)

Procurement Director and PS to nominate the five (5) members of the Independent Procurement Review Panel and present it to the Minister for appointment.

Jan-Mar 2018

3. Establishing a Procurement Committee (Article 58) and a Procurement Unit (Article 61) in 12 ministries/Procuring Entities

The PS to appoint Procurement Committee composed of five (5) senior officers (Department Heads)

The PS to establish the Procurement Unit that shall be at most five (5) officers. The Ministry of Finance may second some of its staff to head the Procurement Units in other ministries/Procuring Entities.

Sep 2017 to Jan 2018 for all 12 ministries

4. Gazette the Public Procurement, Concessions and Disposal Regulations, 2017

The Procurement Director to present the Procurement Regulations to the Attorney General for drafting the Gazette Notice that shall be presented to the Minister of Finance for signature

Immediately

SFMIS 72. The SFMIS team will continue to be guided by the SFMIS activity plan for 2017-2018 (see table below). Plan for SFMIS (2017 – 2018)

Module / Component 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Financial Reporting & Dashboard Financial Charts for Executive Management Mobile Apps Consolidated Real-Time Dashboard Ongoing Development of financial reports and

needed Configuration & Deployment of Payroll for other sectors

Security Sector Health Sector

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Module / Component 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Education Sector CIM Automation of Seaport Customs Receipt Generation of Customs Receipts Auto-generation of Customs Revenue Voucher System Usability Improvements Productivity Improvements Automation of current practices Integration with Tax Management System Integration with Tax Identification Number Auto-generation of Revenue Vouchers Auto-Recording of Financial Transactions

Human Resource Employee Management Recruitment Document Archival Manpower planning (linked to budget preparation) Performance Appraisal Training Management Time Management Employee self-service

Fixed Assets Depreciation (notional for Net Book Value) Asset Count Asset Barcoding

Inventory Control Item Master Store Receipt Store Issue Stock Counts / Inventory Reports

Integration with Customs Declaration System Declaration Management (possibility of interface with pre-shipment system)

Integration with Billing and Revenue Collection Risk Management and Assessment

Cash planning Cash flow forecasting Disbursement schedules and cash releases

Purchasing Release 2 Integration with Inventory and Asset Register Contract management

Integration with other systems Integration with core banking system at the Central Bank

Integration with commercial banks payment systems Ongoing Post Implementation Support

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Component 3: Strengthening the Integrity Pillars

i) Complete the approval of the REOI Evaluation Report submitted to the Bank. ii) Commence the next stage of the procurement process by sending out RFP to

the shortlisted firms.

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Component 5: PFM Reform Oversight, Coordination and Management 73. Continue providing the day-to-day support encompassing preparation and monitoring of the project work plan, organizing ROC, TSC and CIT meetings, ensuring preparation of ToRs for activities due for procurement, liaising with donors, and ensuring preparation of project financial statements.

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V. ANNEXES

1. Financial Management

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ANNEX 1: Financial Management Report for Quarter Ended June 2017

INTERIM FINANCIAL REPORT For Quarter 2, 2017

(April – June)

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The Project Management is responsible to ascertain that the progress report and financial statements of the Project for the period ended June 30, 2017 are prepared, in all material respects, in accordance with the basis of preparation and accounting policies set out in Note 3 to the financial statements. In preparing these financial statements, the Project Management is required to select suitable accounting policies and then apply them consistently in conformity with Cash Basis International Public Sector Accounting Standard (Cash Basis IPSAS) and the requirements of Financial and Accounting procedure of the State, 1961 as amended. The Project Management is responsible for ensuring that proper accounting records are kept which enable the financial statements to be prepared in compliance with the basis of preparation and accounting policies set out in Note 3 to the financial statements as well as in accordance with the terms of the financing agreement for the State and Peace Building Fund Grant Agreement Number TFA 0388 between the Federal Republic of Somalia and the International Development Association. The Project Management is also responsible for safeguarding the assets of the Project, and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Project Management assumes the responsibility to provide, and has provided, the Auditor General with all accounting records, supporting and other documents, minutes, and any other pertinent information and explanations, either orally or in writing, necessary for the audit. Signed on behalf of the Project Management:

…………………………… Ahmed Yusuf Muumin, Accountant General

STATEMENT OF PROJECT MANAGEMENT’S RESPONSIBILITIES

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The Project implementation for this year is 12 months from 01 January 2017 to 30 June 2017, with an approved budget of US$ 10,000,000 from 2015 to 2017 and commitment of the donors is as highlighted in the table below:

Source of funds Donor Commitment

Amount received up to

June 30, 2017

Undrawn balance as of

June 30, 2017 US$ US$ US$ (A) (B) (A)-(B)

Somalia Multi-Partner Fund (MPF) – World Bank (FGS) 10,000,000.002 6,077,773.29 3,922,226.71

Total 10,000,000.00 6,077,773.29 3,922,226.71

2The loan total was 20,000,000 where 5,000,000 and 4,000,000 were allocated for Puntland and Somaliland respectively. 1,000,000 were also allocated for other activities by the Bank and 10 million is for FGS.

Funding summary

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1. General Information

The principal address of the reporting entity is: Ministry of Finance Villa Somalia Mogadishu Somalia

2. Basis of preparation These special purpose financial statements have been prepared in accordance with IPSAS Financial Reporting under The Cash Basis of Accounting issued by Public Sector Committee of the International Federation of Accountants (IFAC-PSC). They are presented in United States Dollar (US$). The measurement basis used is the historical cost basis except where otherwise stated in the accounting policies below.

3. Significant Accounting Policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during year, unless otherwise stated

(a) Reporting entity The financial statements are for the PFM Capacity Strengthening Project – Phase II (P151492, TFA 0388) implemented by the Federal Government of Somalia (FGS) through The Ministry of Finance. The transactions to be captured are only those that are controlled by the reporting entity and those controlled by third parties for and on behalf of the reporting entity. For purposes of these financial statements there were no third party transactions reported in respect of the project activities.

(b) Reporting currency and translation of foreign currencies The functional and reporting currency is the United States Dollar (US$), which is accepted as legal tender in the Federal Republic of Somalia. Items included in the financial statements are measured in the currency of the primary economic environment in which the entity operates.

(c) Reporting Period The reporting period for these financial statements is from Sept 2, 2015 to June 30, 2017.

(d) Payments by Third Parties During the year ended, the project did not benefit from any goods and services as reported to have been purchased on its behalf as a result of cash payments made by third parties during the reporting period then ended June 30, 2017.

(e) Receipts Receipts represent cash received by PFM Capacity Strengthening Project – Phase II ((P151492, TFA 0388), during the period and comprise external assistance from cash disbursements received under Somalia Multi-Partner Fund. The cash disbursements have been recognized as revenue and included in the financial statements when payments are made from the project Designated Accounts DA (A) which is operated as a holding accounts to the main Treasury Single Account (TSA) and when Bank pays entities that provide goods and services on behalf of the project. The closing balance on the Designated Accounts is also included as revenue receipts from the World Bank.

NOTES TO THE FINANCIAL STATEMENTS

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(f) Expenses Expenditure represents outlays of cash made by the project or other agencies for and on behalf of the project. The expenses comprise both of recurrent and capital expenditure and in general they are included in the financial statements when cash is paid out.

(g) Capital items/Non-current assets As of June 30, 2017, there are Capital items purchased at project money. Under the government’s cash basis of accounting, capital items have been fully expensed in the year of purchase. However, these assets are recorded in the Fixed Asset Registers at historical cost as a memorandum record with effect from effective date of the project.

(h) Foreign currency transactions Foreign currency transactions denominated in foreign currencies would be converted into United States Dollars (US$) at the exchange rate ruling on the date of the transaction; realized gains and losses resulting from these transactions would be recognized in the Statement of Receipts and Payments. Monetary assets and liabilities denominated in foreign currency at the year-end would be translated at the closing rate of exchange with the resulting exchange gains/(losses) dealt with through the Statement of Receipts and Payments. However, for purposes of this accounting policy, there were no foreign currency transactions other than US$ translated at the reporting date.

(i) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise of deposits held at call with Central Bank of Somalia.

(j) Employee benefits Employee benefits include salaries, allowances and other related-employment costs

and these have been recognized in the financial statements only when actual payments are made. However, PFM project pays no salaries for government employees. People who have been paid from this project are those who have rendered contractual services agreed upon or made deliverance of goods in accordance with the terms and conditions set for in contracts signed by the parties.

(k) Authorization date The financial statements are not authorized yet for publication by the Accountant General.

4. Exchange rates All monetary amounts in the financial statements are expressed in United States Dollars (US$). The estimated US$ closing rates for major currencies were:

Somali Shilling 22,500 22,500

Great Britain Pound 0.641584 0.641584

From 01 Jan 2017 to 30 June 2017 US$

2017 US$

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Euro 0.825748 0.825748

5. Somalia Multi-Partner Fund

The grants received from World Bank under the Somalia Multi-Partner Fund are not repayable in future. The amounts in the Statement of Receipts and Payments are only recognized when received by and are under the control of the FGS and attributed to the project. The amount of external assistance received for the project in 2015-2017 is as detailed below:

Previous years Current FY – Previous Quarters

Current FY – Current Reporting QT

Current FY -‐ Cumulative

Cumulative Inception to date

Multilateral Sources (a) (b) (c) (b) + (c) = (d) (a) + (d) = (e)

Somalia Multi-Partner Fund – World Bank 4,203,425.63 49,487.16 1,824,860.50 1,874,347.66 6,077,773.29

Total Grant Received as at June 30, 2017 4,203,425.63 49,487.16 1,824,860.50 1,874,347.66 6,077,773.29

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

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