World Bank Document...Document of The World Bank Report No. 13609-KE STAFF APPRAISAL REPORT THE...

Document of

The World Bank

Report No. 13609-KE

STAFF APPRAISAL REPORT

THE REPUBLIC OF KENYA

INSTITUTIONAL DEVELOPMENT AND CIVIL SERVICE REFORM PROJECT

NOVEMBER 30, 1994

PUBLIC AND PRIVATE ENTERPRISE DIVISIONEASTERN AFRICA DEPARTMENT

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CURRENCY EQUIVALENTS

Currency Unit = Kenya Shilling (K Sh)US$1.00 K Sh 50K Sh 1.00 = US$0.02SDR = US$1.473

ABBREVIATIONS AND ACRONYMS

CSRS Civil Service Reform SecretariatDPM Directorate of Personnel ManagementGOK Government of KenyaGTI Government Training InstituteICB International Competitive BiddingIDA International Development AssociationIPPD Integrated Personnel and Payroll DatabaseKIA Kenya Institute of AdministrationMCS Management Consulting ServicesMRC Ministerial Reform CommitteeNSC National Steering CommitteeODA Overseas Development AdministrationO&M Operations and Maintenance ExpenditurePFP Policy Framework PaperPIN Personal Identification NumberPS Permanent SecretaryPSC Public Service CommissionUNDP United Nations Development ProgramVERS Voluntary Early Retirement Scheme

GOVERNMENT FISCAL YEAR

July 1- June 30


INSTITUTIONAL DEVELOPMENTAND CIVIL SERVICE REFORM PROJECT

TABLE OF CONTENTS '

CREDIT AND PROJECT SUMMARY ............................ i

. BACKGROUND . .A. General Background and Overall Economic Performance . 1B. Sector Background .1C. Development Strategy and Medium-term Framework ...................................... 2

II. THE CIVIL SERVICE REFORM PROGRAM .,, . 3A. Major Features of the Kenyan Civil Service and Areas for Reform. 3B. Recent Developments. 6

III. THE PROJECT .............................. 9A. Project Objectives ............................. 9B. Summary Project Description ............................................ 10C. Government Commitment .12D. Institutional Arrangements .13

IV. PROJECT COSTS, FINANCING AND PROCUREMENT .. 15A. Project Costs .15B Project Implementation .17C. Financing Plan .18D. Procurement .19E. Disbursements 21F. Accounting, Auditing and Reporting 22

V. PROJECT IMPLEMENTATION .22

This report is based on the findings of two preappraisal missions and one appraisal mission which visitedKenya in March, May and July 1994, comprising Mr. Khaled Sherif (Mission Leader and Task Manager), Mr.Ian Knapp (AF2PE), Ms. Jacqueline Coolidge (AF2PE), Mr. Said Al-Habsy (LEGAF), Mr. Roger Sullivan(AFTCB), Ms. Mariel Fiat (AF2PE), Mr. Reynaldo Castro (AF2PE), Mr. Sami Atallah (AF2PE), Mr.Angelous Mrope (AFTCB), Mr. Dahir Warsame (AF2EA), and Mr. Colin Bruce (AF2CO). The Credit wasdeveloped in collaboration with Mr, David Wood of the British Overseas Development Administration inEastern Africa (ODA). Nairobi. Mr. Mamadou Dia (AFTCB) is the Lead Advisor and the Peer Reviewer isMr. Roger Sullivan (AFTCB). Mr. Surendra Agarwal (AF2DR) is the Department Project Adviser. Thedocument also benefited from the advice of Mr. Ladipo Adamolekun (AFTCB). Mr. Robert E. Hindle and Mr.Francis X. Colaco are the managing Division Chief and Department Director, respectively.

VI. BENEFITS AND RISKS ................................................ 23A . B enefits ......... ... .............. ...................... 23B . R isk s ................................................ 2 3

VII. AGREEMENTS REACHED AND RECOMMENDATION ................... .......... 24A. Agreements Reached ................................................ 24B. Assurances Obtained during Negotiations ................ ................................ 24C. Conditions of Effectiveness ................................................ 25D. Recommendation ................................................ 25

ANNEXES

Annex I Detail of Phases of CSRPAnnex II Key Milestones of the Project Implementation PlanAnnex III Summary of Monitoring IndicatorsAnnex IV Supervision StrategyAnnex V Management Structure for Project Implementation and SupervisionAnnex VI Project Organization and ManagementAnnex VII Technical Assistance Provided by Project Contractual ServicesAnnex VIII Procurement PlanAnnex IX Estimated IDA Disbursement ScheduleAnnex X Terms of Reference for Principal Accountant CSRSAnnex XI Government of Kenya: Letter of Sectoral PolicyAnnex XII Contents of the Project Implementation Plan (Manual)Annex XIII Documents Available in Project File

MAP: IBRD 26150

KENYA


CREDIT AND PROJECT SUMMARY

Borrower: Republic of Kenya

Implementing Agencies: Directorate of Personnel Management, Civil Service ReformSecretariat, and the Ministries of Finance, Health; Lands andSettlement, Public Works and Housing; Land ReclamationRegional and Water Development

Beneficiaries: Not applicable

Poverty: Not applicable

Credit Amount: SDR 17.2 million (US$25.35 million equivalent)

Terms: Standard, with 40 years maturity

Financing Plan: See Section 4, Table 2

Map: IBRD 26150



I. BACKGROUND

A. General Background and Overall Economic Performance

1. I. Reform of the civil service in Kenya should be viewed in its broad historical context. Four

phases can be distinguished in Kenya's economic performance since Independence in 1963: (a)rapid growth and low inflation in the first decade until 1973; (b) growth and rising inflation during

1973-80, due to adverse terms of trade and the emergence of structural and policy induced

constraints in agriculture and manufacturing; (c) serious macroeconomic imbalances and low

growth during 1980-85, caused mainly by the second oil shock in 1979, the erosion of fiscal

discipline and a severe drought in 1984; and (d) renewed economic growth during 1986-90,

largely the result of structural reforms and progress toward stabilization. However, 1991 and

1992 saw renewed destabilizing fiscal pressures, a weaker reform effort and slower growth. Fiscaldiscipline improved by mid-1992 but monetary expansion in 1993 has continued and performanceon structural reforms has been mixed.

1.2. In 1993 Kenya's economy (GDP at factor cost) is estimated to have grown at 0.2-0.4

percent, down from 0.4 percent in 1992 and 2.3 percent in 1991. The 1993 growth rate is likely to

be the lowest since Kenya became independent. With population growing at about 3.4 percent a

year (down from 3.6 percent in 1992), the slow growth in 1992 and 1993 has, for the first time in

post-independence Kenya, resulted in falling per capita income. The economy is heavilydependent on agriculture, which employs about 80 percent of the labor force and contributesmore than a quarter of GDP. Coffee and tea account for close to one half of merchandise exports.The service sector accounts for about 45 percent of GDP and is an important source ofemployment. It includes tourism which in recent years has become Kenya's leading foreign

exchange earner. The manufacturing sector is relatively developed and diversified, contributesabout 12 percent of GDP and employs close to 8 percent of the labor force.

B. Sector Background

1.3. The civil service, at 272,000 (excluding teachers) as of August 1993, represents over 13

percent of employment in the modern and informal sectors (i.e., excluding smallholderagriculture). At independence in 1963, the civil service had an establishment of 60,300, while

Kenya's population was 8 million. In 1965, the Sessional Paper No. 10 on African Socialism and

its Application to Development in Kenya was issued setting the agenda for greatly expandedgovernment intervention. Kenya's population has steadily increased at an average annual growthrate of almost 4% and had reached about 24 million in 1993. The rapid population growth, alongwith the expectations raised by African Socialism, created an even greater demand for public

services. Consequently, the civil service establishment has grown over the years by about 6.5

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percent per annum. Civil service growth in part has reflected the political philosophy ofsuccessive Governments and their attempts to guide the development process. Another importantfactor affecting growth has been the Government's commitment to be the employer of the lastresort.

1.4. Kenyans are now facing new challenges in economic management and public policy.Quality public services remain a priority, but cost considerations have become significantly moreimportant. Not only must Kenyans' needs be met, they must be met efficiently. Pervasive reformof the civil service is therefore required. In response to this imperative, a wide ranging review ofthe structure and functions of the civil service was conducted in 1992. Extensiverecommendations and an action plan for reform have been developed, and implementation hasstarted.

C. Development Strategy and Medium-term Framework

1.5. An overriding goal of government economic policy is to return to renewed growth as soonas possible. On the basis of policies outlined in the Policy Framework Paper (PFP) for 1994-96, itis expected that GDP growth will recover to 5-6 percent per annum in 1995 and 1996. Theincreased economic activity is expected to derive from higher private sector investment inresponse to more stable macro-economic conditions and improved micro-economic efficiency.Significant progress is called for over the PFP period, beginning with the 1994/95 budget, inshifting allocation of budget resources towards the core functions of Government: themaintenance of law and order and the administration of justice; the provision of broad-based basiceducation and health services; the provision of economic infrastructure; and the protection of theenvironment.

1.6. There are three priority areas for Kenya: (a) public sector adjustment, involving thedivestiture and reorganization of parastatals, the down-sizing and rationalization of the civilservice, and the rationalization of the remaining public expenditures; (b) developing the privatesector through reform of the legal and regulatory environment and financial sector, and theelimination of the remaining foreign exchange, price, marketing and production controls; and (c)targeted intervention to alleviate poverty, including improvement in the delivery of social serviceto low-income groups, with special attention to the development needs of women and residents inarid and semi-arid areas.'

1.7. As Kenya enters a period of significantly accelerated structural change there will be a needfor flexible and responsive management, and strengthened analytical and policy making capability.Over the long run, improved policy formulation and implementation capacity depend primarily onthe creation of an environment supportive of objective analysis and professionalism, a key goal ofcivil service reform. Within this framework, the Government recognizes the need to substantiallyraise civil service wages in order to move towards parity vis-a-vis the private sector. This shouldbe achieved while reducing the total wage bill in relation to GDP, as the size of the civil service is

1 Country Strategy Paper, May 1994.

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reduced. In order to spur growth, development expenditure and recurrent non-wage operatingand maintenance expenditure (O&M) will need to increase as a share of GDP over the PFPperiod. The GOK will consider developing targets for the structure of recurrent budget in light ofthe findings of the studies on O&M requirements at the ministerial level.

II. THE CIVIL SERVICE REFORM PROGRAM

A. Major Features of the Kenyan Civil Service and Areas for Reform

2.1. As described above, there is a consensus that wide ranging rationalization of the structureand functions of the Civil Service is necessary. A comprehensive Civil Service Reform Programand Action Plan was developed in May 1992 under the auspices of the Directorate of PersonnelManagement in the Office of the President, and approved by the Government. This Program wasbased on an extensive review of current problems faced by the civil service. The most importantproblems are listed below and then described in more detail:

(i) civil service organization;(ii) staffing control and financial management,(iii) personnel management and development; and(iv) pay and benefits.

(i) Civil Service Organization

2.2. Growing Central Complexity: Through the 1970s and 1980s there was a rapid growthin the number of ministries and departments.2 In the process, government machinery becamefragmented and multi-layered, leading to a decrease in efficiency and effectiveness. Though thiswas partially addressed with a reduction in numbers of ministries in January 1993, structuraloverlaps, duplication and redundancy still exist at the central level.

2.3. Coordination between Government Bodies: Problems here include: (i) lack of policycoordination between different agencies; (ii) overcentralization of decision-making and insufficientcontact between ministry headquarters and district representatives; (iii) slow implementation ofthe District Focus for Rural Development Strategy introduced in 1983 in order to shift someresponsibility for planning and setting priorities from Nairobi to the districts.

2.4. Structural Problems inside Ministries: Change in policy goals and functions has notalways been matched by reorganization inside the larger Ministries. The lack of clearresponsibilities and functions for different units has made it difficult to measure, control andimprove performance.

2 In 1971 Central Government consisted of 19 ministries. By 1992 there were 35, reduced subsequently by 22 bysimple merging.

(ii) Staffing Control and Financial Management

2.5. Rapid Growth in Staff Numbers: Staff numbers grew rapidly in the late 1980's, totallingover 272,000 by early 1994. Poor recruitment control and ineffective budgeting andestablishment control mechanisms led to considerable staff surpluses. Problems arising nowinclude: (i) gross overstaffing at the lower levels of the service; (ii) lack of resources to hire staffto fill vacant positions in higher job groups and in areas where skills are scarce; and (iii)inadequate provision for complementary non-wage O&M resources (civil service pay nowabsorbs over 70 percent of the recurrent expenditures of central government).

2.6. Budgetary Control Mechanisms: The Budget Department is having difficulty inmonitoring and controlling the expenditure (particularly personal emoluments) of line Ministriesand departments. However, the department has recently instituted quarterly ceilings and put intoplace a budget monitoring system. Recruitment does not always follow laid down machinery, andthe civil service establishment is not properly synchronized with objective assessment ofworkload.3 The recent recruitment freeze has prevented further deterioration but the structuraland systemic weaknesses remain.

2.7. Management Information Systems: The personnel management information system4 forthe civil service is deficient. The Treasury mainframe computer used for running the entire civilservice payroll dates from 1968 and is prone to breakdown. Personnel records at Ministry Levelare mostly compiled manually and do not reconcile with budget estimates or with the Treasurypayroll. Certain large ministries have launched census exercises to improve their personnelinformation, but cannot easily update their findings, and are obliged to repeat the exerciseregularly.

2.8. Lack of focus on priority areas: There has also been little success in concentratinglimited resources on high priority projects. Some Ministries are turning to the donor-financedportion of the budget for the funding of their non-wage O&M. Consequently, they have beenreluctant to reduce the number of projects in their portfolios as this would limit the number ofcandidates for aid funds. There are ongoing attempts to concentrate funding on high priorityprojects.

2.9. Resource allocation and target setting: There are few Ministries where there is a clearlinkage between policy goals; division or unit objectives, and detailed goals operation targets inthe field. There is also little monitoring of actual outputs in terms of improved service delivery toKenya's citizens, and there is no systematic way to determine what services are desired. Finally,the resources devoted to particular objectives are often not monitored, and hence difficult tocontrol. Consequently, the overall efficiency of Ministries as policy setting and executingagencies is reduced.

3 The original mandate of the Management Services function in the Directorate of Personnel management - toproperly organize and structure Ministries/Departments - appears to have been overlooked.

4 i.e. the computerized system for recording staff hiring, promotions, departures, salary and benefit levels, etc..

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(iii) Personnel Management and Development

2.10. Personnel Management Framework: The personnel management function is currentlydivided among several agencies.5 Several reviews since the 1970s have highlighted weaknesses inpersonnel management practices, in particular the handling of recruitment, promotion andtraining. The key body - the Directorate of Personnel Management (DPM) - needs to strengthenlinks with Ministry personnel departments and the Public Services Commission. Personnelmanagement techniques need updating to reflect best international practice.

2.11. Performance Appraisal System: The current performance appraisal system wasintroduced in 1972 following the Ndegwa Commission Report of 1970. Despite revisions in the1980 senior officers are not set specific objectives for the reporting period and tend to be ratedmore on their personal attributes rather than their performance. The system does not adequatelymonitor and record factors such as knowledge of job, quality and quantity of work, initiative,ability to learn and judgment. Senior officers are not trained adequately in using the system, anduntil recently, the appraisal system for civil servants below Job Group G had fallen into disuse.The PSC does not appear to use performance appraisal results when making promotion decisions.

2.12. Competing Private Business Interests: The 1970 Ndegwa Commission Report allowedcivil servants to be involved in private business so long as such business did not interfere withtheir civil service work. However, because of the decline in the Central Government salaries andthe rising cost of living, there has been temptation for the civil servants to spend more of theirtime in private business and therefore to devote less time to their official duties.

2.13. Disciplinary framework: Civil servants are governed by the revised Code of Regulationsissued in July 1992. 6 Although the Public Service Commission (PSC) has overall responsibilityfor implementing the associated Rules of Conduct, enforcement has generally lacked diligence,speed and equity. Overcentralization has meant officers are not disciplined at Ministry level, andmay simply be transferred to other units. New powers to discipline lower grade staff haverecently been delegated by PSC, but it is too early to judge the effectiveness of this.

2.14. Training and manpower development for the service has over the period tended to relyincreasingly on donor financing, while the training of technicians and other specialized cadresnecessary for efficient operations appears to have slackened. The main government traininginstitutes are restricted in their financial and management autonomy. They tend to offer longerspecialized courses rather than short general management courses which may better reflect current

5 The Directorate of Personnel Management; the Public Services Commission; the Judicial Service Commission;operating Ministries and Departments, and the Provincial and District personnel branches.

6 This was the first revision since 1963. The major issues covered include absences, debt, criminal proceedings,improper use of stores, disciplinary proceedings, misuse of funds, acceptance of presents, contact with thepress, participation in politics, suspensions, probation and retirement.

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civil service needs. Once specialist lecturers leave, current civil service salary levels are too lowto attract replacements.

(iv) Pay and Benefits

2. 15. Wage Erosion: Average earnings for civil servants are well behind private sector andparastatal organizations. Average real earnings for civil servants have declined substantially overthe past two decades, and for the lower levels is below a "living wage" based on current pricelevels. Absolute salary levels and the slow progression between levels do not provide the rightkind of incentives to attract, motivate and retain high caliber staff

2.16. Allowances and Non-monetary Benefits: The current system of allowances covering,inter alia, medical expenses and housing contains a number of anomalies and inequities. Inparticular, some officers occupying a government house have been unfairly advantaged. The largenumber of prime site poorly maintained government houses has also distorted the propertymarket. Efforts to dispose of part of the government housing stock have been limited.

B. Recent Developments

2.17. The Civil Service Reform Program and Action Plan developed by Government in May1992 is planned to last over a five to ten year period, and has three principal objectives:

* improve financial viability in the short and medium term;- reverse the progressive decline in efficiency and productivity; and* strengthen capacity.

2.18. The immediate priority is to improve financial viability by containing the size of the civilservice. This is because of the large destabilizing impact of the wage bill on the fiscal deficit andthe economy in general. The longer term strategic vision includes a rationalized organizationstructure with ministries and departments having fewer, more clearly defined functions; effectivedecentralization of service delivery, including traditional ministry structures and contractualarrangements with the private sector; fewer but better paid staff under dynamic management, andwith strong ethics, quality and public service orientation.

2.19. In line with these priorities, the detailed program comprises three phases. In Phase I thepriority will be on cost containment, through introduction of a Voluntary Early RetirementScheme (VERS) and associated rationalization of staffing; improved establishment control;rationalization of selected core ministries; and pay reform. In Phase II, the priority will be onperformance improvement including development of performance targets and systems; extensivetraining programs, additional improvements in personnel management; the expansion ofperformance-based pay in selected departments; further ministerial rationalization, and acontinuation of the VERS. Phase III will consist of refinement and consolidation of these gains,and introduction of more sophisticated management techniques including increased financial andmanagement delegation.

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(i) Rationalization of staffing and improved establishment control

• design, approval and execution of a Voluntary Early Retirement Scheme andbudgeting of K Sh I billion for the first (partial) year for the civil service; almost 6000civil servants were retired by the end of FY94;

* design and delivery of training programs to all 6,000 retirees to prepare them for workoutside the civil service,

* receipt of over 9,000 new VERS applications in CSRS for FY95, and a budgetcommitment of K Sh 1.754 billion for an expected 14,000 retirees in FY95,

* tightening of the recruitment freeze for grades A-G introduced in 1991. Over theperiod I January 1994 to 30 June 1994 this freeze, combined with natural wastage andthe VERS, has reduced the total civil service complement by almost 9,000 from261,727 to 252,440,

* elimination of 22,000 establishment positions from the total approved establishmentfor FY94;

* introduction of the New Personal Identification Number (PIN) for civil servants, toassist in improving establishment control and maintenance of payroll integrity includingelimination of ghost workers and ghost payments. This number is shortly to be linkedto the existing Income Tax PIN; and

* formation of a new inter-ministerial Task Force on deployment and redeployment, todesign and implement mechanisms to improve the distribution and flow of personnelbetween Ministries, Provinces, and Districts. This is particularly important during theVERS exercise. The Task Force will also look at the ratio of Operations andMaintenance (O&M) and Personnel Emoluments (PE) in the recurrent budget.

(ii) Compensation Reforms

. establishment of a new inter-ministerial Task Force on Motivation, which hascompleted a major draft review covering compensation practices, performanceappraisal incentive rewards, personnel management, housing divestiture and the codeof ethics for civil servants; and

* preliminary steps towards decompressing pay scales and monetizing some benefits.

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(iii) Rationalization of Ministries

* reduction of government ministries from 30 to 22 in January 1993; and

* identification of the five ministries to be rationalized during the first year of theprogram, and commencement of preparatory work.

(vi) Staff Development

* preparation of plans to restructure the Kenya Institute of Administration (KIA) thepremier civil service training institute in Kenya into an autonomous and financiallyindependent body,

* establishment of an Inter-Ministerial Task Force on Training and Capacity Building;and

* preparation of new civil service training policies to make provision of training trulydemand-driven, including the decentralized training budgets controlled at theministerial level.

2.20. Overall, the VERS is probably the most visible of the GOK's civil service reform efforts.The goal is to retrench at least 48,000 civil servants over three years (inclusive of regular retireesand natural attrition). Towards the end, the GOK has indicated it will devote K Sh 1.75 billion (inconstant 1994 Kenya shillings) for each of the three years of the program to finance about 10,000early retirees annually (it is anticipated that around 6,000 retirees will leave the civil serviceannually under the normal retirement schedule and their pensions are financed as part of theregular budget).

2.2 1. There has been concern over the high level of payment to some individuals leaving theservice, particularly those with very long service records who would be retiring in any event. Thegovernment is currently examining ways of keeping the average payment low and restrictinghigher benefit packages. There has also been concern that certain Ministries are eliminating staffwithout eliminating the associated posts, and might for example retrench almost all their drivers,then find themselves short six months later and need to recruit. A number of devices, including awell publicized tightening of the recruitment freeze, elimination of all surplus establishmentpositions, and examination of redeployment opportunities inside and between Ministries are inhand to prevent this. It is also the intention of GOK routinely to abolish posts along with VERSretrenchment in the future. Ministries are also being asked not to retire staff in critical areas (i.e."ring-fence" these critical areas), and application forms which are signed by the ministry personnelofficer are also scrutinized by CSRS. An Actuarial Study of the VERS (also referred to as thecapping study) has been contracted in order to refine the VERS formula and improve the costeffectiveness of the VERS. Press reports on the first batch of early retirement packagesprocessed through CSRS suggest than VERS is operating relatively smoothly and fairly.

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2.22. Government is also pursuing reform at the Ministerial level through establishment of

Ministerial Reform Committees, and selection of five targets Ministries for particular attention

(Health, Finance; Public Works and Housing; Lands and Settlements; and Land Reclamation,

Regional and Water Development). These Committees are concentrating in the first instance on

the VERS and have made significant progress in this area. Meanwhile the Ministry of Health has

made substantial progress in developing overall reform programs and improving its staff

information and control systems

2.23. The high level of activity under the CSRP has attracted some support from donors. In

particular, the ODA has agreed to continue its ongoing support for the Kenya Institute of

Administration, and has made an in principle commitment to fund about US$8.0 million of the

costs of the VERS scheme. In addition, they will provide support for a long-term advisor at

CSRS and assist in the Ministry of Health restructuring effort.

IH. THE PROJECT

A. Project Objectives

3.1 The main project objectives will be:

a) To achieve an overall rationalization of staffing and improved establishmentcontrol leading to better resource allocation, forward planning, productivityimprovements and cost-effective delivery of services;

b) To introduce wide-ranging compensation reforms resulting in a simplified andmore transparent grading structure, better aligned to the external markets, and

with better pay relativities,

c) To introduce better personnel management practices to obtain better

performance from existing staff and attract high quality recruits into the service;

d) To improve opportunities for staff development through better planning anddelivery of training by the Management Development Division of DPM and other

government bodies.

e) To commence rationalization of five target Ministries to achieve quantifiableimprovements in service delivery to Kenya's citizens.

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B. Summary Project Description

3.2 The project will support Phase I of the Government's Civil Service Reform Program,which focuses on cost containment. ' The project consists of five components, each relatingdirectly to the objectives above. Work on the first three components (rationalization of staffingand improved establishment control; compensation reforms, and personnel management reform)will be led by CSRS. Work on staff development will be led by the Manpower DevelopmentDivision of the DPM, supported by Government Training Institutes (largely supported by theBritish Overseas Development Administration). Work on rationalization the five target Ministries(which also involves elements of staffing and improved establishment control, and personnelmanagement reform) will be led by the Ministerial Reform Committees in each Ministry,supported by CSRS and the MCS division in the Directorate of Personnel Management. Therelationship of these main components and institutions involved is set out in Table 1 below.

TABLE 1: KENYA Civil Service Reform ProgramRelationship of Project Components and main Executing Agencies

Components Main Beneficiaries (1)

Civil Service Reform ManagementReform Secretariat Committees Development

l______________________________________ ____________________ ___________________ Institutes (2)

A. Rationalization of Staffing and X (X)Improved Establishment Control

B. Compensation Reforms XC. Personnel Management X (X)D. Staff Development (X) (X) XE. Rationalization of Target Ministries X

Note (1) All beneficiaries report through to the National Steering Committee for Civil Service Reform.

Note (2) Component supported by ODA for KIA. Other beneficiaries may Include the Government TrainingInstitute at MombasaL

X Main beneflciary(X) Supporting initiatives organized by other beneflciaries

3.3 The Project's main components are outlined below (for a more detailed Project Workplan,see Annex II).

(i) Rationalization of Staffing and Improved Establishment Control

short-term assistance in improving the design of the VERS, including a review of costsand benefits;

7 Phases II and III of the program deal with performance improvement and consolidation of gains respectively,and are shown in more detail in Annex I. These phases may or may not be assisted by a follow-on IDA project.

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* short-term assistance in developing an overall structure for establishment and payrollcontrol to ensure staff reductions achieved through VERS can be sustained;

* definition, development and introduction of a major new Integrated Personnel &Payroll Database system for the entire civil service; and

* a long-term resident advisor will work at CSRS to advise on these initiatives, and giveadditional assistance on all other project components below.

(ii) Compensation Reforms

* a comprehensive review of pay and benefits, grading, policies and procedures, and jobevaluation techniques, leading to full implementation of an improved structure;

* a detailed study on how the Government should move away from the practice ofhousing civil servants, and assistance in achieving this,

- implementation of performance related pay, or an alternative system, to improvemotivation on a pilot basis; and

- development and roll-out of a pilot "High Flyers Scheme" to attract and retain highcaliber staff.

(iii) Personnel Management

- development of an overall human resource strategy and training in changemanagement techniques for key groups;

* review of central personnel management organization and procedures, includingoptions for decentralization; and

* development and introduction of a modern performance appraisal system for bothsenior and junior grades;

(iv) Staff Development

support to the Kenya Institute of Administration to help it become an efficient,autonomous provider of high quality market-oriented training courses. Work willinclude appointment of consultants to develop the institute's new contractualrelationship with government; review its structure, course portfolio, and range ofservices; assist in costing courses and improving financial management, andattachments of staff to other international training institutes;

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limited support to the Government Training Institute at Mombasa to support trainingof early retirees under the VERS. This support will be provided pending GOK'ssubmission of a needs assessment and a financial plan satisfactory to IDA.

* execution of intensive specialist training programs, involving courses in Kenya andabroad, for key staff in CSRS, DPM, the PSC and the Reform Committees.

(v) Rationalization of Target Ministries

• support to rationalization programs in the five target key ministries (Health; Finance;Lands and Settlements; Public Works and Housing; Land Reclamation, Regional andWater Development,

* Ministerial programs will typically start with an organizational review, either startingfrom scratch, or (in the case of Health) building on what has recently been done, andassisting in design and execution of detailed implementation programs. This work willbe combined with a review of personnel management structures and practices,including an upgrading of the personnel management function. This will later link withcentral initiatives run by CSRS to update job descriptions, regrade posts and introducea new performance appraisal system;

* in parallel, work will commence on establishment control, through building interimMIS systems to improve monitoring of staff numbers, and tightening recruitmentprocedures to preserve gains from the VERS. 8 This will lead into wider studies andimplementation assistance on staffing norms, based on the new organization structure.Work on development of performance targets will follow this, aiming to build anintegrated system with top-level policy objectives leading down to creation of detailedservice delivery plans;

s each Ministry will also undertake between two and three Management Reviews ofsignificant functions or units, comprising analysis of the units' performance, andimplementation of recommended changes; and

* a long-term advisor will work with CSRS to advise on these initiatives.

3.4 In addition to these components, the project will directly support CSRS and relatedReform Committees through provision of equipment and logistical support.

C. Government Commitment

3.5. Govemment of Kenya has already demonstrated considerable commitment through therapid Program start-up described above. Within one year of setting up CSRS very significant

8 Within three years these will be combined into the new IPPD database run from the Ministry of Finance.

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progress has been made on the VERS exercise, and Government has agreed to fund the bulk of

costs for this. Other initiatives have been launched in most of the other program areas. The

Government's Letter of Sectoral Policy outlines further policy reforms to be implemented in the

near future (see Annex XI).

D. Institutional Arrangements

3.6. The project has three principal beneficiaries, each responsible for a specific component as

outlined above. The Executing Agency is the Civil Service Reform Secretariat.

* Civil Service Reform Secretariat, established by Government in August 1993 as theprimary vehicle for management of the Civil Service Reform Program;

• Ministerial, Provincial and District Reform Committees in the five targetMinistries (Finance, Health, Public Works, Lands and Settlements, and WaterDevelopment) which have been established to spearhead reform in each Ministry; and

* Management Development Institutes, including KIA and the Government TrainingInstitute in Mombasa for the purpose of training early retirees.

3.7. All these beneficiaries report to the National Steering Committee (NSC) for Civil

Service Reform. NSC answers to the Cabinet and is responsible for the overall guidance of theCivil Service Reform program and development of general strategy. The NSC Chairman is theSecretary to Cabinet and the Secretary is the Director of CSRS.

Civil Service Reform Secretariat (CSRS)

3.8. During August 1993, CSRS was launched as the primary vehicle to manage the Reform

Program under the direction of the NSC. At the launch, the Minister of State defined the

activities of the Secretariat as:

(a) setting up the machinery for implementing the early retirement program in closeconsultation with all ministries concerned through ministerial advisory committees;

(b) carefully monitoring the complement of staff according to job groups so as to

eliminate overlaps and idleness in all sectors,

(c) studying the civil service wage bill and developing ways of curbing waste andmisuse of funds through improper payments and claims;

9 NSC members comprise the Permanent Secretaries of Provincial Administration and Internal Security; Officeof the Vice President and Ministry of Planning and National Development; Ministry of Education; Ministry ofLocal Government; Ministry of Labor and Manpower Development; the Secretary of Public ServiceCommission; and the Solicitor General.

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(d) developing budgetary proposals for acquisition of necessary equipment to improveproductivity in the civil service; and

(e) advising the minister-in-charge of the Directorate of Personnel Management(DPM) on appropriate short-term in-service training needs which would improvesupervision capacity in the civil service and increase skills and motivation amongstaff

3.9. CSRS is housed in DPM in the Office of the President but is accountable directly to NSCthrough the Permanent Secretary, DPM in his capacity as the Vice-Chairman of NSC (see AnnexV, page 1). In many respects, therefore, CSRS is, for administrative purposes, operating as aDepartment of DPM.

3.10. Within CSRS, operational units are organized according to the tasks detailed in its TOR(see Annex V, page 2). CSRS works in conjunction with reform committees which are located inthe ministries, provinces and districts. On policy issues, these reform committees are directlyaccountable to the NSC (see Annex V, page 3). The staff of the Secretariat are all full time civilservants.

Ministerial, Provincial and District Reform Committees (MRCs, PRCs and DRCs)

3. 11. Ministerial, Provincial and District Reform Committees have been established in allGovernment Ministries to lead initiatives falling under the Civil Service Reform Program. Thereare similar organizations at Provincial and District level. The Reform Committees report throughthe Secretary of the National Steering Committee. They are typically chaired by the PermanentSecretary, with the Director of Personnel and other Directors and Deputy Directors as members.

3.12. Their Terms of Reference include publicizing and creating an enabling environment forthe Civil Service Reform program; processing VERS applications; monitoring staffing levels;drawing up personnel planning and development strategies, and identifying areas for additionalO&M spend possible through personnel budget savings.

3 13 CSRS has run an extensive briefing campaign for Ministerial, Provincial and DistrictReform Committees including numerous regional visits, from early 1994. The MIRCs have madevariable progress in the different Ministries. They have generally focused on the VERS scheme astheir top priority, but some are now developing strategies for personnel planning and training, asrequired by their TOR.

Management Development Institutes

3.14. Training of civil servants will form an integral part of the Reform Program as ministriesare rationalized and reoriented. At present, training is supply-driven and is focused on neither theorganization's nor the individual's need. The Government has recognized this and intends todelegate training budgets to individual ministries. Once ministries have undertaken their owntraining needs analysis exercises, they will be able to select courses from the most appropriate

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provider, depending upon which provider supplies courses most closely tailored to their needs.This reallocation of resources to the user of the service should shift the emphasis from supply-

driven training to demand-driven training.

3. 15. The most significant potential provider is the Kenya Institute of Administration (KIA), at

present the premier provider of civil service training in Kenya. Legislation is currently in hand to

give KIA new status as an autonomous Executive Agency (one of the first in Kenya). This should

help it operate more commercially, offering courses to the private sector, and paying market rates

for teaching staff ODA has been working closely with KIA for some time and will fund themajority of support under the project, including redundancy packages for staff to be potentially

laid off

3.16. Another provider to receive more limited assistance under the project is the GovernmentTraining Institute at Mombasa in order to support training of early retirees. Support to theGovernment Training Institute at Mombasa will be provided by the Bank and coordinated throughCSRS.

IV. PROJECT COSTS, FINANCING AND PROCUREMENT

A. Project Costs

4.1. Total project costs including the VERS are estimated at about $156.98 million (excluding

taxes and duties, from which the project is exempt). The estimated foreign exchange componentis estimated at 14 percent of total cost. Base cost estimates are in July 1994 prices. The costs by

project component are set out in Table 2.

4.2. Contingencies. Contingencies of US$14.14 million (10% of base costs) are composed offive percent for price contingencies and five percent for physical contingencies. The price

contingencies are based on an average international inflation rate of 2.2 percent per year for theduration of the project. Physical contingencies allow for increases in real resource requirements in

goods, consultancies and training.

4.3. Government Counterpart Funds. The proposed IDA credit of US$25.35 million

equivalent will finance 16% of project costs net of duties and taxes over a three year period. Thelocal contribution made by Government will be approximately US$120.93 million during theproject's life. The Government has committed to provide an annual injection of about US$40million (equivalent in Kenyan shillings) towards project cost.

4.4. Parallel Financing. Parallel financing of about US$10.7 is expected to be obtained from

ODA, principally to support a long-term advisor in CSRS, inputs into the Kenya Institute of

Administration, and a contribution to the VERS exercise. In addition, ODA will also provide

support for a long-term advisor at CSRS and assist in the Ministry of Health restructuring effort.

Support to KIA includes technical assistance and refurbishment of facilities and will be appraised

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TABLE 2: Cost by Project Component(USS mrllions)

Local Fordegn Total % Forel nVERS a 113.0 113.0 0%

A. Rationalization of StalMng & Improved Est. Control-Technical Assistance Studies 0.10 0.40 0.50 80%-Long 'erm Advisor bi 0.00 0.43 0.43 100%-Integrated Personnel & Payroll Database 0.10 1.70 1.80 94%-Staffing norms Staff redeployment 0.60 0.90 1.50 60%-Training of Retirees 0.10 0.90 1.00 90%-Computersi Vehicles 1.50 2.39 3.89 61%Sub-total 2.40 6.72 9.12 74%

B. Compensation Refonms- 'I'cchnical Assistance Studies 0.20 1.91 2.11 91%

Sub-total 0.20 1.91 2.11 91%

C. Persornnel Management- 'ecchnical Assistance Studies 0.09 0.70 0.79 89%- Computers for PSC Staff 0.05 0.00 0.05 0%

Sub-total 0.14 0.70 0.84 83%

D. Staff Development- Support to Key Mgt. Training Institutes 0.20 0.70 0.90 78%- Kenya Institute of Administration bt 0.10 1.20 1.30 92%- 'I'mg. & Cap. Bldg. - CSRS 0.04 0.16 0.20 80%- Tmg. & Cap. Bldg. - MRCs, PRCs & DRCs 0.24 0.96 1.20 80%- '1mg & Cap. Bldg. - PSC 0.03 0.12 0.15 80%-'I'mg. & Cap. Bldg. - DPM 0.03 0.12 0.15 80%- Computers, E'quipment/Office Supplies cl 0.10 0.36 0.46 78%Sub-total 0.74 3.62 4.36 83%

E. Rationalization of Target NlinistrfiesMinistry ofHealth d '

- 'echnical Assistance Studies 0.60 0.90 1.50 60%- Computers/1.quipment 0.08 0.10 0.18 56%Sub-total 0.68 1.00 1.68 60%

Ali nistry of l;nance- Technical Assistance Studies 0.22 2.00 2.22 90%

'I'raining and Capacity Building- ComputerstEquipment 0.05 0.10 0.15 67%

Sub-total 0.27 2.10 2.37 890/.Ministry of Public Works

- 'Technical Assistance Studies 0.21 0.98 1.19 82%- Computers/Equipment 0.06 0.00 0.06 0%Sub-total 0.27 0.98 1.25 78%Ai nistry ofl.ands

- 'Iechnical Assistance Studies 0.21 0.98 1.19 82%- Computers Equipment 0.05 0.00 0.05 0%

Sub-total 0.26 0.98 1.24 79%Ministry of Water D)evelopmnenr

- Technical Assistance Studies 0.20 0.97 1.17 83%- Ciomputers'.Equipment 0.05 0.00 0.05 0%

Sub-total 0.25 0.97 1.22 80%

- Iroject Management Costs el 4.22 0.00 4.22 0%

TOTAI BASE COST 122.43 18.98 141.41 13%

Contingencies(10%.) f 12.24 1.90 14.14 13%Repayment of PPF Advance 1.43 1.43 100%TOTAL PROJECT COST 134.67 22.31 156.98 14%

(a) N 11 Government budget commitmentto VERS, in real terTns, is K Sh 1.75 billion shillings peryearforthree years. Exchange rate used isK Sh 50 USS1.00. In addition, ODA plans to support VERS with S8.0 million in grant Contributions.

(b) Component to be funded bv O)DA.(c) Off-cc supplies include requirements for basic CSRS operations. Local travel will be financed under this component.(d) ODA has been requested to suppon the review of the Ministry of Health.(e) P'roject Management Costs (mostly CSRS staffsalaries and overheads) to be paid for by GOK.(f) Contingencies based on forecasted inflation rates of an average of 2.2 percent per annum, yielding an overall price contingency of about five

percent over the life of the project, plus an additional five percent for physical contingencies.

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in detail following the passage of relevant legislation by Parliament. Financial support to the

VERS exercise is subject to agreement over conditions, and will also meet the cost of a resident

CSR Adviser.

B. Project Implementation

4.5 The overall management structure for implementation and supervision of the project is

shown in Annex III. The primary focus will be on existing Government staff and structures -

DPM, CSRS, the Reform Committees, and the Management Development Institutes. These units

have already demonstrated implementation capacity in starting to push through an aggressive

timetable for the complex VERS exercise.

4.6. Government structures will be supplemented by extensive use of local and foreign

consultants to provide specialist skills, and additional analytic and implementation capacity. The

local consulting market is relatively well developed, and it is anticipated that local firms, or

combinations of local and international firms, will be able to bid for a significant number of

assignments. For areas where very specialist skills or complex project management experience is

required, international firms may be preferred. Draft TORs for all assignments over the three year

project period are set out Section 5 in the Implementation Manual. These are likely to need

refinement by the beneficiaries to take account of circumstances immediately prior to issue.

4.7. Overall Coordination, Administration and Supervision. Coordination and

supervision of project components will be the responsibility of the National Steering Committee

and the CSRS. The CSRS is the principal administrative unit supporting the National Steering

Committee and its Director will be designated as the Government of Kenya's Task Manager for

the project. Further, an accounts section will be established at CSRS to provide the

administrative support for the project. Expertise from the Ministry of Finance will be sought to

staff this new accounts section to ensure that individuals with IDA project experience are readily

available.

4.8. To ensure integration with other projects (e.g., the parastatal reform credit), IDA

supervision for both this project and related activities will be undertaken by the same Task

Manager. There will be particular need to coordinate with ODA regarding the training

component, where ODA is financing the bulk of support to KIA and IDA is providing relatively

minor assistance to two other institutions. The Resident Mission and other donors would be

included in supervision activities as appropriate.

4.9. The project will depend on the close co-ordination between CSRS and the other

beneficiary institutions. Particularly close linkages will need to be established with DPM (with

whom CSRS are already working closely) to ensure skills required for the Compensation Reform

component and the Ministerial rationalization tasks are available centrally. In addition, close links

with the Ministry of Finance will be needed to ensure that adequate amounts are budgeted for the

VERS exercise, that the IPPD development takes full account of civil service needs; and that

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budgeting and establishment control reforms are coordinated between target Ministries and theBudget Division of the Ministry of Finance.

4.10. The CSRS will be supported by the credit (US$25.35 million) with the Secretariat's mainresponsibilities being to handle administrative aspects of (i) recruitment and employment ofconsultants, individuals as well as firms; (ii) procurement of goods, computers, vehicles, officeequipment, (iii) management of project accounts and special accounts, including preparation andpresentation of withdrawals and replenishment applications for the credit proceeds; and (iv)ensuring the semi-annual reports are prepared, discussed by the National Steering Committee, andthen forwarded to IDA.

4.11. Regarding procurement for other beneficiaries (the Reform Committees, and key traininginstitutes) this will be organized through CSRS. To ensure adequate ownership of the program, itis recommended that the Reform Committees have majority voting on panels to finalize TORs andselect consultancies, and make proposals for procurement of goods and other items to CSRS. Toensure consistency across the program, procurements would need a "no objection" from CSRS,although it is not anticipated that this would be exercises often. Procurement for KIA will bemanaged by ODA using its own procedures.

4.12. To assist in detailed task execution, an Implementation Plan has been prepared by CSRSas part of project preparation activities. This Manual contains: all agreed procedures; e.g.standard letter of invitation package, detailed costs breakdowns; draft TORs for studies andconsultancies; listings of agreed procurement needs, formats for quarterly reporting; and annualwork plans/programs.

C. Financing Plan

4.13. The proposed IDA credit of about US$25.35 million is equivalent to about 16% of totalproject costs, net of duties and taxes. The foreign and local costs, and the Government'scontribution to the project are outlined in the budget and financing plan. The proposed financingplan for the project is set out in Table 3. ODA has stated its commitment to fund major portionsof the restructuring of KIA along with a long term technical advisor at CSRS and assistance toVERS.

4.14. The credit will refinance the PPF upon effectiveness. The Government's contribution tothe project will finance the bulk of the VERS payments and salaries of CSRS staff and overheads.These expenditures will not recur after project completion and will, therefore, not representincremental budgetary expenditures. This approach will minimize implementation problemsotherwise arising from the splitting of invoices between the Bank and the Borrower.

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TABLE 3: Financing Plan (Life of Project)(US$ million)

Project Element of IDA IDA ODAI/ GOKI/ TOTAL3/ %/IDA

A. VERS scheme 8.00 105.00 113.00 0%B. Training 3.08 1.30 0.52 4.90 63%C. Consulting Services 13.97 0.43 14.40 97%D. Equipment/Computers/ 4.34 0.18 4.52 96%

Office SuppliesE. Vehicles 0.36 0.01 0.37 97%F. Project Management Cost 4.22 4.22 0%Unallocated 2.17 0.97 4/ 10.99 14.14 15%Repayment of PPF Advance 1.43 1.43 100%

TOTAL 3/ 25.35 10.70 120.93 156.98 16%

I/ ODA plans to support inputs to KIA and the VERS exercise subject to agreement over conditions.2/ As attached to the Aide Memoire following appraisal.3/ Numbers may not sum exactly due to rounding discrepancies.4/ Funds will support Ministry of Health restructuring.

D. Procurement

4.15. Procurement under the credit would cover the cost of goods, consultant services fortechnical assistance, studies and training (net of taxes). The estimated detailed costing of goods,equivalent to US$5.38 million will include computer equipment, including a major mainframedevelopment at the Ministry of Finance, and a small number of vehicles and their incrementaloperating costs. IDA funding of about US$18.76 million is expected to finance consultingservices, and training.

4.16. All consultants financed by the Credit would be hired in accordance with IDA's guidelineson the employment of consultants. Co-financed consultants are expected to have specific terms ofreference with verifiable goals to be achieved, in the same way as those financed by IDA. Draftterms of reference for all major consultant contracts financed by the credit were discussed andconfirmed during appraisal. Procurement arrangements are presented in Table 4.

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TABLE 4: Amounts and Methods of Procurement (Life of Project)

Project Element Procurement Method in US$ millions 1/Total Cost (IDA-financed portion in pare ntheses)

ICB LCB Other GOK Total CostA. Goods: Equipment/ 3.24 1.31 0.83 5.38

Computers/ Vehicles/ (3.24) (1.21) (0.72) (5.17)Office Supplies

B. Consulting Services 15.84 15.84(15.37) (15.37)

C. Training 5.39 5.39(3.39) (3.39)

D. Project Management Cost 4.64 4.64(0.00) (0.00)

Total Procurement 3.24 1.31 22.06 4.64 31.25(3.24) (1.21) (19.48) (0.00) (23.93)

E Repayment of PPF 1.43 1.43(1.43) (1.43)

F. VERS Scheme 8.80 115.50 124.30I ____________________________ I ________ I ____________ (0.00) (0.00) (0.00)Total Project Cost 2/ 3.24 | 1.31 32.29 120.14 156.98l __________________________ _ l (3.24) (1.21) (20.91) (0.00) (25.35)

1/ Including contingency.2/ Numbers may not sum exactly due to rounding discrepancies.

4.17. World Bank Guidelines will be followed for procurement of goods and consultants andexperts for technical assistance. Bank standard bidding documents will be used. At negotiationsIDA and Government agreed on standard procurement times (see Implementation Manual,Section 3.1.3).

4.18. Prior Review. All consulting contracts and procurement of goods above US$50,000 willbe subject to prior review. Consulting contracts to individuals above US$25,000 will be subjectto prior review. More than 80% of the credit will be subject to prior review.

Method of Procurement

(a) Contracts for computers, vehicles and office equipment whose contract value isequivalent to US$170,000 or less can be awarded on the basis of local competitivebidding, up to an aggregate limit of $1.31 million in accordance with World Bankguidelines. LCB procedures would include public advertisement, public bidopening, clearly stated evaluation criteria, award to the lowest evaluated bidder,foreign bidders, if interested, will not be precluded from participation. The firstLCB document for goods will be reviewed prior to issuance to the bidders.

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(b) International or local shopping (i.e. contracts awarded on the basis of acomparison of price quotations obtained from at least three suppliers) will beundertaken for items or groups of items for goods estimated to cost the equivalentof less than US$50,000 per contract, up to an aggregate amount of US$750,000.Off-the-shelf shopping may be used as many items will need to be procured insmall amounts over the life of the project.

(c) Consulting services will be procured on the basis of a short-list. It is estimated thatunder US$12 million will be provided by international firms and at least US$2.5million will be provided by local firms. As provided for in the World BankGuidelines on the Use of (Consultanis by World Batnk Borrowers and by TheWorld Bank as Executing Agenicy (August 1981), "the Bank encouragesborrowers to employ domestic consulting firms in connection with Bank-financedprojects where such firms are qualified to perform the work either alone or incombination with foreign firms." There are several qualified Kenyan consultants,and both the GOK and IDA are in agreement that their services should beemployed wherever possible. For areas where very special skills or complexproject management experience is required, international firms may be contracted,but these firms will be encouraged to subcontract work to local firms whereverpossible. It is also expected that a great deal of training will be procured locally.

(d) Training: Members of CSRS and MRCs will undertake training both domesticallyand internationally. Their annual training plans will be submitted to IDA, as partof the annual project workplans, indicating participants, courses, venues, durationsand costs.

E. Disbursements

4.19. The fully implemented IDA credit would be disbursed over three years with the largestdisbursements expected in the second year of the Project. The Project is expected to becompleted by October 31, 1997. The project closing date would be April 30, 1998. A detaileddisbursement schedule and anticipated disbursement profile are given in Annex IX.

4.20. Disbursements would be made against standard IDA documentation with the followingexceptions, for which certified statements of expenditures (SOEs) would be used: (i) contractsfor goods and services costing less than US$50,000 equivalent; (ii) consultant services forindividuals costing less than $25,000 and firms $50,000; (iii) all in-country seminars (trainingcourses, and (iv) all performance and field allowances. SOEs would be certified by the head of

accounts department in DPM. These would be subject to review by supervision missions and

annual audits (para. 4.22).

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F. Accounting, Auditing and Reporting

4.21. Special Accounts. In order to facilitate the availability of funds for the Project whenneeded, Special Account would be established in a commercial bank and operated and maintainedon terms and conditions satisfactory to IDA. An initial deposit of US$2.0 million will bedeposited by IDA into the Special Account. The Special Account will be replenished on the basisof satisfactory documentary evidence, to be provided to IDA, of eligible payments made from theaccounts for goods and services required for the Project.

4.22. Auditing. The CSRS would maintain accounts and records for project activities,including SOEs and the Special Accounts (para. 4.21) in accordance with sound accountingpractices. Assurances were obtained that the Government would establish, by the date of crediteffectiveness, a functioning accounts section within CSRS and would have the records andaccounts of the Project, including those for the Special Accounts and SOEs, audited for eachfiscal year by the Auditor General, and that it would submit the audit reports to IDA within sixmonths of the end of every fiscal year, with a separate opinion by the auditors on SOEs.

4.23. Reporting. Reports on project implementation, summarizing progress achieved,difficulties encountered and changes and adjustments to be made would be submitted twice peryear by each participating agency to the Chairman of the National Steering Committee, throughthe Civil Service Reform Secretariat. The Committee would meet at least twice per year toreview progress, make appropriate decisions and assign responsibilities for any needed follow upaction. Progress reports will be submitted to the Bank. The agenda and the minutes of themeetings would be the responsibility of the CSRS Program Director and would be transmitted toIDA, semi-annually, after appropriate internal clearances, to assist with project supervision.

4.24. Reviews. Agreement was reached with Government that a formal mid-term review of theproject's progress will be undertaken 15 months after project effectiveness. Monitoring indicatorsare shown at Annex III.

4.25. Supervision Plan. The resources required for supervision are detailed in Annex IV.Eight to eleven staffweeks would be required for supervision per annum.

V. PROJECT IMPLEMENTATION

5. 1. A major potential issue may concern shortage of funding for the VERS exercise.Government is committed to funding a significant element of this (as detailed above) but has itsown budget constraints, and has therefore approached donors for assistance. Additional donorassistance might become necessary if the number of applicants exceeds the government budgetallocation for 10,000 retirees per year.

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5.2. The project design relies on effective co-ordination between CSRS, DPM, PSC, and the

Reform Committees. Particularly strong links are required between CSRS and the Ministry of

Finance for the Rationalization of Staffing and Improved Establishment Control component. To

date, most of these linkages appear to work reasonably well. As assistance is channeled into other

agencies, it will be important that they "buy in" to the reform process. Procurement arrangements

(where other agencies select their suppliers, subject to no objection from CSRS) are designed to

help this. This will additionally relieve CSRS of some of the management burden of controlling in

detail very many initiatives.

VI. BENEFITS AND RISKS

A. Benefits

6.1. The proposed project to be financed by IDA is integral to the Government's civil service

reform strategy and complements its wider macroeconomic reforms. Specific benefits from the

project include: (a) higher productivity and more cost-effective delivery of services arising from

rationalization of staffing and better use of O&M expenditures; (b) a better motivated and higher

caliber civil service paid at nearer to market rates, (c) better deployment and movement of staff

arising from an upgraded personnel management function and improved systems for hiring,

appraising, promoting, and disciplining civil servants; (d) upgraded skills arising from improved

training capacity, more responsive to real operational needs; (e) increased decentralization, better

organization and greater focus on the needs of the customer arising from introduction of devolved

targets and performance indicators, commencing in five target Ministries; and (f) build-up of

significant reform management capacity at the center of Government (CSRS) and in the target

Ministries.

B. Risks

6.2. The major risk associated with the project would be an unexpected weakening of

political pressure to continue with (and adequately fund) the VERS scheme, and/or to introduce

the tough establishment control initiatives needed to ensure cost containment benefits are

maintained in the future. Government funding commitments to VERS are contained in both the

Letter of Sectoral Policy (Annex XI) and the Credit Agreement. The Government has also

committed itself through both the LSP and the Credit Agreement to eliminate all posts vacated

through the VERS (see Annex XI). Other components such as pay reform and Ministerial

rationalization will have controversial aspects needing considerable political impetus from the

National Steering Committee to drive them through.

6.3. The main technical risks with the VERS scheme include the possibility that current

arrangements are relatively generous to some individuals, either resulting in overspending by

Government and consequent restrictions on the scheme, or very high payments arousing public

dissatisfaction. The National Steering Committee will use the recommendations of the project's

Actuarial Study (already underway, financed by the PPF) to modify the VERS formula to ensure

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that the VERS is as cost effective as possible. Similarly, as the VERS exercise proceeds, there isa significant risk that Ministries will retire needed skilled staff, and then seek to re-employ orretain other individuals in these posts later, making the exercise largely futile. There is also therisk of "double-dipping" by staff who leave, then rejoin another public institution to obtain anotherpackage. Government is aware of these risks and is currently launching studies under the PPF todevelop practical solutions.

6.4. There are also technical risks that the major MIS development scheduled to improvepayroll and personnel control is not completed on time, or does not operate entirely tospecification. Use of standard software packages (introduced successfully in other developingcountries) should minimize these possibilities. Finally, there is the institutional risk that personnelor other changes weaken the ability of CSRS and other bodies leading reform to push throughinitiatives. There is an associated danger that lower level bureaucrats deliberately orunconsciously frustrate implementation, particularly in the personnel management, compensationreform, and Ministerial rationalization components. The project contains substantial elements fortraining, equipment and related items to ensure that as far as possible support is provided to helpboth senior and middle level officers perform.

VII. AGREEMENTS REACHED AND RECOMMENDATION

A. Agreements Reached

(i) Government submitted a draft Project Implementation Plan (see para. 4.12); and

(ii) Government submitted to the Association a Letter of Sectoral Policy (see para.3.05 and Annex XI).

B. Assurances obtained during negotiations are:

(i) Government would allocate K Sh 1.75 billion annually (in constant 1994 Kenyashillings) in its budget for VERS (see paras. 4.03 and 4.14);

(ii) Government would prepare semi-annual progress reports for submission to theAssociation (see para. 4.23),

(iii) Government and the Association would carry out a mid-term review of the Project(see para. 4 24),

(iv) Government would maintain at all times the CSRS, NSC and the ReformCommittees (see paras. 3.6-3.13);

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(v) Government would maintain records and accounts and carry out audit by

independent auditors (see para. 4.22);

(vi) Government would implement the agreed policy reforms according to the Letter of

Sectoral Policy (see Annex XI); and

(vii) Government would implement measures, satisfactory to IDA, to ensure that

positions vacated by retirees through the VERS are eliminated and canceled from

the civil service establishment (see para. 6.2).

C. Conditions of Effectiveness

(i) Government would establish a functioning accounts section within CSRS with staff

in adequate numbers and with qualifications and experience satisfactory to IDA. In

particular, the GOK will hire a chief accountant, with qualifications acceptable to

IDA (as specified in the agreed Terms of Reference - see Annex X). The accounts

section shall be a functioning entity by the date of credit effectiveness (see para.

4.22); and

(ii) Government would furnish to IDA evidence showing that all positions already

vacated by retirees through the VERS have been eliminated and canceled from the

civil service establishment (see para. 6.2).

D. Recommendation

On the basis of the above assurances and conditions, the proposed Institutional

Development and Civil Service Reform Project would be suitable for an IDA Credit of

SDR 17.2 million (US$25.35 million equivalent).

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ANNEX I

DETAIL OF PHASES OF CSRP

(i) Rationalization of Staffing and Improved Establishment Control

The elements of this component will include the following:

continuing implementation of VERS to reduce staffing at grades Phase 2A-G by about 80,000 (cumulative with Phase I) over five years.

* assessment of efficiency gains achieved under Phase I-11 Phase 2-3components in order to design and implement refinements asnecessary.

(ii) Staff Development and Personnel Management

This component of the project would include the following activities:

e enhancement of management training and support for specific Phase 2training activities in critical areas.

assessment of efficiency gains achieved under Phase I-II Phase 3components in order to design and implement refinements asnecessary.

(iii) Compensation Reforms.

This component of the project will support the following activities

* design and testing of systems of performance based incentive Phase 2payment elsewhere in the civil service.

* implementation of a decompressed scale. Phase 2

* asessment of efficiency gains achieved under Phase I-IL Phase 3components in order to design and implement refinements asnecessary.

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ANNEX IIPage I of 4

KENYAINSTITUTIONAL DEVELOPMENT AND

CIVIL SERVICE REFORM PROJECT

KEY MILESTONES OF THE PROJECT IMPLEMENTATION PLAN

Components Beneficiary Weeks Letter of Contract ContractInvitation Start Completion

A. Rationalization of Staffingand ImprovedEstablishment Control

1. Actuarial and Financial CSRS 14 8/94 10/94 12/94Review of Costs andBenefits of the VERS

2. Introducing Improved CSRS 57 8/94 11/94 1/95Establishment Control

3. Specification and CSRS 257 12/94 3/95 6/96Execution of IntegratedPersonnel and PayrollDatabase

4. Training of Retirees CSRS n.a. ongoing 3/985. Long-term Advisor CSRS 144 1/95 4/95 3/98

B. Compensation Reforms

1. Review of Job Evaluation, CSRS 176 3/95 6/95 3/96Grading, Pay and BenefitsPolicies and Procedures

2. Study on Housing for Civil CSRS 84 6/95 9/95 6/96Servants

3. Feasibility Study for CSRS 24 9/95 12/95 3/96Performance Related Pay

4. Development of Pilot CSRS 17 12/95 3/96 6/96"High Flyers Scheme"

C. Personnel Management

1 Development of Human CSRS 13 12/94 3/95 6/95Resource Strategy andImplementation Capacity

2. Review of Personnel CSRS 70 6/95 9/95 6/96Management Procedures

3. Development of Revised CSRS 30 3/96 6/96 12/96Performance AppraisalSystem

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ANNEX 11Page 2 of 4





D. Staff Development

I Support to Key KIA/CSRS 12/95 3/96 3/98Management, TrainingInstitutes (excluding KIA)

2. Training Programs for CSRS/MRC/ n.a. ongoing 3/98CSRS, PSC, MRC and PSC/DPMDPM

E. Restructuring of TargetMinistries

1. Ministry of Health

(a) Organization & MRC 29 1/95 4/95 10/95Personnel Management (Health)Review

(b) Development of MRC 129 1/95 4/95 10/95Staffing Norms and (Health)Implementation ofEstablishment Control

(c) Assistance with MRC 57 9/95 12/95 3/96Conduct of (Health)Management Reviewsand ImplementationPilots

2. Ministry of Finance

(a) Organization and MRC 31 3/95 6/95 9/95Personnel Management (Finance)Review

(b) Development of MRC 71 3/95 6/95 12/95Staffing Norms and (Finance)Implementation ofEstablishment Control

(c) Revenue Authority MRC 61 9/95 12/95 9/96Organization Review (Finance)

(d) Revenue Authority MRC 50 3/96 6/96 12/96Personnel Management (Finance)

- 29 -

ANNEX IIPage 3 of 4





(e) Development of MRC 40 3/96 6/96 9/96Performance Targets (Finance)for the RevenueAuthority

(f) Assistance with MRC 63 6/96 9/96 9/97Conduct of (Finance)Management Reviewsand ImplementationPilots

3. Ministry of Public Works

(a) Organization Review MIRC 21 12/96 3/97 6/97(PublicWorks)

(b) Development of MRC 59 12/96 3/97 9/97Staffing Norms and (PublicImplementation of Works)Establishment Control

(c) Assistance with MRC 53 6/97 9/97 3/98Conduct of (PublicManagement Reviews Works)and ImplementationPilots

4. Ministry of Lands

(a) Organization Review MRC 14 12/96 3/97 6/97(Lands)

(b) Development of MRC 66 12/96 3/97 9/97Staffing Norms and (Lands)Implementation ofEstablishment Control

(c) Assistance with MRC 53 6/97 9/97 3/98Conduct of (Lands)Management Reviewsand ImplementationPilots

- 30 -

ANNEX IfPage 4 of 4





5. Ministry of WaterDevelopment

(a) Establishment Control MRC 10 3/97 6/97 9/97and Personnel (WaterManagement Devt.)

- 31-

ANNEX III

Summary of Monitoring Indicators for the Project

Major Activities Expected Impact Indicator of Achievement of Project TimingObjectives Targets

Rationalization of Increase in productivity, and Meeting VERS targets, along with net decrease 1997Staffing and reduction in management in total numbers. Successful introduction ofImproved burden of controlling surplus IPPD at Ministry of Finance. Up-to-dateEstablishment staff. Better budgeting, information on civil service numbers andControl planning and allocation of working establishment control mechanisms.

staff resources. Resources Increased O&M spending.freed up for O&M spending.

Compensation Streamline Salary and Benefit Better pay decompression; salary levels nearer 1997Reforms Structure. Introduce Criteria to the market; simplified grading structure and

Based Job Grading. Reduction schemes of service; disposal of majority ofof inequitable benefits. government housing stock.

Personnel Higher quality of staff in more Better procedures evidenced by lower staff 1997Management appropriate jobs, with better turnover, improved mobility, faster promotions.

morale. Achieved through Physical restructuring of personnel units.improved mechanisms for Introduction and operation of new performancehiring, firing, promotion, appraisal system.appraisal, etc., and betterorganization of personnelfunction.

Staff Development Training to become demand Analysis of course portfolio, and buying habits 1997driven encouraging enhanced of civil service institutions. Direct feedbackquality. from civil servants.

Rationalization of Improvement in service Monitoring of new performance targets per 1997Target Ministries delivery in target Ministries. Ministry, to include public surveys.

Implementation of physical reorganization athigher levels. Implementation ofrecommendations from management reviews.Successful establishment of new RevenueAuthority.

Ongoing

Capacity Building Strengthening of organization, Production and implementation of aggressivefor Phases 11 and staff and procedures in CSRS, workplans according to the Program.III of Reform MRC, PSC, KIA capacity.Program

- 32 -

ANNEX IVPage 1 of 2

SUPERVISION STRATEGY

Borrower's Contribution to Supervision:

(a) The CSRS will submit semi-annual reports of project monitoring data to IDA in March andSeptember of every year.

(b) The Accounting Unit in the CSRS will maintain up-to-date project accounts and presentsummary accounts to IDA every six months.

(c) The audits of project accounts, the Special Account and Statement of Expenditures byindependent auditors acceptable to IDA will be made available to the Bank within sixmonths of the close of each fiscal year.

(d) Each implementing unit will report semi-annually to the CSRS on implementation,including progress and delays.

(e) By March 31, 1996, the CSRS, in consultation with the NSC, will prepare and provide toIDA, for its approval, a plan for carrying out a Mid-Term Project Review by June 1996 inconsultation with IDA. The CSRS will, with the assistance of the implementing units, carryout a Mid-Term Review in accordance with the agreed plan. Thereafter, Government willpromptly take all actions recommended as a result of the review that are required toachieve project objectives.

(f) The CSRS will be responsible for coordinating arrangements for Bank supervision missionsand for providing information required by missions.

(g) Mission briefing meetings on arrival and wrap-up meetings before departure will normallybe chaired by the Director of CSRS.

Bank Supervision Inputs:

(a) It is estimated that regular supervision from Washington (to review progress reports,procurement actions, correspondence, etc.) will require five staffweeks in the first year ofthe project and three staffweeks in its second year. Five staffweeks will be required for themid-term review with an additional five staffweeks involved in the final supervision andpreparation of the PCR. The staff time in the table that follows is in addition to the day-to-day supervision.

- 33 -

ANNEX IVPage 2 of 2

SUPERVISION PLAN

Approximate Activity Expected Skills (Staffweeks)Date

April 1995 Supervision Mission/ Project Task Manager (1)Launch Workshop CSR Specialists (2)

Legal Counsel (1)Accountant (1)

September 1995 Supervision Mission Task Manager (1)CSR Specialists (2)

January 1996 Supervision Mission Task Manager (I)CSR Specialists (2)

July 1996 Mid-Term Review/ Task Manager (1)Supervision Mission CSR Specialists (2)

Legal Counsel (1)Accountant (1)

November 1996 Supervision Mission Task Manager (1)CSR Specialists (2)

April 1997 Supervision Mission Task Manager (1)________________ CSR Specialists (2)

December 1997 Final Supervision Mission Task Manager (1)Implementation Completion CSR Specialists (2)

Review Preparation Mission Legal Counsel (1)Accountant (1)

Kenya Institutional Development and Civil Service Reform ProjectManagement Structure for Project Implementation and Supervision

Cabinet

NSC ec/Director

I I~~~~~P

(CSRS) Dearmet

Kenya In"t" of Public Service Reform ConmmitteesAdministraion Commission (MRC, PRC, DRC)

Govt. Tri7n Hesalthl

MombasaFinance

Land Reclamatio,Rgoa and Water Developmn

|Public Works and Housing_

|lnsadSettlernent __

tn m

Structure of the Civil Service Reform Secretariat

Director

Staffing Principa Inst ICapacity Building v]IDeputy Program Director | Accountn Deputy Program Directori

Dev. Of Staffing Payroll Admin and PM& Eval / PerforanceNorms l | & Budget i E Benefits L Training Management

| Downsizing 0 | OrgaoisaliOa Reviews

Structure of the Civil Service Reform Committees

Cabinet

I

National SteeringCommittee

Ministerial Provincial DistrictCSRC CSRC CSRC

t ;<

pv eaQ CD zew4 MO) XI-t<

Directorate of Personnel Management

| Permanent Secretary/ Director

Deuty Director Deputy Director Deputy Director Deputy Secretary Programme Director|MCS PA MD F & E CSRS

oX_41

Uh

Civil Service Reform Policy Making Process

Cabinet

National Steering Committee

| Permanent Sec/Director DPM

Other DPM Depts Programme Director(CSRS)

Staffing Deputy Prog. Inst. Capacity Building ;

Director Deputy Proj. Director Ouq ZCD

en

° X

- 39 -

ANNEX VI

PROJECT ORGANIZATION AND MANAGEMENT

NATIONAL STEERING COMMITTEE (NSC)

Terms of Reference

1. The NSC will act as the advisory body to all implementing agencies by:

* monitoring project implementation;* addressing and seeking solution to problems, that cannot be resolved through

the normal lines of command; and* advising the cabinet on policies and other matters related to the project

The Civil Service Reform Secretariat (CSRS) will undertake much of the detailed

background work for the NSC. The NSC answers to the Cabinet.

2. Coordination will thus take place through the established mechanisms of the GOK.

The membership of the NSC is limited but can be expanded if necessary.

3. The NSC meets four times per year, with additional meetings as required.

4. Membership: The NSC Chairman is the Secretary of the Cabinet, while the NSC

secretary is the Director of CSRS. The rest of the Members are as follows:

(a) Permanent Secretary, Provisional Administration and internal Security

(b) Permanent Secretary of the Office of the Vice President and Ministryof Planning and National Development

(c) Permanent Secretary of Education(d) Permanent Secretary of Local Government(e) Permanent Secretary of Labor and Manpower Development(f) The Secretary of the Public Service Commission(g) The Solicitor General

- 40 -

ANNEX VIIPage 1 of2

TECHNICAL ASSISTANCE PROVIDED BY THE PROJECTCONTRACTUAL SERVICES

STAFFWEEKS1. Contracts with Firms/Institutes

Single Package with One Firm

A. Rationalization of Staffing and Improved Establishment Control

1. Actuarial and Financial Review of Costs and Benefits of the VERS 142. Introducing Improved Establishment Control 573. Specification and Execution of Integrated Personnel and Payroll Database 257

B. Compensation Reforms

1. Review of Job Evaluation, Grading, Pay and Benefits, Policies & Procedures 176and Procedures

2. Study of Housing for Civil Servants 843. Feasibility Study for Performance Related Pay 24

C. Personnel Management

1. Development of Human Resource Strategy and Implementation Capacity 132. Review of Personnel Management Procedures 703. Development of Revised Performance Appraisal System 30

D. Restructuring of Target Ministries

1. Ministry of Health

i. Organization & Personnel Management Review 29ii. Development of Staffing Norms & Implementation of Established Control 129

iii. Assistance with Conduct of Mgmt. Reviews and Implementation Pilots 57

2. Ministry of Finance

i. Organization and Personnel Management Review 31ii. Development of Staffing Norms and Implementation of Established Control 71

iii. Revenue Authority Organization Review 61iv. Revenue Authority Personnel Management 50v. Development of Performance Targets for the Revenue Authority 40vi. Assistance with Conduct of Mgmt. Reviews & Implementation Pilots 63

3. Ministry of Public Works

i. Organization Review 21ii. Development of Staffing Norms & Implementation of Established Control 59iii. Assistance with Conduct of Mgmt. Reviews & Implementation Pilots 53

- 41 -

ANNEX VIIPage 2 of 2

STAFFWEEKS

4, Alinistr of Lands'

i. Organization Review 14ii. Development of Staffing Norms & Implementation of Established Control 66

iii. Assistance with Conduct of Management Reviews & Implementation Pilots 53

5 Alinistry of Wfater Development

i. Establishment Control and Personnel Management 10

2. Individuals

(a) Rationalization of Staffing and Improved Establishment ControlLong-Term Advisor 144

(b) Compensation ReformsDevelopment of Pilot "High Flyers Scheme" 17

- 42 -

ANNEX VIII

PROCUREMENT PLAN

Project procurement will be performed on a scheduled basis as follows:

Procurement Schedule(US$ million)

Project Element Procurement FY96 FY97 FY98 TotalFrequency/Year

Computer/Equipment/ 2 1.30 2.50 0.90 4.70Vehicles

Consultants Services 4 3.50 5.50 4.97 13.97

Training N/A 1.00 1.10 0.98 3.08

Refunding of PPF Advance N/A 1.43 0.00 0.00 1.43

Total * 7.23 9.10 6.85 23.18

* excluding contingencies and incremental operating costs.

The Borrower will submit updates to the Bank on a semi-annual basis. Theseupdated reports will monitor actual versus estimated procurement dates, US dollar totals bysupplier and aggregate US dollar totals by project element. The Borrower will indicate causesof, and corrective actions to be taken, on all substantial variances and schedule delays.

- 43 -

ANNEX IX

ESTIMATED IDA DISBURSEMENT SCHEDULE

IDA Fiscal Year Disbursement Accumulated Accumulatedand Quarter Ending During Quarter Disbursement Disbursement %

- (US$ Thousand) -

FY1995

Mar. 31, 1995 0 0 0June 30, 1995 0 ° °

FY1996

Sep. 30, 1995 1,800 1,800 07Dec. 31, 1995 1,900 3,700 15Mar. 31, 1996 2,000 5,700 22June 30, 1996 2,040 7,740 31

FY1997

Sep. 30, 1996 2,400 10,140 40Dec. 31, 1996 2,500 12,640 50Mar. 31, 1997 2,500 15,140 60June 30, 1997 2,520 17,660 70

FY1998

Sep. 30, 1997 1,950 19,610 77Dec. 31, 1997 1,920 21,530 85

Mar. 31, 1998 1,920 23,450 92June 30, 1998 1,900 25,350 100

- 44-

ANNEX XPage l of2

TERMS OF REFERENCE FORPRINCIPAL ACCOUNTANT - CSRS

1. The accounting records and books of account at CSRS should be designed not only topresent the historical record of receipts and payments, but should also be able to depict thefinancial status of the project at the end of an accounting period. Given below is the proposedterms of reference for the project Principal Accountant (PA) at the Civil Service ReformSecretariat.

Terms of Reference

2. Qualification: Professionally qualified accountant or advanced level partly qualifiedaccountant and having broad experience in public sector accounting and finance as well asmanagement cost accounting. He should also be computer literate.

3. Key Functions: The PA should be fully familiar with the Government-based accountingpractice and have the capacity to maintain financial records required under the project as specifiedin the Development Credit Agreement (DCA). The PA should check all CSRS expenditures andensure that expenditure returns are processed and submitted through the Treasury. He shouldcapture all project expenditures and incorporate them into CSRS's financial statements. The PAshould develop a system of monitoring and facilitating funds flow to Ministries and reformcommittees participating in the project. The PA should initiate the preparation of WithdrawalApplications based on Statement of Expenditures (SOEs) and direct payment where applicableand prepare Payment Authorization Forms (PAFs). This should be done for all payments throughthe Special Account (SA). The PA should liaise with Treasury on any SA replenishmentapplications at least once every month. The PA should also interact with the Project Coordinatorin the preparation of annual work programs; budgets and allocation of funds especially in theissuance of Authority to Incur Expenditures (AlEs). In addition, the PA would establish a recordof actual disbursements matched with the provisions made in the project documents under eachmajor category of expenditure, and compile data showing current and cumulative actualexpenditure and commitments, under each category and project component. The PA should alsoprepare the consolidated project accounts from all the project financial data (sources andapplications) and ensure that project accounts and records are submitted to the Auditor by the duedate. The PA shall coordinate with the Auditor General's department for annual audits inaccordance with IDA requirements as stated in the DCA.

- 45 -

ANNEX XPage 2 of 2

Accounts and Audits

4. A single consolidate account should be prepared for the project. The Government'sappropriation accounts will no longer be acceptable by IDA as an adequate representation ofexpenditures incurred under the project. Responsibility for preparing project accounts will restwith the PA at CSRS, who will specifically be assigned the task of establishing and maintainingthe project's financial records and accounts. The PA would obtain information from Ministriesand Reform Committees through the Pay Master General (PMG) Unit of the Treasury on allproject expenditures and incorporate the information with project expenditures. He/she will usethis information to prepare consolidated project accounts.

5. A foreign exchange SA would be established for the project with a commercial bankthrough the Central Bank of Kenya on terms satisfactory to IDA. Upon credit effectiveness, aninitial deposit will be placed in the SA representing about 3 months of operating expenditures.Operations of the SA including replenishments (preferably on a monthly basis) would follow Bankprocedures.

6. Audit: The accounts would be audited by independent auditors satisfactory to IDA, andthat all audited accounts, together with the auditors' report and separate opinion on the recordsand accounts used to support disbursement against SOEs will be submitted to IDA no later thansix months after the end of each Government fiscal year. Government will ensure that theauditors' opinion is obtained on the operation of the project SA in each fiscal year and submittedto IDA together with the PA's report on or by the due date (in the present case, December 31).

- 46 -

ANNEX XIPage 1 of 7

REPU3LIC OP KENYA

OFFI0 OF rHE PRESIDBNT

re!. ,_ -, ;a:rob ~~D12t=%ATE or PERS-CN}+ Mj_aGs19NTedc: 21.1W P.O. Box 30a50rar: 216145VA-= m24* p>:quKxOctober 13, 1994

Mr. Edward JaycoxVice President, AfricaWorld Bank1818 H Street NW,WASHINGTON DC 20433

Dear

LETTER OF SECTORAL POLICYCIVIL SERVICE REFORM PROGRAMME (CSRP)

Background to CSRP: Diagnosis of the Problems

1. Following several years of internal study and debate, the Government of Kenya prepared a Civil ServiceReform Programme and Action Plan in March, 1992. At that time, it was already evident that to sustain PublicService Programmes from the economy's scarce resources, it was absolutely mandatory that the efficiency andproductivity of the Civil Service be improved. In this regard, there was urgent need to identify and implement ona sustainable basis substantial cost-saving and productivity-enhancing measures.

2. The Civil Service Reform Programme and Action Plan identified five (5) major problem areas whichwould be the subject of the envisaged reform initiatives as follows:

(i) Civil Service Organization: growth in size and complexity over the years of GovernmentMinistries, Agencies, Departments and Services may have led to possible internal duplication,efficiency of organizational structures, hierarchies of authority, delegation, spans of control, andjob descriptions and specifications;

(ii) Staffing: inadequate control over staffing especially at lower echelons, leading to a bloatedpayroll and dwindling budgetary resources for operations and maintenance;

1

-47 - ANNEX XI

Page 2 of 7

(iii) Pay and Benefits: in comparison to the private sector, relatively low compensation levels whichmay have led to low morale and increasing inability of the Government to attract and retainrequisite technical and managerial talent,

(iv) Staff Development and Personnel Management: observed weaknesses in the system of skillneeds planning, staff training and records management leading sometimes to poor placement,deployment, induction, career progression and performance evaluation. This had significantimplications on establishment control, capacity building, morale, service ethics and regulations,discipline and not least, productivity;

(v) Financial and Performance fanagement: need for improved mechanisms for maintaining bestfinancial and performance management standards, including payroll integrity, establishmentcontrol, and objective performance evaluation instruments and procedures; slow adoption ofinnovations in management information systems.

3. Objectives of CSRP, Achievements to Date, and Commitments for Further Action

The Civil Service Reform Programme seeks to alleviate the problems already identified. This will bedone in three phases, sequenced to overlap at various implementation stages. The most immediate pnority is costcontainment which should be vigorously implemented as the first phase of the Programme. This phase will befollowed by one on performance improvement. The third phase of the programme will consist of identifiedmeasures to refine and sustain reform gains. As already mentioned, however, these three phases are sequencedto overlap at various stages of implementation because the CSRP's five major problem areas are very closelyinterrelated and intricately intertwined. The first phase consists of the following components: (i) Rationalizationof Staffing and Expenditure, (ii) Staff Development and Personnel Management, (iii) Compensation Reforms, and(iv) Rationalization of Target Ministries. These are described in greater detail below, including achievements todate and Government commitments for further action:

(i) Rationalization of Staffing and Expenditure: the main objective here is to achieve a better ratio of 0 &M against personnel emoluments in the recurrent budget. This ratio currently stands at about 3:7. Downsizing ofthe Civil Service establishment has already taken centre stage as a single most important long-term cost-reductionstrategy.

(a) The Government implemented a hiring freeze on Job Groups 'A' to 'G' in 1991 and has sinceimposed vigorous enforcement measures. Over the period 1st January 1992 to 30th June, 1994this freeze, combined with natural wastage and Voluntary Early Retirement Scheme (VERS - seebelow), has reduced the total Civil Service Complement from 275,283 to 252,940. The hiringfreeze on recruitment in grades A-G will be maintained and enforced through the durationof the Civil Service Reform Program.

(b) The Government undertook verification of personnel records during April - October, 1992.

(c) The Government undertook design, testing and full implementation of unique eight digit personalidentification numbers (PIN) for the entire service with a view to securing payroll integrity,including elimination of ghost workers, ghost payments; and controlling recruitment into theService. The Government will commence comprehensive computerization of the payroll

2

-48 - ANNEX XI

Page 3 of 7

system to increase its accuracy and effectiveness as a management and budgeting tool, and

to cleanse the payroll to remove any remaining ghost workers and/or ghost payments.

(d) The Government reduced the number of Ministnres from 30 in 1991/92 to 22 in January, 1993.

(e) Since July 1993, Govermment eluminated 22,000 vacant positions from the total approved

establishment for the 1993/94 financial year; the government will reduce establishment by

26,000 by January 1995 through phased abolition of vacant posts. In addition, Government

will ensure that posts vacated through the VERS will be eliminated.

(f) The Government initiated a high profile formal launching of the Civil Service Reform Programme

and issue of Personnel Circular No.5 of 12th October, 1993 which detailed and publicized the

CSRP goals and objectives, including its institutional framework. At the helm was a high

powered National Steering Committee (NSC), chaired by the Permanent Secretary/Secretary to

the Cabinet and Head of Public Service. The Civil Service Reform Secretariat (CSRS), headed

bv a Progranmne Director, was set up as the operational armn of the NSC. Ministerial, Provincial

and District Civil Service Reform Committees were also established with terms of reference

which to a large extent covered the problem areas alreadv mentioned. These Reform

Committees were subsequently afforded opportunity through seminars (December 1993 to

January 22. 1994) to discuss the design of the Programme, including implementation modalities

of its vanous components, of which the staffing component, involving dowmsizing the service

through a Voluntary Early Retirement Scheme, immediately took centre stage,

(g) The Government implemented the Voluntary Early Retirement Scheme (VERS) for officers in

grades A - G' as part of downsizing of the establishment. The VERS, through which at least

30,000 officers are expected to Voluntarily retire over three years, is complemented by a safety

net package designed to alleviate post retirement hardships while positively influencing retiree

commitment to invest in small scale enterprises within the private sector. By 30th June, 1994

some 5,800 officers had retired under the VERS at a total Safety Net cost to Government of

k.sh. 1 billion which had been budgeted for during the 1993/94 financial year. All the retirees are

being trained so as to enable them cope with the challenges of early retirement;

(h) The Government will monitor the timely availability and processing of VERS application

forms throughout the duration of the Civil Service Reform Program and make resulting

data available to those external donors who are assisting or financing related aspects of the

Program.

(i) The Government has commissioned an actuanal study to bear upon the Safety Net Package, to be

completed by November 1994. The results of this study will be used to guide determination of

equitable and sustainable safety net packages for VERS.

(j) In order to ensure that VERS does not result in the loss of essential skilled cadre that would have

to be replaced, the Government will establish objective criteria for "ring-fencing" certain

skill categories and remove them from eligibility for early retirement under the VERS, by

January 1995.

3

49- ANNEX XIPage 4 of 7

(k) In order to ensure against any potential for "revolving doors," the Government will institutemechanisms for ensuring that beneficiaries of the VERS do not rejoin the public service forat least five years.

(I) The Government created an Interministerial Task Force in mid 1994 to look into service-wideissues of deployment and redeployment in the light of VERS. This Task Force works closelywith CSRS and the established Reform Committees.

(m) The Government allocated Kshs. 1.75 billion during the 1994/95 financial year for continuation ofVERS with a target 10,000 retirees by 30th June, 1995 and a further 4,200 should additionalfinancial resources become available to Government in the course of the year. Government willallocate K.Sh.1.75 annually in its budget for VERS. A further 6,000 civil servants are expectedto leave the service annually through normal attrition, making a total of 48,000 officers expectedto have left the service by end of the third year. The Government has already written to ODAabout funding of this excess of 4,200 and positive discussions are going on.

(n) The Government implemented changes in the retirement policy to allow Civil Servants in JobGroup 'H' and above who are 40 years of age (as opposed to 45 years), with at least 10 years ofservice, to retire. This complements the VERS.

Along with VERS are measures to streamline civil service organizational structure; derive and implementstaffing norms; improve establishment control; optimize staff deployment; develop job inspection capacities;cleanse and comprehensively computerize the payroll system to increase its accuracy and effectiveness as amanagement and budgeting tool; and introduce improved financial management systems.

(o) In particular, in order to improve expenditure controls and monitoring, the Government willidentify areas where O&M spending is critical, and develop a number of "budget-neutral"packages for consideration, by April 1995.

(p) By January 1995, the Government will identify and procure resources to conduct staffingnorms studies. By February 1995, Government will commence staffing norms studies for allcadres in service. By about June 1995, Government will implement the findings andrecommendations of the staffing norms studies.

(ii) Staff Development and Personnel Management: this component will include: development andimplementation of an improved skill needs planning and staff training; strengthening of management traininginstitutes and enhancement of management training; streamlining the systems of recruitment, induction,performance assessment, job inspection, promotions and discipline, and vigorous implementation of a revisedCivil Service Code of Regulations as part of efforts to develop and promote better personnel managementpractices.

(a) The Government will develop a new training policy for the civil service, which will be basedon the needs identified at the ministerial level and financed by decentralized training budgetsat the ministerial level. An Inter Ministerial Task Force on Training and Capacity Buildinghas been created for this purpose.

4

-50- ANNEX XI

Page 5 of 7

(b) The Government has prepared plans to restructure the Kenya Institute of Administration (K.I.A.)

- the top post entry management training institution for the service -into an autonomous and

financially independent body. The Government will design, develop and implement measures

to strengthen the Kenya Institute of Administration (legislation for autonomy) and increasecapacity in other management training institutes.

(c) In addition, the Government initiated training needs assessment for the Reform Committees in

August, 1994; and completed a training needs asscssment for CSRS in September 1994.

(d) The Government will identify training needs for Key job groups in the Civil Servicebeginning November 1994, and therefor start implementation of training programs.

(e) The Government will Review career structures (grading, job descriptions,schemes of

service and career planning) in conjunction with the Ministerial Reviews (see below).

(f) The Government will Commence Review of the Civil Service Code of Regulations byFebruary, 1995.

(g) The Government will review bottlenecks in the current appraisal systems starting March -

June, 1995.

(h) The Government will design and test output focussed performance evaluation instruments

by July/August 1995, with a view to implementing, where feasible, improved performanceevaluation instruments and procedures by September/October, 1995.

(i) The Government will determine and implement supportive linkages between performanceappraisal and schemes of service. A sub-output here is a career planning manual.

(iii) Compensation Reforms: this component will examine the pay and benefits packages available to various

cadres in the service with a view to identifying measures that could be undertaken so as to enhance

professionalism, quality, motivation and discipline, and also attract and retain requisite technical and managerial

competence. It is envisaged that through this component, measures towards wage decompression, monetization of

allowances, and equitable and sustainable housing policy for Civil Servants will be identified and recommended

for implementation.

(a) The Government has formed an inter-ministenral Task Force during June/July 1994 to study and

make recommendations to the Government on compensation reforms, performance appraisal,

incentive rewards, personnel management, Civil Service housing policy, Code of Regulations and

Service ethics, and other measures to be undertaken in order to enhance motivation in the service;

(b) The Government has implemented improved conditions of service, including monetization of out-

patient medical benefits and substantial wage decompression, with effect from 1st July, 1994 as

contained in Personnel Circular No.6 of 7th July, 1994 on 'New conditions of Service for the

Kenya Civil Service 1994'.

(c) In addition, the Government has initiated a review/study of civil service remuneration packages to

facilitate movement towards parity with the private sector, under the auspices of the Task Force

on Motivation and other Government initiatives.

5

- 51 -

ANNEX XIPage 6 of 7

(d) The Government has initiated a study on monetization of benefits received by civil servantsbeyond those already implemented. The Government will initiated a specific study on housingpolicy by May 1995.

(iv) Rationalization of six Target Ministries: The Government has identified six target Ministries for intensivereform assistance during the first phase of the Programme and commencement of preparatory work. TheseMinistnres are:-

* Ministry of Health;* Ministry of Agriculture, Livestock Development and Marketing;* Ministry of Finance;* Ministry of Public Works and Housing,* Ministry of Lands and Settlement; and* Ministry of Land Reclamation, Regional and Water Development.

(a) The Government is conducting an overall organization review to re-examiine the following:existing organizational structure; hierarchy of authority and spans of control; conflicts, overlapsand ambiguities in jobs descriptions; staffing norns; identify areas for increased delegation;improvement of communication channels; leadership styles and related training needs; humanresources management and target-setting.

(b) The Government will implement the resulting recommendations for two lead Ministries: theMinistry of Health and the Ministry of Agriculture, Livestock, Development and Marketingby June 1995. In addition, the Government will continue exploratory work for four otherMinistries: Finance, Public Works and Housing, Lands and Settlement, and LandReclamation, Regional and Water Developent during the first half of 1995. The Governmentwill implement the recommendations in the Ministries of Finance and Public Works in FY95/96 and in the Ministries of Lands and Settlement, and Land Reclamation, Regional andWater Development in FY 96/97.

(c) In addition, the Government intends to identify and eliminate duplication, overlap and ambiguityin the management of human resources; to develop and implement an improved skills needsplanning system and staff training in all other ministries during the second phase of the CivilService Reform Program.

4. Initial Support to CSRP

Credit for the Programme's achievements so far goes not only to the Government of Kenya which isunreservedly committed to the CSRP goals and objectives, but also to the World Bank which through its severalCSRP Appraisal Missions and close collaboration with Government of Kenya (GOK) has significantlycontnbuted to the envisioning and preparation of the project as it now stands. The ODA has assisted GOK byproviding the CSRS with requisite equipment, funds for mounting the Reform Commnittee seminars and supportfor preliminary consultancy studies on retiree training. Discussions are also being held with ODA on additionalfunding of VERS. GOK has also worked closely with UNDP on funding requirements for CSRP activities.Other donors have expressed interest and understanding, and it is GOK's hope that they will soon be able to makedefinite commitments to augment the efforts already made towards full implementation of the CSRP.

6

- 52 -ANNEX XIPage 7 of 7

5. Implementation Arrangements

The National Steering Committee of the CSRP will provide policy guidance, approve plans, budgets andtime schedules, and generally superintend over all implementation arrangements in Ministnres, Districts andProvinces. The National Steering Committee's operational arm, the CSRS, will provide the necessary co-ordination and technical support, including procuring specialized service-wide consultancy services.

Responsibility for successful implementation of all agreed components of the Project in each ministryrests with the Ministerial Reform Committee, chaired by the Permanent Secretary who is the chief executive of theMinistry. As expected, Ministerial Comrmittees Will inevitably have a sectoral focus.

The Provincial and District Civil Service Reform Committees will be responsible for projectimplementation in Provinces and Districts, respectively. The inter-disciplinary, multi-sectoral approach todevelopment planning and implementation which has been the hallmark of District planning during the last tenyears will enable these Reform Committees to consider all the implementation issues globally. This willcomplement the sectoral focus by Ministerial Reform Committees.

Each Reform Committee will implement, monitor and evaluate progress, continuously reporting anychallenges to the National Steenrng Committee of the Programme.

Since Ministries may not be self sufficient in certain resources, including technical and managerialcompetence required for the Reform, it is envisaged that requisite external input Will be sought and procuredunder the IDA credit.

GOK has submitted funding proposals to IDA and other donors and is ready for negotiations as soon asthis is agreed upon. This letter, therefore, apart from highlighting the goals, objectives, targets and time schedulesof the Civil Service Reform Programme, serves as an appeal to your good offices for technical and budgetarysupport. GOK is convinced that all the CSRP project components will be successfully carried out through thispartnership.

Please accept the assurances of our highest consideration.

GAYORtE. AVEDIPERMANENT SECRETARY/DIRECTORDIRECTORATE OF PERSONNEL MANAGMENTAND VICE CHAIRMAN, NATIONAL STEERINGCOMMITTEEOFFICE OF THE PRESIDENT

Encls.

7

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ANNEX XIIPage 1 of2



PROJECT IMPLEMENTATION PLAN

TABLE OF CONTENTS

Page

OBJECTIVES OF THE PROJECT IMPLEMENTATION PLAN 1

INTRODUCTION TO OVERALL PROJECT IMPLEMENTATION PLANLAYOUT 3

SECTION 1 5

1. I PROJECT BACKGROUND AND DESCRIPTION ..................................5

1.1.2 B ackground ................................................ 5

1.1.3 Projection Description ................................................ 6

1.1.4 Project Benefits and Risks .............. ................................. 11

1.1.5 Financing Plan ................................................ 14

1.1.6 Project Costings ............................................... 14

SECTION 2 20

2.1 IMPLEMENTATION MANAGEMENT ................................................. 20

2.1.1 Organizations Responsible for the Project ............................................. 20

2.1.2 Implementation Approach ................................................. 27

2.1.3 Responsibility of the Implementing Agency with IDA ............................ 28

2.1.4 Relationship of Implementing Agency with IDA .................................... 28

2.1.5 Role of IDA during Project Implementation .......................................... 29

2.1.6 Administrative Arrangements for Project Implementation ...................... 29

2.1.7 Administrative Procedures ................................................. 29

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ANNEX XIIPage 2 of 2

SECTION 3 54

3.1 IM PLEM ENTATION PLAN ..................................... ................... 54

3.1.2 Time-bound Detailed Implementation Plan ................... ....................... 54

3.1.3 Procurement Actions ......................................................... 58

3.1.4 Disbursement Schedule: ....................... ............................ . ... 59

3.1.5 CSRS Project Accounts ........................................................ 62

3.1.6 Timing of Reports ......................................................... 70

SECTION 4 162

4. 1 M ONITORING AND EVALUATION ......................................... ..... 162

4. 1 .1 Key Progress Indicators for monitoring delivery of project inputs andachievement of project outputs ........ ................................................ 162

4.1.2 Procurement Plan ......................................................... 164

4.1.3 Key development inpact indicators for measuring progress in reachingproject development objections ......................................................... 168

4.1.4 Key financial indicators to assess the projects budgetary and financialhealth ....................................................... 169

4. 1.5 Major loan covenants that require special attention ... . ....................... 172

4.1.5. 1 Project Organization and Management .................... ..............I... 172

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ANNEX Xm

DOCUMENTS AVAILABLE IN PROJECT FILE

1. Kenya Civil Service Reform Programme andAction Plan. Directorate of PersonnelManagement, Office of the President, GOK. May 1992.

2. Kenya Civil Service Reform Programme: A Review of the Organizational Structureand Capacity of the reform Secretariat and the System for the Operationalization ofthe Early Retirement Scheme. KK Consulting Associate. October 1993.

3. Report of the Task Force on Motivation in the Civil Service under the Auspices of theCivil Service Reform Programme. Directorate of Personnel Management, CivilService Reform Secretariat, GOK. June 1994.

4. Investment Opportunities for Civil Servant Retirees: Needs of Assistance. Preparedby KenAID for the Civil Service Reform Secretariat. June 1994.

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