Report No. 46652-KG Kyrgyz Republic Education Sector Fiduciary Capacity Assessment Report September 2008 Operational Policy and Services Europe and Central Asia Region Document of the World Bank KYRGYZ REPUBLIC EDUCATION SECTOR FIDUCIARY CAPACITY ASSESSMENT TABLE OF CONTENTS ACKNOWLEDGMENT...................................................................................................1 EXECUTIVE SUMMARY ...............................................................................................2 1. INTRODUCTION ...................................................................................................11 A. BACKGROUND 11 B. OBJECTIVE, SCOPE, AND OUTPUT 11 2. PUBLIC FINANCIAL MANAGEMENT FRAMEWORK ..................................13 A. ORGANIZATIONAL ARRANGEMENTS 13 B. CONTEXT OF PUBLIC FINANCE MANAGEMENT 13 C. BUDGET CYCLE 14 E. PUBLIC PROCUREMENT 17 F. DONOR SUPPORT FOR EDUCATION 25 3. THE EDUCATION SECTOR--THE MINISTRY OF EDUCATION, ADMINISTRATION, RAYONS, AYIL OKMOTUS, AND SCHOOLS..........26 A. EDUCATION SECTOR AND ITS INSTITUTIONS 26 B. FINANCIAL MANAGEMENT ARRANGEMENTS 29 C.CURRENT EXPENDITURE SYSTEMS AND FLOW OF FUNDS 34 D. PROCUREMENT CAPACITY IN THE EDUCATION SECTOR 43 4. CASE STUDIES OF SELECTED EXPENDITURE ITEMS................................47 A. SALARIES 47 B. FOOD ITEMS 49 C. TEXTBOOKS 50 D. UTILITIES AND MAINTENANCE 51 E. HIGHER EDUCATIONAL INSTITUTIONS 52 5. ACTION PLANS FOR CAPACITY BUILDING ..................................................55 FIGURES Figure 1. Kyrgyz Procurement System Benchmarked Against International Standards (OECD­ DAC Methodology) ..........................................................................................19 Figure 2. Current Organizational Structure of MOES Financial Departments ................29 Figure 3. The Subordinating Scheme of the Ayil Okmotus .............................................31 Figure 4. Allocation of Categorical Grants from Republican Budget, by Region ...........36 Figure 5. Allocation of Equalization Grants from Republican Budget, by Region .........36 Figure 6. Funds Flowchart--Local and Republican Budgets...........................................39 TABLES Table 1. Education Expenditures as a Share of Total Republican Expenditure................27 Table 2.General Budget _Expenditures by functions, cash basis......................................28 Table 3. Allocation of Republican Budget Funds among Institutions in the Education Sector ...........................................................................................................................................37 Table 4 Structure of expenditures from the state budget for secondary education in 2006 (mln som). ..................................................................................................................................38 Table 5. Educational Expenditures, Town of Shopokov, 2006­07..................................47 Table 6. Phase 1 Action Plan to be implemented by the MOEs during 2008-2009..........57 Table 7. Phase 2 Action Plan for Education Sector to be implemented during 2009­10 .58 ANNEXES Annex 1 - Flow Diagram for Investment Expenditures within Education Sector.............60 Annex 2. Flows of Funds and Information Diagram within Education Sector ................61 Annex 3. Overview of Information Flows between the Treasury Offices and other Budget Process Participants ...........................................................................................................62 Annex 4. Local Budget Performance by Regions, 2006 ...................................................63 Annex 5. Overall National Budget Performance in Education by Region, 2006..............65 Annex 6. Current Organizational Structure of Education Sector ......................................66 ACKNOWLEDGMENT This report was prepared by a World Bank team comprising Naushad A. Khan (Task Team Leader); John Ogallo, Senior Financial Management Specialist; Nurbek Kurmanaliev, Procurement Specialist (ECSPS); Aisuluu Bedelbayeva, Education Specialist (Human Development Sector); and Gulnaz Turbatova, Financial Management Consultant. Irina Goncharova, Program Assistant, supported the team. The peer reviewers for the assessment are Roland Clarke, Senior Country Economist (ECSPE); Joseph Mubiru Kizito, Senior FM Specialist (LCSFM); Irina Luca, Lead Procurement Specialist (AFTPC); and Hiroyuki Maruyama, Senior Procurement Specialist (ADB). The team would like to thank their many colleagues and counterparts in Kyrgyz Republic for their excellent cooperation. We are grateful to I. Boldjurova, Minister of Education; E. Imanalieva, Deputy Minister; and the heads of respective departments and the administration of the Ministry of Education and Science (MOES). Thanks too to the staffs of the Jalalabad and Naryn Oblast administrations, and those of several rayons and ayil okmotus in the two oblasts. The World Bank team is particularly grateful to the counterpart team--Farida Ryskulueva, Head of the Strategic and Analytical Work Unit (SAWU); Marat Usenaliev, Head of the Preschool, School, and Out-of-school Education Department; Aziz Murataliev, Chief specialist of the Economic Unit; Begaym Muratalieva, Chief specialist of the Accounting Unit, and Ainura Turgunbaeva, Head of the Rehabilitation, Monitoring, and State Procurement Unit (RMSPU) of the Ministry of Education and Science of the Kyrgyz Republic. Regional Vice President: Shigeo Katsu, ECAVP Country Director: Annette Dixon, ECCU8 Sector Director: Theodore Ahlers, ECSPS Sector Manager: Sunil Bhattacharya/Siew Chai Ting, ECSPS Task Team Leader: Naushad Khan, ECSPS 1 Executive Summary KYRGYZ REPUBLIC EDUCATION SECTOR FIDUCIARY CAPACITY ASSESSMENT EXECUTIVE SUMMARY Introduction 1. The Government of the Kyrgyz Republic (GOK), the World Bank, and international and bilateral partners agreed on the need for a fiduciary assessment of the education sector. A joint World Bank/Government team analyzed financial management, procurement arrangements and capacity in the Ministry of Education and Science (MOES) and key institutions at the oblast, rayon and local levels. The assessment is being carried out in two stages. In the first stage, reported here, fiduciary conditions in the education sector were assessed. Based on the findings of this review, short-term and medium-term fiduciary capacity building action plans were prepared and included in Annexes 11 and 12 of this report. A second stage assessment will be carried out after the MOES has implemented the short-term fiduciary capacity building plan. The second-stage assessment will determine whether the fiduciary conditions in the education sector are favorable for an effective use of new approaches such as SWAp and suggest, as necessary, further corrective actions. Public financial management framework 2. The Kyrgyz Republic began to reform its public expenditure management in the mid 1990s. These reforms formed an important element of the National Poverty Reduction Strategy (NPRS) of 1996-2005. Since then, foundations of public expenditure management have been introduced, including a legal framework, budget management procedures, and a treasury system. The NPRS recognized Public Finance Management (PFM) as a pillar of poverty reduction and economic growth. There is mixed progress in the implementation of the broader PFM Action Plan. There has been progress in areas such as development of new budget classification. Progress has been slower in other areas such as adoption of public sector accounting standards and development of internal audit framework. The slow pace stems from poor management of reform, lack of a clear champion, lack of qualified staff to lead efforts, and low technical capacity. The education sector and its institutions 3. Expenditure on education. Nearly 10 billion som or one fourth of the total national budget was allocated to finance education sector in 2007. According to the National Statistics Committee, the dynamics of the last five years demonstrates that the proportion of education expenditures in the national budget is fairly considerable accounting for 20-23 per cent. Moreover as a proportion of GDP education expenditures have been increased lately. Thus, for example, according to MF data the GDP proportion of education expenditures accounted for 3.9% in 2001; 5% in 2005 and 6.5% in 2007. The major proportion of national education expenditures accounts for primary and secondary education averaging 60% of all education expenditures. In 2007 expenditures allocated for school education increased up to 77% against 66% in 2006. The average budget expenditure per student is 6,010 som for pre-school institutions; 2,220 som for secondary schools, 10,234 som for vocational schools and 8,530 som for higher education institutes. Education expenditure in 2001 was 3.5 percent of GDP. Education spending as a share of GDP has increased over the last few years, levelling at 5.2 percent of GDP between 2005 and 2006. This change was determined by the introduction of the Law on Nutrition for Students of General Educational Schools (October 23, 2007), which stipulated that all students in primary Education Fiduciary Capacity Assessment schools (grades 1­4) be provided with breakfast. Education spending has increased as a share of total public expenditures in recent years, demonstrating the government's commitment to the sector. 4. Institutional arrangements. The MOES directly manages 90 educational organizations, mainly central- and regional-level higher educational institutions (22), secondary professional educational institutions (23), specialized secondary schools, gymnasiums and boarding school (29), and various centers, inspectorates and editorial offices (16). All these 90 institutions are financed out of state budget allocations. The remaining 3,000 educational institutions are financed through local governments and other organizations. 5. Budgeting and budget performance. Budget formulation and planning tend to follow a top-down approach. Like other ministries, MOES has little opportunity to plan expenditures based on their programs on an annual basis. At the local level, ayil okmotus budget planning follows a similar top-down approach. Often, deviations occur from the budget figures that were prepared at the beginning of the year. There is unpredictability in availability of funds due to weak budget preparation process, non-timely release of budgeted funds by the Central Treasury, weak organizational and procedural aspects of budget execution, and lack of forecast in planning the expenditures by the MOES and ayil okmotus. 6. The MOES should have a greater role in formulation of budget based on its programs and the policies that it adopts. This calls for a "bottom­up" approach in which the budget is formulated with significant input from the MOES, based on sectoral policy and strategy. The MOES should periodically analyze budget performance, noting effects on various education programs caused by delayed release of funds. This would include arrears to suppliers of goods and services, including utilities. Such analysis would anchor dialogue with the MOF on budget performance for the education sector. 7. Budgetary Flows. There is considerable fragmentation of sources of funding in the education sector. As a result it is difficult to have a consolidated view of the main sources and uses of funds. Such fragmentation undermines accountability and contributes to fiduciary weaknesses in the education sector. Moreover the MOES cannot determine periodic flows--for example, receipt of funds by quarter. In addition there is unpredictability in availability of funds due to weak budget preparation process and non-timely release of budgeted funds by the Central Treasury. There are complaints that the MOF releases funds with substantial delay, especially for expenditures other than for salaries and food. The MOES tries to adjust by resorting to survival tactics, such as certain protective conditions or clauses in contracts with suppliers. 8. There is need for major institutional reforms in financing and managing the education system. Such reforms would give the MOES greater control and accountability of education sector resources and thus encourage the MOES to exercise greater fiduciary controls. 9. Accounting systems. There is need for substantial capacity building effort at all levels for accounting staff, including computer literacy, basic accounting, budgeting, internal financial controls, internal audit, and reporting. Accounting staff need not only focus on compliance with rules and regulations, but also consider the more generic aspects of financial management processes, including using financial management as means of providing information for decision- making. Several concrete actions are needed. First, a training program is necessary to upgrade accounting skills at all levels, including at rayon and ayil okmotus. This includes Training of Trainers (TOT) to ensure continuous capacity building. Second, the current practice of assigning 3 Executive Summary procurement responsibility to accountants, especially in the regions, should be discontinued. Third, processes and procedures that are currently done manually should be automated. Current expenditures 10. A considerable portion of current expenditures are channelled to finance infrastructure and staff. In general the expenditures of the sector are not cost-effective. Thus, during the period 2001- 2007 while the number of students has dropped by 31,500 people (3%) in the school educational system, the number of schools has increased by 88 (4%); the number of teaching staff salaries has increased by 6,000 (8%); and the number of administrative, management and service staff has increased by 2,000 (6%). In the higher educational system, regardless of the number of students in a higher educational institute, the number of administrative, management and service staff accounts for high average values of 40-45%. Thus, there are high maintenance costs for infrastructure incurred in the primary vocational system (for both production, training facilities and dormitories) with a low enrolment of students and use of capacity existing in the system. Since 2006, some budget expenditures have been allocated for food for students of primary general schools (1-4 grades) in accordance with the Law on Nutrition of Students. Food funding is 5 som (US$ 0.14) per student. A considerable proportion of budget funds are allocated for nutrition of students of primary vocational and pre-school education. At all education levels there is ineffective use of funds allocated for educational process. 11. Financing of primary and secondary schools. The school educational system is characterized by high centralized funding. Thus, over 62% of all expenditures are financed with funds allocated from the national budget (including categorical grants) and nearly all expenditures (from 93% to 100%) are financed with budget funds in such oblasts like Naryn, Jalal-Abad, Osh and Batken. The following expenditures are fully financed from the national budget: school staff salaries, food for students of 1-4 grades, minor repairs and purchase of textbooks, and centralized payment of major expenditures for communal utilities. The budget of general educational institutions is formulated on the basis of integrated indicators depending on: the number of students in a class; the number of administrative, management and service staff; maintenance costs of facilities; and other items. The current existing mechanism of financing practically does not allow schools to influence the formation of structure of costs for their maintenance, which ultimately does not facilitate economic prerequisites for flexible and effective use of resources. Moreover, a considerable differentiation of financing for education by national regions is caused by multi-level budget system and lack of fairness and transparency in allocation of categorical grants from the national budget to support social programs at local level. In spite of the fact that secondary education has been recognized as a priority of the state policy and given that an average of 60% of the sectoral budget is allocated to finance it, the average expenditure per student (2,229 som) is less than fivefold compared to that of primary and secondary vocational education, and fourfold compared to those in higher educational institutes. Per capita financing of schools counting on 1 student was piloted in 2006-2007 school year in Tokmok; 2007-2008 in Issyk-Ata rayon (under the World Bank financed "Village Education" project). The model of Issyk-Ata rayon will be extended to other rayons and towns of Chui oblast in 2008-2009. Large financial resources and well-trained and high capacity staff are required to expand the coverage of the per-capita school financing model to other national regions. Education Fiduciary Capacity Assessment 12. According to the Law on Education, financing of state educational institutions is based on a certain amount per student in accordance with the principle of consistent increase in actual expenditures. Expenditures financed in the form of grants from the republican budget include teachers' salaries, food expenses for each primary student in first through fourth grades, and repairs and maintenance works of secondary and primary schools. All other expenditures of rural schools are financed from the budget of ayil okmotus. City schools are financed from city budget, and schools located in rayons are financed from rayon budgets. According to recent changes in regulations, the budget has two levels--republican and local. The transition to a two-level budget process has certain benefits for local level authorities because they now have more flexibility in the management of the available funds. There is also a greater sense of ownership of the funds by the local authorities, which enhances accountability and transparency in their use of the funds. 13. Financial reporting. The MOES does not currently prepare consolidated financial statements for the entire sector. Such reports are probably available in the MOF. MOES needs a mechanism to consolidate financial information for the MOES that would facilitate strategy development and decision making. Implementation of the MOF Treasury system and a review of financial information requirements of the MOES are essential in order to design a reporting system that would support such consolidation. 14. Information systems. Accounting and reporting are done manually at all levels of the education sector. There is a need for the review of the MOF treasury system and MOES financial reporting requirements in order to develop a mechanism for generating sector-wide consolidated financial reports using treasury system. External assistance may be required to computerize the accounting system at various levels, based on the "project intent" document being developed by the MOES. 15. Internal control and external audit. As in most budget organizations, there is too much emphasis on compliance with regulations, while the broader concept of internal control is not appreciated. A MOES internal audit unit is needed to conduct internal audits at the levels of headquarters, rayons, and individual schools. In addition, rayon administrations and ayil okmotus need internal manuals on financial management. External audit of the education sector is conducted by the Chamber of Accounts (COA), the Supreme Audit Institution. With regard to performance of local budget funds, the ayil okmotus report monthly and quarterly to the local kenesh. The number of inspections of the ayil okmotus is insufficient taking into account the absence of an internal audit structure in MOES. In certain schools, parents' councils provide additional financing to schools from their own resources. To ensure the integrity of spending, these councils generally carry out their own inspections, which can take place at any time during the year. It is expected that fulfillment of the recommendations on internal control (above) would strongly supplement the work of external auditors and thus strengthen overall control and accountability at the local level. Procurement 16. The general procurement environment. Ineffective implementation of the May 2004 public procurement law (PPL) is a major weakness of the Kyrgyz public procurement system. Deficiencies include absence of proper guidance to procuring entities; lack of procurement organization and capacity; undesirable procurement practices; poor budgetary allocation processes; inadequate external and internal controls; an unimplemented anticorruption agenda; and a weak supply side that mistrusts the procurement system. 17. Public procurement at country level. The recent World Bank report "Kyrgyz Republic: Public Procurement System Assessment Using the OECD-DAC/World Bank Methodology, 5 Executive Summary November 10, 2007." concluded that: an assessment of the Kyrgyz public procurement system compared with the international procurement standards and practices shows that progress has been achieved but much remains to be accomplished. The legislative framework for procurement has evolved toward achieving international standards in recent years. On the other hand, institutional arrangements to implement the legislation have made little headway. In particular, the operations of the procurement system do not inspire much trust among the providers of goods, works, and services in the evolving national procurement market. This indicates a strong need to initiate partnerships between the public and private sectors to strengthen existing external controls, to establish internal controls, and to implement the anticorruption program effectively. The report includes detailed recommendations for improvements in the system. 18. Procurement in the Ministry of Education and Science (MOES).. There is urgent need for procurement capacity building in the education sector, beginning with the MOES. Its Rehabilitation, Monitoring and State Procurement Unit (RMSPU) should be strengthened through additional procurement staff and training both in international and public procurement. This will not only enable the RMSPD to carry out public procurement more efficiently and economically but will also allow it to assume responsibility for implementing procurement under donor-funded projects. Similarly, the Capital Construction Department (CCD) should be made responsible for all procurement of civil works. The MOES should collaborate with the National Procurement Training Center (NPTC) on designing and delivering procurement training for the staff of the MOES and its affiliate institutions. In order for the RMSPU and CCD to undertake procurement under donor-funded projects, their staff should also receive training in international procurement. Finally, a website should be established to link the MOES with oblast, rayon and ayil okmutu administrations. This will enable knowledge sharing, dissemination of education sector related information on education policy including government regulations, and publication of tender notices and contract award information. This will also promote public-private partnership in the education sector. 19. Oblasts, rayons, and ayil okmotus. Procurement at the oblast, rayon, and ayil okmotu level is generally handled as a side job by accountants from the Department of Accounting and Administration. A permanent tender committee usually operates at each level. In the ayil okmoto, tender committees sometimes include school principals in procurement decision meetings. The use of local accountants for procurement necessarily presents a potential conflict of interest. Permanent tender committees not only encourage the development of undesirable relationships with potential goods and service providers, they violate the current PPL. In general, ayil okmotus centrally procure food items for their schools and state institutions. Those who deal with procurement are generally unaware of the new PPL that is in force. In order to ensure segregation of duties and resolve the conflict of interest situation the practice of using accountants for carrying out procurement should be discontinued. Regional and local administrations should either appoint qualified and trained procurement officers or train their existing staff (other than accountants) in procurement. To the maximum extent possible, the practice of using permanent tender committees should be replaced with ad hoc tender committees as stipulated in the PPL. 20. Procurement support and control systems. The SAPPMR has a branch in each oblast to support procuring entities at oblast, rayon, and ayil okmutu levels. These branches organize procurement training for public officials from time to time. However, the content and the frequency of the training provided are not adequate. These branches are also responsible for overseeing the conduct of procurement by procuring entities with budgetary resources to ensure compliance with the provisions of the PPL. It appears, however, that these offices spend substantial amount of time on reviewing tender documents, evaluation reports, and contracts and issuing permits, which are not functions attributed to the SAPPMR or its branch offices by the Education Fiduciary Capacity Assessment PPL. There is generally low awareness among the public officials of the public procurement legislation or changes to the regulatory framework. High cost of training in procurement, i.e., fees charged by the NPTC, deter oblast, rayon and ayil okmotu administrations from sending sufficient number of their staff for participating in such training. Internal controls do not exist; external control is carried out from time to time by Chamber of Accounts (CAO). The CAO staff generally do not receive adequate training in public procurement to carry out effective audits in this area. Fiduciary capacity building action plans 21. Many of the fiduciary weaknesses discussed in this assessment mirror larger problems of the country's Public Finance Management (PFM) system and public procurement. The short-term action plans discussed below aims at building the fiduciary capacity of the MOES. The sooner the action plan is implemented the sooner the MOEs would be able not only to carry out public procurement with budgetary resources and financial management of these resources more economically and efficiently but also to assume fiduciary responsibilities, both on procurement and financial management, under donor-funded activities. The implementation of the phase 2 action plan will help in improving fiduciary arrangement in the education sector as a whole. This will provide multilateral and bilateral donors the necessary assurances that the funds provided by them for the improvement of the education sector in the Kyrgyz Republic will lead to the intended results. It must, however, be noted here that the issues in the education sector in the Kyrgyz Republic cannot be resolved in isolation from broader PFM reforms, e.g., treasury modernization, accounting reforms, including development of chart of accounts, development of institutional and legal framework for internal audit, etc. These reforms, however, can be (and to some extent are being) introduced in a parallel rather than sequential manner. 22. Phase 1 Short-Term Action Plan.. The Phase 1 action plan should be implemented by the MOES during the period 2008-2009. Implementation of this action plan will help the MOES enhance its fiduciary capacity, including financial management, accounting and procurement practices which will result in: (i) more economic and efficient use of its budgetary funds; (ii) gradually assuming responsibility for implementing donor-funded projects, beginning with FTI- funded activities; and (iii) creating favorable fiduciary conditions for using new mechanisms of implementing investment operations, such as SWAp. The estimated cost of Phase 1 Action Plan is US$659,000. 23. Phase 2 Medium-Term Action Plan. The phase 2 action plan concerns the education sector as it relates to the levels at the rayon and ayil okmuto. The actions proposed in this action plan should be implemented over the period of 2009-2010. The implementation of this action plan will not only result in economic and efficient use of budgetary resources for the education sector at regional and local levels but will also contribute to the development of the education sector through effective management of budgetary funds, including donor funds pooled in support of education sector programs using SWAp mechanism. The estimated cost of Phase 2 Action Plan is US$497,000. 24. Attachment 1 to this summary contains the actions proposed for the phase 1 and phase 2 action plans and their impact on the fiduciary arrangements in the MOES and its subordinated institutions. 25. Implementation of Fiduciary Capacity Building Action Plans. In order to implement the Phase 1 and 2 action plans, it will be necessary for the MOES to establish a team of senior officials headed by a Deputy Minister to serve as an oversight committee. It is recommend that the Strategic and Analytical Work Unit (SAWU) of the MOES be made responsible for day-to-day implementation and coordination of activities under the two action plans. For this purpose, this Department should 7 Executive Summary enhance its capacity by adding at least one dedicated consultant and the requisite office equipment. The RMSPU should support the SAWU in implementing the two plans. The SAWU should also be made responsible for coordination with the education sector related regional and local government bodies and schools. In addition, services of international and local consultants for implementing different fiduciary capacity building activities will be required. The cost of implementation of the two action plans is estimated at US$1,156,000. It is expected that the FTI grant funds will be used for financing the implementation of the two action plans. Efforts should be made to explore the possibility of obtaining the necessary financial support from other donors as well. Education Fiduciary Capacity Assessment Phase 1 Action Plan to be implemented by the MOES, 2008­09: Actions and their Impact Action Impact 1 Streamline budgeting process, as part of annual Improved budget formulation that responds to budget formulation, based on the medium- sector strategy and programs, and to improved term strategy of financing the education transparency and efficiency of the budget sector, and train staff to prepare annual budgets process. based on sectoral needs. 2 Develop mechanism for consolidated financial MOES will have a clear view of annual budgets information for the MOES and its subordinated executed against agreed targets institutions 3 Streamline accounting and computerize Enhanced efficiency, timeliness, and reliability of accounting processes and financial reporting accounting transactions and financial reporting with in-built controls 4 Introduce basic controls over primary and Economic and efficient use of public funds for secondary education records, including payroll intended purposes and contract management 5 Design and deliver Training-of-Trainers Improved skills at central and local levels and Program for financial management and sustainable capacity building in PFM accounting 6 Install in MOES an automated accounting Timely and accurate record keeping and reporting system for management of donor funds as a first for donor-financed activities step towards full automation of accounting 7 Recruit local FM and procurement consultants Added FM and procurement capacity for MOES to support MOES in implementation of FTI 2 to assume FTI 2 implementation responsibility 8 Strengthen RMSPU (for procurement of goods Effective procurement organization and capacity and services) and Capital Construction in the MOES Department for civil works 9 Train MOES procurement staff in international Enhanced MOES capacity in conducting procurement international procurement 10 Train MOES staff in public procurement, Awareness among MOES staff of requirements of including introduction to international public procurement law procurement 11 Provide office and training equipment for the Strengthened technical capacity of the Department RMSPU for carrying out procurement effectively 9 Executive Summary 12 Strengthen the MOES website Effective interaction with other education sector institutions at all levels; knowledge sharing; and dissemination of procurement and other information Phase 2 Fiduciary Capacity Building Action Plan for Education Sector to be implemented during 2009­10 Action Impact Enhanced capacity to consolidate financial 1 Introduce robust accounting and financial information, reliable accounting and reporting and reporting system better management of resources Create internal audit unit in the MOES and 2 Improved controls at all levels in education sector other education-relevant institutions at regional for economic and efficient use of public resources and local levels Introduce program budgeting, along side annual Improved budget formulation that responds to 3 budget formulation. Train staff and streamline sector strategy and programs. This would enable preparation of annual budget using the program- the MOES to monitor budget execution for the based approach. The annual budget will need to whole sector, enable efficient data collection for be reconciled to the program budget as part of the better decision making. MTBF process. Design and deliver procurement training for 4 public officials serving education sector at Enhanced capacity of public procurement officials oblast, rayon, and ayil okmotu levels Education Fiduciary Capacity Assessment 1. INTRODUCTION A. Background 1.1. In pursuance of paragraph 48 of the Joint Country Support Strategy for the Kyrgyz Republic, 2007­2010 (dated May 23, 2007), the Government of the Kyrgyz Republic (GOK), the World Bank, and other international and bilateral donors agreed on the need for a fiduciary assessment of the education sector.1 The main objective of this assessment is to help the Government of the Kyrgyz Republic (GOK) take the necessary measures for fiduciary capacity building in the education sector. It seeks to deal not only with existing weaknesses in the sector, but also to create favorable conditions to support new mechanisms of implementing investment operations, such as SWAp. 1.2. The assessment is being carried out in two stages. Under the first stage, a joint World Bank/Government team reviewed existing fiduciary conditions in the education sector, including the Ministry of Education and Science (MOES) and its affiliated bodies; and education related institutions in two oblasts, Naryn and Jalalabad. This report covers only the first stage. A second stage assessment would be carried out after recommendations included in this report have been implemented. The second stage assessment will determine whether conditions are favorable to support a sector wide approach (SWAp) will recommend, if necessary, further fiduciary capacity building measures. B. Objective, Scope, and Output 1.3. The objective of this assessment is to review the current financial management and procurement arrangements and capacity in the education sector. Based on the findings of this review, a short-term action plan has been prepared. The implementation of the recommendations included in this short-term action plan aim at strengthening MOES fiduciary capacity with a view to assuming responsibility for projects funded by Education-for-All Fast Track Initiative (FTI) and other donors. The second phase action plan will in the medium term address the weaknesses of the education sector as a whole, which would lead to effective use of new approaches such as SWAp. The first action plan will be implemented within one year of the date of this report and is expected to be financed with the proceeds of the first FTI Catalytic Fund grant. Education sector institutions covered by the assessment 1.4. The fiduciary assessment focused on financial management and procurement in key education sector relevant institutions and representative regions (oblasts). Institutions were selected in close collaboration with the MOES. Financial management, procurement arrangements, and capacity were analyzed at the central, regional, and local levels. The following were included: (i) the Ministry of Education and Science; (ii) Naryn (North) and Jalalabad (South) oblasts; (iii) two rayons, including Bazar-Korgon and and Shopokov, which are considered to have good public management capacity; and Kochkor, which is considered to have low capacity; (iv) one medium and one large city school in Naryn and Jalalabad; (iv) two schools in the rural areas of Bazar- 1 Paragraph 48 states, "The Bank will also continue to have strong engagement in education sector. If the necessary fiduciary conditions and commitment and capacity of the Government are seen to be in place, the Rural Education Project may be followed byan Education SWAp in FY10..." 11 1. Introduction Korgon and Kochkor ayil okmotu; (v) the ayil okmotu administrations; and (vi) a state university in Bishkek. 1.5. For the financial management, the assessment covered the following areas: institutional arrangements; planning and budgeting; funds flow; staffing issues; budgetary accounting; accounting policies and procedures; internal control, including internal audit; external audit; reporting and monitoring; information systems; and capital expenditures. 1.6. For the procurement capacity assessment, the following issues were covered: (i) legal aspects; (ii) procurement cycle management, including procurement planning, preparation of bidding documents, prequalification, management of bidding process from advertisement to bid opening, bid evaluation, contract award, preparation and signing of contract, contract management during implementation, and general handling of procurement cycle; (iii) organization and functions; (iv) support and control systems, including auditing mechanisms, integrity/ethics systems, and anticorruption initiatives; (v) record keeping; (vi) staffing (vii) general procurement environment; and (viii) assessment of private sector, particularly the availability of sufficient number of supplies in the remote rayons, the price policy, compliance with the PPL, and so forth. 1.7. In assessing the capacity of the sector, the team focused on key expenditure items. These included overall human resource management, including appointments, deployment, training and salaries; textbooks; maintenance and repair; utilities; facilities and school equipment, including information system (IT), laboratories, desks and boards; canteens, including food for preschool students; and transport. In addition, revenue streams were examined through in-depth review from the perspective of procurement and financial management. Methodology and approach The assessment was conducted in accordance with the Interim Guidelines on Fiduciary Arrangements for SWAps (dated November 22, 2002). The team reviewed the institutional arrangements and capacity of the sector; its laws, rules, and regulations; and their implementation in actual practice. The team interviewed relevant education sector staff to ascertain their awareness of existing fiduciary problems. In addition to the education sector institutions, the team consulted with the Ministry of Finance (MOF), the Treasury, the Ministry of Economy, the State Agency on Public Procurement and Materials Reserves (SAPPMR), and the Chamber of Accounts (COA). The assessment drew on other Economic and Sector Work (ESW) products. Coordination with the donors participating in EFA-FTI 1.8. The assessment was coordinated with other donors active in the Kyrgyz Republic, including UNICEF, ADB, EU, and SECO. At the outset, the team informed these donors of the objectives and expected output of the assessment, and invited their participation. The donors received, reviewed, and provided comments to the draft concept note and the draft of this report and made valuable suggestions for improvement. Education Fiduciary Capacity Assessment 2. PUBLIC FINANCIAL MANAGEMENT FRAMEWORK A. Organizational Arrangements 2.1. The Government primarily comprises executive and legislative authorities. At present, the executive authority includes 14 ministries and five committees; 11 agencies, the financial police; and the presidential and subnational administrations. The subnational administration consists of four types of units--oblasts (provinces), towns, rayons (rural administrative districts), and ayil okmotus (local self-government units). There are seven oblasts and oblast-level entities; 51 rayons; and 472 ayil okmotus. The structural relationship among these units is generally (but not universally) hierarchical. The legislative authority is invested in Parliament. In recent years, the government has started developing the legal framework for decentralization and local government reform. A decision was taken in 2002 to create the local ayil okmotus, which are independent in financial management and procurement. See also Annex 9 for Financial Management Practices Gap Analysis. 2.2. Each oblast, rayon, and town is governed by an executive administration and a legislative council (kenesh). Local self-government bodies are representative. The executive and administrative functions allow local populations to manage their own affairs. The heads of local self-governments are elected officials from among the local self-government bodies in ayils, and cities of rayons. The local self-government bodies are financially independent and have the necessary autonomy to manage their affairs. B. Context of Public Finance Management 2.3. The Kyrgyz Republic began to reform its public expenditure management in the mid 1990s. These reforms formed an important element of the National Poverty Reduction Strategy (NPRS) of 1996-2005. Since then, foundations of public expenditure management have been introduced, including a legal framework, budget management procedures, and a treasury system. The NPRS recognized Public Finance Management (PFM) as a pillar of poverty reduction and economic growth. Donors have supported these reforms through bilateral technical assistance and implementation of policy actions included in budget support lending operations--for example, Governance Structural Adjustment Credit (GSAC) funded by the International Development Association (IDA). Donors have also undertaken several diagnostic studies to better understand the country's PFM framework. These studies have resulted in actions such as revising the Law of the Chamber of Accounts (COA) and enacting a new Public Procurement Law (PPL). The Country Development Strategy (CDS) of 2006-2010 recognizes that continued improvements in Public Financial Management (PFM) are essential for poverty reduction and economic growth. In mid 2006, the Ministry of Finance collaborated with donors on diagnostic studies to systematically define feasible PFM Action Plan for reforms. 2.4. There is mixed progress in the implementation of the PFM Action Plan. There has been progress in areas such as development of new budget classification. Progress has been slow in areas such as adoption of public sector accounting standards and development of internal audit framework. The slow pace stems from poor management of reform, lack of a clear champion, lack of qualified staff to lead efforts, and low technical capacity in the particular areas. Everyone agrees that technical assistance is required to help the authorities move forward. The World Bank and other donors (SIDA, SECO, DfID) are putting together a multi-donor trust fund to support capacity 13 2. Public Financial Management Framework building in PFM. This will go a long way in supporting implementation of specific reforms, especially those that are key priorities in the government's PFM Action Plan. C. Budget Cycle Budget formulation 2.5. Republican budget is formulated and executed according to the Law on Main Principles of Budget and the Jogorku Kenesh2 "decree and budget resolution on main directions of budget" allocation. These main decrees and resolutions are prepared by the MOF and presented to the budget committee of the Jogorku Kenesh. They then go to Parliament for approval. The Resolution provides the basis that allows line ministries to then prepare their budgets. 2.6. The Government has initiated reforms in the budget system, particularly the transfer to two-level (republican and local) systems of budget formation and execution. The law on the budget of the Kyrgyz Republic for 2007 and 2008 reflects this new principle of formation of the budget. One of the objectives of this reform of financial decentralization is to influence directly the processes which are in place at the local administration levels. The reforms are expected to directly improve the services of local administrations to local citizens--for example, more timely payments of social fees, creation of additional working places, and efforts to strengthen local budget capacity. However, the reforms have also introduced fragmentation of financing, especially in the education sector, thus undermining fiduciary controls in the sector. General procedure of budget formation 2.7. All local and central level government organizations develop their draft budgets based on predefined budget parameters and control amounts. The Ministry of Finance provides these parameters based on the budget resolution, the inflation forecast, GDP growth, and wage increase coefficients. MOF instructions require the line ministries to link their annual budgets with the Medium-Term Budget Framework (MTBF) and other sector strategies. In general, budget entities cannot yet provide this linkage effectively due to limited republican budget resources, and lack of budgeting skills by the personnel. Moreover, local administrations as well as the MOES do not formulate their budgets in congruence with prioritized long-term goals and programs. In practice budget formation is implemented based on the empirical data, i.e., with reference to previous years' budget performance. 2.8. Local self-government bodies (ayil okmotus) have the right to be totally financially independent from the republican budget. Financial resources of local self-government bodies are made up from: · Special means of the local budget · Categorical, equalizing, and stimulating grants allocated from the higher territorial level budget3 2Parliament 3 Categorical grants are "grants/transfers from republican budget to finance certain types of local budget expenditures that are guaranteed by the state--for example, salaries and Social Fund contributions." Equalizing grants are "grants/transfers from republican budget to finance the expenditures of local administrations in order to provide a stable social and economic position in accordance with minimal state social standards." Stimulating grants are "grants/transfers from republican budget for local administrations to stimulate effective budget funds, funds of the state programs and projects, funds of the projects directed to increase the incomes of the local budgets and to stimulate mobilization of the local sources of revenues." This latter type of grant is provided to local administrations on competitive basis in accordance with the Education Fiduciary Capacity Assessment · Extra-budgetary funds · Credit resources, transfers, and grants · Voluntary contributions and donations · Incomes from municipal securities and local loans · Deductions from national taxes and other incomes · Full amounts received as a result of administrative penalty payments · Other additional incomes from activities, organized by ayil okmotus (for example, income from the enterprises established at the local level depending on the needs of ayils), and revenues received from activity of enterprises and organizations set up for the needs of local communities. 2.9. The ayil okmotus also have local community property ownership, which serves as an income-generating source of local self-government and is used for financing social and economic needs of the population. The communal property includes land, movable and immovable property, local community treasury, and municipal securities. The order of property use is established by local kenesh in accordance with statutory legal acts of the Kyrgyz Republic. 2.10. Notwithstanding the financial independence of ayil okmotus, the financial resources available are insufficient to cover all needs, including those relating to education in secondary schools. As a result, funding of secondary schools is inadequate. Schools are forced to devise other methods of raising funds, for example, additional teaching activities. Budget execution 2.11. The Treasury Department in the Ministry of Finance is the key institution for budget execution. Improvements have been made in the budget execution process in recent years. A single treasury account with client account mode has been functioning since 2001. A cash-flow forecasting division within Treasury was established in November 2006, with the objective of forecasting revenues and expenditures of the republican budget. This has been achieved through three actions--drafting quarterly and monthly reports; preparation of regular analytical notes; and preparation of monthly forecasts on budget expenditures. The availability of regular information on budget performance increased the analytical potential of the MOF. This also assisted management of MOF in taking actions that ensure effective budget reallocations. 2.12. Several shortcomings have not been fully addressed due to lack of an overall PFM development strategy. These include lack of integrated IT system for budgeting, accounting and reporting; general staff skills constraints; nontransparent budget revisions; lack of proper internal financial control systems; and budget classification and chart of accounts that do not fully comply with international standards. Some of these problems would be resolved through ongoing of modernization of the treasury system under the Governance Technical Assistance Credit from the World Bank, which includes the component for "Establishing of Treasury Modernization Information System (TMIS) and Human Resource Management Information System (HRMIS)." 2.13. The "Technical Note on Budget Execution Process" highlighted the arbitrary nature of budget execution in the Kyrgyz PFM system, the departures from the original budget during the year, and the uncertainty regarding the availability of resources. These weaknesses are at the heart conditions set by the Government of the Kyrgyz Republic. The definitions are provided in accordance with the Law on the Main Principles of Budget Rights, No. 78, dated June 11, 1998, with the last amendment No. 110, dated July 15, 2006. 15 2. Public Financial Management Framework of the structural problems of the public expenditure management process. In addition, ineffective institutional arrangements and poor capacity result in substantial redundant activity, particularly in detailed in-year adjustments to the budget. Combined with unrealistic and misaligned budget preparation, it is clear that the manner in which public expenditure is managed in the KR generally leads to unproductive outcomes. 2.14. Lack of budget credibility and the unpredictability in the availability of funds for commitment of expenditures by spending ministries has two serious consequences--first, problems in the budget formulation process; and second, weaknesses in the budget execution process, including extensive central control and weak resource management capacity. Some problems are partly related to the manually managed practices in the Central Treasury (CT)--for example, lack of information flow in a timely manner. This undermines important treasury functions of cash (financial) planning, monitoring of payment arrears, and timely generation of financial management information reports. The quality of accounts generated by the central treasury also suffers from shortcomings, compromising their reliability. In principle, such problems are to be resolved through modernization of the Treasury system under the GTAC project. However, other problems are related to organizational and procedural aspects of the budget execution process and capacity constraints that ultimately affect sector ministries. Accounting and financial reporting systems 2.15. The MOF is responsible for developing and issuing accounting and reporting guidelines together with formats for budget institutions. The CFAA4 noted that accounting within the budgetary institutions is laborious and usually done manually. It was noted that the line ministries do not prepare consolidated financial statements comprising all resources within their sector. Rather, line ministries prepare financial statements only for units that are directly financed through them. It is therefore difficult to construct a sectoral picture from the financial reports prepared by line ministries, and such reports can only be obtained from the Treasury. Financial statements of the regional units of the line ministries are consolidated into regional government financial statements. 2.16. The objective of financial reporting system seems to be fulfillment of MOF requirements rather than to produce meaningful information for decision making within the line ministries. Line ministries do not prepare consolidated financial reports based on the modified accrual method. Rather, financial reports are prepared for each source of financing using the forms elaborated by the Central Treasury. The Treasury prepares cash-based financial statements for cash management purposes and for reporting to Parliament. At the whole-of-government level, no reconciliation is carried out between the modified accruals-based and cash-based financial statements. There are also no whole-of-government consolidated financial reports that can be subject to financial audit. 2.17. With support from USAID, the government has been implementing a three-year program of public sector accounting program. This includes reviewing and updating of legislation and appropriate accounting standards. It is expected that the regulations would reflect changes in public sector accounting, especially adoption of cash-based IPSAS. Procedures would be specified for higher-level consolidation, including instructions for netting out transfers and interoffice balances. D. Internal Control and Audit 4Country Financial Accountability Assessment, 2004, as updated by the Country Fiduciary Assessment of 2007 Education Fiduciary Capacity Assessment 2.18. The Kyrgyz Republic does not currently have either legal or institutional framework in place for an effective internal control structure. The concept itself is not well understood within the country. According to various legal provisions, internal audit of budget organizations is the responsibility of the Central Treasury. The Central Treasury organizes and manages the system of internal financial audit on appropriate and efficient use of government funds. It also manages budget organizations' implementation of the normative acts of the Ministry of Finance. This audit is mainly about collecting the reports on the fullness of how budget funds are used. Also, the financial control department of the Ministry of Finance carries out revision and control functions that cover different issues, including illegal expenditures, misuse of special funds received from sources outside the Central Treasury (off-budget), and other financial violations. 2.19. As part of ongoing PFM reforms, an Internal Audit Division has been created within the Ministry of Finance. A draft law on internal audit has been prepared, together with audit standards and manuals that are currently undergoing review within the government. Comments to the draft law and the manual provided by PEMPAL5 are expected to be incorporated in the final draft of the law and manual. 2.20. External audit is done by the Chamber of Accounts of the Kyrgyz Republic, a state audit institution whose mandate is to carry out external audit in budget organizations. Various diagnostic studies (CFAA/CFAU and PEFA) confirm that the Chamber of Accounts auditors lack the skills and experience that are necessary to apply audit practices in accordance with international standards. Most of the audit staff of the Chamber of Accounts are well-seasoned in control and revision work, but have little exposure to modern auditing practices. As a result of capacity constraints, most donors do not place any reliance on audits by the Chamber of Accounts; and most donor-assisted investment operations continue to be audited by private sector auditors. 2.21. Several recent efforts are helping to build capacity of the Chamber of Accounts and to transform it into a truly independent Supreme Audit Institution. These efforts include DfID technical assistance that helped to revise the law, a twinning program arranged under the Health Reform Program, and a World Bank IDF grant for capacity building. Priority is being given to training, including on-the-job training to equip the auditors with skills for cutting-edge practices and procedures, such as risk-based and financial audit methodologies. E. Public Procurement 2.22. The Government of the Kyrgyz Republic initiated public procurement reform in April 1997 and enacted the first Public Procurement Law (PPL) in 1994. Since then, the country's legislative framework for procurement has developed steadily. Following the 2002 CPAR recommendations, the Government drafted a new PPL, which was passed by the Jogorku Kenesh (Parliament) in April 2004 and took effect on May 24, 2007. This current PPL not only implemented several 2002 CPAR recommendations but is also substantially in line with international standards. 2.23. The PPL spells out the major principles of the public procurement process. It identifies the parties to which the PPL applies, defines the scope of the SAPPMR authority, and outlines the stages of purchasing procedure. Two main categories of institutions fall under PPL jurisdiction-- 5Public Expenditure Management Peer Assisted Learning (PEMPAL), an initiative by several donors supporting improvements in public expenditure management. 17 2. Public Financial Management Framework state and other entities that use the state budget; and state-owned enterprises (SOEs). The PPL has notable strengths. First, all users of budgetary funds (central and local) are responsible for their own procurement under the decentralized procurement system. Second, suppliers and contractors are provided with adequate notification of bidding opportunities. Third, the SAPPMR National Procurement Training Center (NPTC) designs and delivers procurement training to procuring entities' staff. The NPTC has acquired the necessary skills to design and deliver procurement training programs. While it has trained about 1,500 public officials during the last three years, there is still a large unmet training demand. 2.24. The SAPPMR has overall responsibility for developing procurement legislation and providing support and oversight to ensure procuring entities' compliance with the procurement legislation. As stated earlier, procuring entities are responsible for the actual conduct of procurement, while external controls are exercised by the Chamber of Accounts. There are currently no system of internal controls. However, the Treasury in the MOF, in processing contractual payments to providers of goods, works and services, ensures that each contract procuring entities have complied with the PPL and regulations. While a framework for national public procurement exists, weak implementation of the PPL leaves much room for improvement. 2.25. The public procurement legislative framework provides a theoretically sound environment for competitive and transparent procurement. This framework includes the PPL, a number of resolutions, and standard bidding documents. However, procuring entities at all levels of government are poorly organized. Their personnel are inadequately trained. Despite the fact that the PPL provides that either the existing department of administration or finance of a procuring entity be assigned the responsibility of carrying out procurement in compliance with the PPL, most procuring entities still conduct procurement through permanent tender committees. Other shortcomings include the absence of proper guidance to procuring entities; lack of procurement organization and capacity; use of less competitive procurement methods; poor budgetary allocation processes; inadequate external and internal controls, including an anticorruption agenda that is yet to be implemented; and a weak supply side, which has little trust in the procurement system. 2.26. The complaint resolution illustrates these weaknesses. Only 20 bidders registered complaints in 2005 and only 40 in 2006, a reflection that the mechanism is not trusted by bidders. The data collection system for procurement is not yet fully functional. Without this data, a more complete analysis of purchasing becomes difficult. Furthermore, qualified procurement professionals are generally in short supply. Procurement consequently is being conducted by unqualified governmental staff with minimal training provided by the NPTC. The net result is weak implementation of the PPL and continued poor practices ranging from planning to contract implementation. 2.27. A World Bank team and SAPPMR staff recently carried out a joint analysis of the Kyrgyz public procurement system and prepared the report "Kyrgyz Republic: Public Procurement System Assessment Using the OECD-DAC/World Bank Methodology, November 10, 2007." The OECD- DAC methodology is based on four pillars which support sound operations through (a) the legislative and regulatory framework; (b) the institutional framework and management capacity; (c) purchasing operations and market practices; and (d) the integrity and transparency of the public procurement system. Based on this methodology, the World Bank and SAPPMR counterpart teams reviewed in depth the PPL and the other procurement-related pieces of legislation. They consulted with relevant government agencies and interviewed private firms, including construction contractors, consulting firms, and suppliers of goods. The benchmarking exercise was undertaken to provide an objective assessment of actual performance of system, while establishing a framework within which to measure progress toward reform. Figure 1 summarizes results of the Education Fiduciary Capacity Assessment scores assigned to the OECD-DAC pillars. Each point of the diamond represents one of the four pillars. The full area within the black-lined diamond represents an "ideal" system that perfectly conforms to international standards as defined by OECD­DAC definitions and methodology. The smaller red-lined diamond represents the current state of the Kyrgyz public procurement system. 2.28. This snapshot comparison (Figure 1) of the actual system with the international standards represented by the OECD/DAC baseline indicators (BLIs), shows that progress has been made but much remains to be done. The legislative framework for procurement (Pillar I) has evolved toward achieving international standards in recent years. On the other hand, institutional arrangements (Pillar II) to implement the legislation have made little headway. In particular, the operations of the procurement system (Pillar III) do not inspire much trust among the providers of goods, works, and services in the evolving national procurement market. This indicates a strong need to initiate partnerships between the public and private sectors to strengthen existing external controls, to establish internal controls, and to implement the anticorruption program (Pillar IV) effectively. See also Annex 9 for Procurement Practices Gap Analysis. Figure 1. Kyrgyz Procurement System Benchmarked Against International Standards (OECD­DAC Methodology) Legislative Framework (I) 3,0 2,5 2,0 1,5 1,0 0,5 Integrity & Institutional & Transparency 0,0 Mngmt Capacity (IV) (II) [Country Score] Maximum Kyrgyz Republic The "ideal" Proc Operations & Markets (III) The following paragraphs include detailed discussions of the findings and recommendations for each Pillar: Pillar 1: Legislative and Regulatory Framework (Overall score: 2.1) 19 2. Public Financial Management Framework Following the 2002 CPAR, the PPL of May 2004 provided a sound framework for public procurement. The government issued standard bidding documents, except for standard request for proposals for consulting services, which is being developed. The BLI assessment, confirms that the legislative framework generally meets international standards. The findings and recommendations under the indicators for this pillar are as follows: Indicator 1: Public procurement legislative and regulatory framework meets agreed standards and complies with obligations Summary of findings · The legal framework provides for a sound public procurement system. The PPL of May 24, 2004, applies to all goods, works, and services procured with national budgetary funds and the funds of enterprises that are majority owned by the government. It provides for appropriate procurement methods and processes that promote transparency, fairness, and economy. · The Ministry of Finance's Order of October 18, 2001,6 requires that procuring entities seek and obtain for each procurement action a document (permit) from the SAPPMR certifying that it has complied with the PPL. This requirement not only adds to the procurement lead time but also cedes unnecessary discretion to the SAPPMR. This discretion opens the potential for misuse in the procurement process. · The PPL has no provision on sanctions against procuring entities or staff for violating the PPL. Recommendations · Although the Ministry of Finance's Order of October 18, 2001 has been amended to cancel the requirement of the SAPPMR's involvement in the actual procurement process, the amended order is yet to be implemented effectively. The MOF and the SAPPMR need to make concerted efforts to have all levels of government implement the changes. · Include a separate provision on sanctions against procuring entities and their staff for violating PPL provisions. Indicator 2: Implementing regulations and documentation Summary of findings · Lack of a comprehensive implementation regulation and a manual. · The PPL provides for bid prequalification but no criteria to determine when to apply it and no clear requirement that qualification should be assessed on a pass-or-fail basis. · No guidance note exists on how to evaluate technical and financial proposals for consultant services. · Standard Tender Documents exist and are of good quality. However, technical specifications prepared by procuring entities are of poor quality. · The PPL requires that the contract should be awarded to the lowest evaluated bid, but there is no guidance regulation or note for procuring entities. Recommendations 6 Information on this subject received from the Treasury is as follows: "The order of the Ministry of Finance dated March 29, 2007, amended the `Instruction for the regional departments of the Treasury under the Ministry of Finance of the Kyrgyz Republic on the procedure for opening and keeping Treasury accounts on national budget expenditure transactions` to cancel the requirement for national budget institutions to submit the written permission from the public procurement agency to the Treasury." Education Fiduciary Capacity Assessment · Prepare a comprehensive implementation regulation and a manual with detailed explanations and clarifications of PPL provisions, including evaluation methodology for goods, works, and consultants. · Include criteria in the implementation regulation that would enable potential bidders' qualifications and experience to be assessed for prequalification on a pass-fail basis. · Use clear and broad technical specifications and introduce the concepts of "substantial responsiveness" and "substantial equivalence," with a view to procuring the best-quality goods, works, and services. The SAPPMR may have to develop model technical specifications, and design and deliver training to procuring entity staff in preparation of broad and clear technical specifications. Pillar II: Institutional framework and management capacity (Overall score: 1.0) Pillar II looks at how the procurement system (defined by the legal and regulatory framework) operates in practice through existing institutions and management systems. The CFAU team found little improvement since the last CPAR. The overall score of 1 indicates that substantive work is needed for the system to meet the applicable standards. Benchmarking results and recommendations are provided below. Indicator 3: Public procurement system is mainstreamed and well integrated into the system of public sector governance Summary of findings · Procurement planning for budget formulation and budget execution is weak. The requirement of Article 13 of the PPL to prepare a procurement plan upon the approval of the Republic's budget is not met. Multiyear procurement planning does not exist. · The Treasury does not release the funds allocated to procuring entities in a timely manner. Frequently, these funds are available to procuring entities only a few weeks before the end of the fiscal year. As a result, procuring entities conduct uneconomic procurement using methods and procedures that lack transparency and do not foster optimal competition. · Initiation of procurement actions without ensuring availability of funds is common, frequently leading to cancellation of tenders and even of contracts that have been awarded and signed. This seriously affects bidder confidence in the system. As a result, a growing number of bidders are deciding against doing business with the government. · Procuring entities are not allowed to use funds saved through competitive procurement procedures, creating a disincentive for realizing any savings. Recommendations · The SAPPMR must work with the MOF to improve procurement planning from the start of budget formulation, as well as to enforce procuring entity compliance with Article 13 of the PPL. At the same time, the SAPPMR should prepare and disseminate to procuring entities detailed procurement plan formats listing all the essential information about every contract, such as the contract description, estimated value of the contract, procurement method, and the key procurement processing dates leading up to contract signature. · The MOF should consider ways and means to make funds available to procuring entities in a timely manner, at least three months before the fiscal year closes. · The MOF/SAPPMR must issue an order requiring all procuring entities to obtain written confirmation of funding availability before launching any tenders. · The MOF should consider allowing procuring entities to use the savings derived from 21 2. Public Financial Management Framework competitive procurement processes. Indicator 4: Country has a functional normative/regulatory body Summary of findings · The SAPPMR is inadequately staffed to fulfill its responsibilities for overseeing and supporting procurement by procuring entities in compliance with the PPL. Recommendations · Consider strengthening the SAPPMR to enable it to fulfill its oversight, support, and capacity-building roles in an effective manner. Indicator 5: Existence of institutional development capacity Summary of findings · The SAPPMR has the necessary means at its disposal (a website, the Public Procurement Bulletin, and government newspapers) to collect and disseminate information about the legal framework, tenders, and contract awards. However, the quality of the information published leaves ample room for improvement. · No sustainable strategy and procedure exist for collection and maintenance of statistical data on procurement. · The National Procurement Training Center of the SAPPMR provides training to public officials but is unable to meet all training needs. Furthermore, procuring entities do not receive budgetary allocations to pay the NPTC for training. · No quality control standards exist to evaluate staff performance. The SAPPMR is yet to develop and implement a program for testing and certifying public officials as procurement professionals. Recommendations · The SAPPMR must review and verify the information contained in tender and contract- award notices to ensure that the information is accurate and in compliance with the PPL. · The SAPPMR should develop a strategy and procedure for collection, maintenance, and dissemination of statistical data on procurement. · The SAPPMR should strengthen the NPTC to meet the training needs of the country. The agency should also introduce a testing and certification program to staff procuring entities with certified procurement officials. Pillar III: Procurement operations and market practices (Overall score: 0.7) Pillar III involves the operational effectiveness and efficiency of the procurement system at the level of individual actions. It considers the market as a means of judging the quality and effectiveness of the system after procurement procedures are put into practice. This pillar looks not at the legal and regulatory or institutional systems per se, but rather at how they operate. This Pillar received an overall very low score of 0.7. Findings from the benchmarking for this pillar follow below, with recommendations for improvement. Indicator 6: Efficient country procurement operations and practices Summary of findings · Few procuring entities have qualified procurement staff; some use a permanent tender committee, which is inconsistent with the PPL; and others assign this important task to one or two staff members who are already encumbered by the demands of other workloads. Education Fiduciary Capacity Assessment Recommendations · Implement the Prime Minister's Resolution of January 9, 2007, which requires each procuring entity to establish a procurement section in one of its departments and to staff it with qualified procurement specialists. · Strengthen the NPTC to meet the training needs of the country and to introduce a testing and certification program for procurement professionals. · Allocate budgetary funds to procuring entities to meet the cost of staff procurement training. Indicator 7: Functional public procurement market Summary of findings · Public and private sector partnership is weak. NGOs play a minor role in public procurement. Private sector institutions are still organizing. Most consulting firms, contractors, and suppliers have little confidence in the procurement system. This lack of confidence may be attributed to the following: incorrect and misleading publication of procurement opportunities; difficult access to bidding documents; poor quality of bidding documents, especially technical specifications; short bid preparation time for bidders; minutes of bid openings are not prepared properly and signed by all participants; unnecessary requirement to obtain a license from the SAPPMR before contracts can be awarded and signed; cancellation of tenders without reason; cancellation of contract awards without justification; frequent amendments to contracts during contract performance; and delayed contractual payments. Recommendations · The SAPPMR should develop mechanisms for partnership between the public and private sectors. NGOs should be encouraged to be more active in this partnership. To build private sector confidence in the public procurement system, the SAPMMR and procuring entities should eradicate undesirable procurement practices. Indicator 8: Provisions for contract administration and dispute resolution Summary of findings · While contract conditions include clauses on inspection, quality control, and other important matters, the contract administration procedures are generally weak, especially for civil works. Written contract administration procedures do not exist and staff members are not provided with systematic training to fill the gap. Recommendations · To ensure that procuring entities administer contracts properly, it is imperative for the SAPPMR to prepare a simple manual on contract administration and for the NPTC to design and deliver a training program for procuring entities. Pillar IV: Integrity and transparency of the public procurement system (Overall Score 1.2) Pillar IV includes five indicators that a system must meet to operate with integrity. These controls support implementation in accordance with the legal and regulatory framework, as well as measures to address the potential for corruption. The pillar also covers important efforts to involve stakeholders in the control system. 23 2. Public Financial Management Framework Indicator 9: Country has an effective control and audit system Summary of findings · While external audit exists in the form of the Chamber of Accounts, internal controls are nonexistent. The COA audits procurement regularly, but these audits are ineffective since the chamber's staff is not properly trained in procurement processes. Furthermore, COA findings are not made public. It is not known whether recommendations are taken into account or properly enforced. Recommendations · Strengthen the capacity of the COA staff to audit public procurement. Make COA findings public and ensure that recommendations are implemented. Indicator 10: Appeals mechanism efficiency Summary of findings · Providers of goods, works, and services have little confidence in the appeals mechanism because they do not view the complaint review mechanism as impartial, fair, and transparent. SAPPMR cannot effectively and objectively review and adjudicate complaints about a bidding process for which it also issues a document (permit) certifying that a procuring entity has complied with the provisions of the PPL. Recommendations · The complaint mechanism under the current PPL could be improved by expanding the parties able to file complaints and the subjects or grounds that are subject to complaint. The mechanism as designed only admits complaints from "participants" or actual bidders, effectively closing it to "interested parties" such as whistleblowers or potential bidders who did not participate because of irregularities or perceived irregularities. The grounds for complaint are also severely restricted. They should be expanded to include irregular selection of procurement method; the choice of award winner under Paragraph 4, Article 27; and the irregular granting of preferences under Article 3, if in contravention of the provisions of the PPL. Additionally, the practice of "debriefing" of bidders should be considered for inclusion in the new implementation regulations as well as in a future revision of the PPL. This will enhance transparency since the procuring entity has to articulate its justification for the award. It will also discourage the filing of frivolous complaints or those based on misunderstandings that can be easily clarified in a debriefing. Indicator 11: Degree of access to information Summary of findings · Procurement information is easily accessible but its quality is poor since SAPPMR does not systematically check the information submitted by procuring entities. Recommendations · The SAPPMR must introduce quality controls so that information, especially in tender notices, is accurate, correct, true, and consistent with the relevant provisions of the PPL. Indicator 12: Ethics and anticorruption measures are in place Summary of findings · The Kyrgyz Republic is a signatory of the UN Convention on Anti-Corruption as of August 2005. In October 2005, the National Anticorruption Council was established and an Anticorruption Agency was set up. The legal framework on anticorruption is adequate as discussed above, but implementation of the anticorruption legal framework is weak. The Education Fiduciary Capacity Assessment Anticorruption Agency is still in the preparation stage of its fight against malfeasance. Moreover, no nexus seems to connect the PPL and the anticorruption legislation to identify the punitive consequences of corrupt behavior in procurement and the possibility of referral for criminal charges. The PPL would benefit from such a nexus since the procurement law only cites "bribery" and not other relevant prohibited acts such as collusion, coercion, fraud and, to some extent, obstructive practices. Recommendations · The GOK should align the PPL with the anticorruption legislation and strengthen its implementation. F. Donor Support for Education 2.29. The Kyrgyz Education system has benefited from assistance from a number of donors, including the Asian Development Bank (ADB), World Bank, USAID, UNICEF, UNESCO, Save the Children, Soros Foundation-Kyrgyzstan, GTZ, and EU. The largest donor-supported initiatives in education are those of ADB and World Bank. In 2006, the country was accepted to FTI partnership, thus qualifying for funding from the EFA-FTI Catalytic Fund grant. A first tranche was received for US$9 million for 2007. (See Annex 12 for details.) The ADB has completed its first Education Sector Development Program (ESDP). A second ESDP project complementing the World Bank-financed Rural Education Project (REP) is now being implemented. The second ESDP focuses on school rehabilitation, textbooks and learning materials, and modernization of curriculum. ADB's Community-Based Early Childhood Development Project focuses on improving health, nutrition, and educational development for children. The World Bank-financed Rural Education Project aims at (i) improving teacher incentives, including the development of a performance-based promotion system and fellowships to attract new teachers; (ii) providing school grants for improved learning in two pilot oblasts; (iii) improving the Textbook Rental Scheme and providing textbooks and learning materials; and (iv) developing sample-based national student assessment. USAID, the other major donor in the education sector, supports curriculum reform, in- service teacher training, parental and community involvement in schools, school rehabilitation, and education finance and management reform. UNICEF and UNESCO have supported studies on learning achievement by students finishing grade 4 and grade 8. 25 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools 3. THE EDUCATION SECTOR--THE MINISTRY OF EDUCATION, ADMINISTRATION, RAYONS, AYIL OKMOTUS, AND SCHOOLS A. Education Sector and its Institutions 3.1. According to the Constitution of the Kyrgyz Republic (Article 32), every citizen has the right to education; general basic education shall be compulsory and free of charge, and everyone shall have the right to receive general basic education in state and municipal educational institutions. The state provides every person, in accordance with individual aptitude, access to secondary professional, higher and postgraduate professional education. Paid education of citizens in state and other educational institutions is allowed in accordance with the procedure established by legislation. The state exercises control over teaching and other activities of educational institutions in accordance with law. 3.2. The Kyrgyz education system is comprised of: (i) pre-school (children between six months to six years of age); (ii) primary education (grade 1-4); lower secondary education (grades 5-9); (iv) upper secondary education (grades 10-11); (v) primary and secondary professional education, and higher education. Primary and lower secondary education (grades 1­9) is compulsory and free of charge in accordance with the Constitution of the Kyrgyz Republic. Boarding schools and specialized secondary schools financed under the republican budget also exist. In addition, there are numerous private institutions and other nongovernmental educational organizations to meet the education and training needs of the population. 3.3. Reforms of the administrative system at oblast, rayon, and local levels are underway in the Kyrgyz Republic. The oblast education departments have been abolished by the Order of the MOES as of November 1, 2007, following a governmental order and presidential decree. Previously, oblast departments of education served as direct sources of information for the MOES. They aggregated all data collected at the oblast level, except the data on higher education institutions, secondary professional education institutions, out-of-school institutions and other organizations within the jurisdiction of the MOES. With the abolishment of the oblast departments of education, these functions were transferred to the rayon and city departments of education. 3.4. In April 2007, the MOES was reorganized. Responsibilities for the youth policy section were transferred to another state agency. With reductions of staff, the MOES organizational structure of the Ministry has further changed. At the time of conducting this fiduciary assessment review and report preparation, the MOES consists of 66 staff members and its structure includes three departments, seven units and one sector (See Annexes 6 and 7). The MOES is responsible for formulating national education policy and its implementation, setting the standards for each level of formal education, curriculum development and introduction of innovative practices, teacher training, accreditation of higher education institutions, and international cooperation. 3.5. Under the Government's decentralization policy, local governments were initially given the responsibility for managing and financing all costs of primary and general secondary schools. Application of this policy during the first two years (1995 and 1996) led to serious problems of arrears and non-payment of teachers' salaries. In response to these problems, the Government recentralized financing of teachers' salaries for primary and secondary education by introducing categorical grant transfers intended to fully cover salaries of teachers and health workers in each oblast. Education Fiduciary Capacity Assessment 3.6. Even though the MOES is the central government agency that formulates education policy, it controls only a relatively small part of the sector's overall budget allocations provided for institutions under the republican jurisdiction: higher education institutions, secondary specialized and out-of- school education establishments, as well as specialized boarding schools for talented kids and children with disabilities. In addition, MOES is not involved in allocating categorical grants from the republican budget among the regions to support social programs on the local level. 3.7. The following illustrates the separate budget authorities in the financing of education: - higher education institutions, primary and secondary specialized professional education institutions, as well as boarding schools are funded from the republican budget; - general secondary schools, gymnasiums, and lyceums are financed out of local rayon and city budgets; - small primary and incomplete secondary schools are funded by aiyl-okmotu budgets. This existing system on separation of budget authorities in the education sector creates problems with carrying out a unified and coordinated government sector strategy in the education sector and realization of financing priorities and program ­ based allocation of assets, regulation of flow of funds between the levels of education, on one hand, and balancing of its distribution among oblasts, on another hand. 3.8. Budget policy in the education sector is basically reduced to provision of funds for current expenditures on personnel and infrastructure maintenance. The use of considerable funds for personnel and infrastructure support at all levels of the education sector results in a situation where the learning process lacks overall support. The Table 1 below presents the information on expenditures in the education sector for the years 2001- 2007 years as percentage of GDP and as a share of total public expenditures: Table 1. Education Expenditures as a Share of Total Republican Expenditure 2001 2004 2005 2006 2007 Expenditures for education from state budget: - mln. soms 2847,6 4556,4 5066,8 6568,4 9079 - as a percentage of GDP 3.9 4.8 5.0 5.8 6.5 - as a share of total public expenditures 23.2 24.2 25.2 26.0 21.2 * Source: Ministry of Finance The Table above shows the growth of education spending as expenditures both as a share of GDP and as a share of total public expenditures. The diagram and table below show the structure of consolidated spending for education, as well as allocation of assets among the programs in 2006: 27 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools 10% 4% 5% 18% 63% Source: Ministry of Finance Table 2.General Budget _Expenditures by functions, cash basis Allocation of assets between the programs: Total, including: Mln som Budget in Special in means, mln Mln som % to % to som total total Preschool education 369,3 288.5 7,5 80,8 7,4 Primary and secondary 2617,7 2486.5 64,2 131,2 12,0 education Primary professional 333,0 294.4 7,6 38,6 3,5 education Secondary professional 189,5 133.4 3,4 56,1 5,1 education High education 960,5 227.3 5,9 733,2 67,0 Other 495,5 441.8 11,4 53,7 5,0 Total: 4965,5 3871.9 100 1093,6 100 * Source: Ministry of Finance Education Fiduciary Capacity Assessment B. Financial Management Arrangements Institutional arrangements 3.9. The MOES directly manages 90 educational units.7 These are mainly central- and regional- level higher education institutes and specialized secondary schools, such as schools for children with disabilities. All other 3,000 educational units are financed through local governments, as well as by the Ministry of Health (Medical Academy), the Ministry of Rural Agriculture (Rural Academy), and others. 3.10. Two departments within the Ministry of Education are responsible for financial management activities--the Economic Department, consisting of four staff members; and Accounting Department, also consisting of four staff members. The 90 educational units directly report to MOES on financial activities, including budget preparation. The Economic Department is responsible for planning and calculation of expenditures and budget funds; drafting regulations; and running statistical data on subordinated institutions. The Accounting Department is responsible for all accounting within the ministry. It receives and processes payments from the republican budget, pays the taxes and other state duties, controls budget performance, collects reports from subordinated institutions, and helps carry out economic analyses based on accounting data. 3.11. The MOES does not monitor or control expenditures in the education sector as a whole, since ayil okmotus directly report to the Ministry of Finance with an established scheme of reporting. The MOES has neither the human, organizational, nor financial resources to undertake such a function. Accounting and financial reporting would need to be substantially strengthened if the MOES were to be responsible for financial management functions of the whole sector. 3.12. The current organizational structure of the financial management department of the MOES shows eight established positions. However, only three positions are currently filled in both the accounting and economic divisions. The reduced number of staff is perhaps related to existing circumstances where rayon educational divisions do not provide financial information (by schools and other educational institutions) to the MOES. The direct financial reporting to the MOF by rayon educational divisions (rather than through the MOES) may have influenced the MOES management decision not to fill the vacancies. Existing staffing level would not be able to meet additional requirements if MOES were required to monitor all financial flows within the educational sector. The current organizational structure of the two financial departments is shown in Figure 2. Figure 2. Current Organizational Structure of MOES Financial Departments 7Information was provided by the MOES counterparts. 29 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools 3.13. Recommendations on institutional arrangements The accounting division should be strengthened to its full capacity in order to cope with any additional workload that might result if the MOES were to be responsible for financial management functions of donor-funded operations using country systems. 3.14. Due to recent changes in the budgeting process, the rayon departments of the MOES were excluded from the financial pool. These departments currently implement only the supervision of and other activities related to the content of education process. The ayil okmotus are direct receivers of the republican funds, through rayon treasuries. Each ayil okmotus has at least one accountant and a cashier. The number of staff depends on the rayon size. Figure 3 illustrates the organization of local self government, including the subordinating scheme of the ayil okmotus. Education Fiduciary Capacity Assessment Figure 3. The Subordinating Scheme of the Ayil Okmotus 3.15. The ability of the MOES to accumulate and process financial information on secondary and primary schools is undermined by different instructions of the Ministry of Finance. These instructions mostly relate to the division of functions and responsibilities between the Central Treasury and MOES on collection of information for budget performance, based on the source of financing. As a result, limited financial information is available to the MOES to implement sector-wide programs. 3.16. The existing structure of vertical organization in the education sector envisages the role of MOES only in regard to educational policy making, drafting legislative rules and base(?), and administration of the republican level education institutions. From a fiduciary perspective, the sector appears to be fragmented, with some functions of budgeting and reporting taking place directly between the MOF and oblasts, rayons, and ayil okmotus, rather than through the Ministry of Education. This would seem to undermine the ability of the MOES to develop and cost a sector-wide strategy and to implement, monitor, and evaluate such a strategy. Budgeting 3.17. The budgeting process within the education sector follows the standard process envisaged in the budget law. According to paragraph 40 of the Law on Main Principles of the Budget Law in the Kyrgyz Republic, the MOES is required to submit to the Ministry of Finance main economic and financial data by March 15. This information is mostly prepared based on the state development programs. In order to calculate main control figures for the ministries and other state organizations for the coming three years, the Ministry of Finance prepares the control figures for line ministries and agencies by April 30, in compliance with the decision of the Council on Economic Policy under the Government of the Kyrgyz Republic 3.18. The MOF normally provides instructions on budget preparation for each budget year, which includes the control figures (ceiling). The forecast on price increase and other main indicators on social-economic development are incorporated in the control figures. Like all other ministries, the 31 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools MOES is required to submit its budget to the MOF for review. By June 21 of each year, a draft is submitted on consolidated budgets on special funds for the following year. This document is accompanied by the calculations and explanations of expenditures as well as data on planned expenditures for next three years. At the same time, planning data and indicators are submitted on staff, organizational structure, and content of educational institutions for the next year. 3.19. After approval of the Law on Republican Budget for the current year, Parliament issues an appropriate decree. This decree envisages the reallocation of funds between the regions, Bishkek and Osh cities, as well as distribution of funds among the ministries, state agencies, committees, and other state authorities. The budget funds which should be directed to finance the republican organizations that are subordinated to the MOES, according to the Law on Republican Budget, is reallocated by the MOES within the educational sector. These organizations include 22 universities, 23 secondary professional educational institutions, 29 secondary and boarding schools and schools of gymnasium type; and 16 other educational institutions (such as out-of-school school organizations, children's homes, organizations of methodological work, institutions on qualification enhancement, specialized boarding school, sport institute, and specialized printing house.)8 In total, 90 educational institutions are financed through the MOES. Another 3,000 institutions are financed from the local budget and other ministries and agencies. The exception is salaries, which are financed from the republican budget. 3.20. The budget has two classifications--first, line-ministerial (in the case of MOES, these are expenditures for the administration and education); and second, functional (such as Higher Educational Institutions (HEIs), schools, and kindergartens). The budget is formed on the basis of the line- ministerial classification for higher educational institutions. The Ministry of Finance checks the estimates (distribution) of the budgetary funds. Based on control figures, the expenditures are financed according to the following classifications: · Categorical grants- Transfers from republican budget provided on grant basis to finance certain state guaranteed expenditures. · Equalized grants- Transfers from republican budget provided to local budgets to fulfill minimal social state standards to support stable social-economic condition. · Incentive grants- Transfers from republican budget to local administrations to stimulate and support effective spending of the budget funds, as well as funds of special state programs and projects in order to increase the revenues of local budgets and to fully mobilize sources of local income. 3.21. Budget formulation and planning tend to follow a top-down approach, with spending ministries having limited input. As a result, the MOES (like other ministries) has, in certain cases, little opportunity to plan expenditures and obtain sufficient financing for educational programs for the whole year. At the local level, ayil okmotus budget planning follows a similar top-down approach. Often deviations occur from the budget figures that were prepared at the beginning of the year. In addition there is weak organizational and procedural aspects of budget execution and lack of forecast in planning the expenditures by the MOES and ayil okmotus. 3.22. There is considerable fragmentation of budgetary flows in the education sector. As a result it is difficult to have a consolidated view of the main sources and uses of funds. Such fragmentation undermines accountability and contributes to fiduciary weaknesses in the education sector. Moreover 8 Data presented in accordance with the information provided by the Strategic Division of the MOES Education Fiduciary Capacity Assessment the MOES cannot determine periodic flows--for example, receipt of funds by quarter. In addition there is unpredictability in availability of funds due to weak budget preparation process and non-timely release of budgeted funds by the Central Treasury. There are complaints that the MOF releases funds with substantial delay, especially for expenditures other than for salaries and food. The MOES tries to adjust by resorting to survival tactics, such as introducing certain protective conditions or clauses in contracts with suppliers. For example, it stipulates that payment to suppliers will be made when funding becomes available; or that the supplier or contractor is to pay penalties to the MOES in cases of failure to perform, while respective penalties by the MOES will be due only when funds become available. Such practices lead to the MOES being unable to effect settlements with suppliers of services and goods on time, or to accurately forecast when funds will become available. This unpredictability delays performance of important activities. It results in complaints from suppliers and contractors, who may inflate prices to factor in the anticipated delays. All in all, the MOES is undermined in its ability to plan or implement educational programs in a timely fashion. 3.23. At the local level, ayil okmotus budget planning follows a similar top-down approach. Deviations occur from the budget figures that were prepared at the beginning of the year. This unpredictability is related to weak budget preparation process, non-timely release of budgeted funds by the Central Treasury, weak organizational and procedural aspects of budget execution, and lack of forecast in planning the expenditures by the MOES and ayil okmotus. At present, analytical data on budget performance does not exist for either MOES or ayil okmotus. 3.24. Recommendations on budgeting The MOES should have a greater role in the formulation of budget based on its programs and the policies that it adopts. This calls for a "bottom­up" approach in which the budget is formulated with significant input from the MOES, based on sectoral policy and strategy. The MOES should periodically analyze budget performance, noting effects on various education programs caused by delayed release of funds. This would include arrears to suppliers of goods and services, including utilities. Such analysis would anchor dialogue with the MOF on budget performance for the education sector. There is need for major institutional reforms in the financing and managing the education system. Such reforms would give the MOES greater control and accountability of education sector resources and thus encourage the MOES to exercise greater fiduciary controls. Accounting system 3.25. The accounting function of Ministry of Education is headed by a chief accountant, who is responsible for all accounting, record keeping, and reporting. Three other staff perform accounting functions, including payments for supplies and services and salaries, as well as all transactions related to the state (republican) budget for the MOES head office and other institutions directly subordinated to the MOES (in other words, those receiving funding through the MOES). 3.26. As in most budget organizations, accounting in the MOES is a labor intensive, manual process requiring the maintenance of several registers and production of numerous paper reports, especially those reports required by the MOF and other government agencies. Use of computers is very limited even for simple tasks as producing reports in excel spreadsheet, and the MOES does not seem to have any plans to automate the accounting and reporting system. As a result there are risks of inaccuracy and un-timeliness of reporting, a situation that would get worse were the MOES to have a greater role in budgeting and financing for the whole sector. This situation would also pose significant challenge to the implementation of a bottom-up approach to budgeting, as suggested above. 33 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools 3.27. Although the chief accountant maintains a manual general ledger, there are no periodic trial balances to ensure that errors and omissions in the various accounts are detected early and corrected. Risk is substantial that ledger entries may not be accurate or complete. The MOES does not, therefore, benefit from efficiency gains that accrue from computerization of the accounting system, with attendant controls that ensure accuracy and reliability, such as regular production of trial balances. 3.28. Regionally, accounting departments no longer exist at the oblast level. Only the City Administrations have accounting departments. At rayon and ayil okmotu levels, only one or two persons deal with accounting. They do not have specific accounting specializations, much less economics backgrounds. These staff members are sometimes assigned both accounting and procurement functions, thus creating potential conflicts of interest. Since the financing comes directly to schools and to other budgetary organizations, capable accounting is critical if effective internal control functions are to be maintained. 3.29. The law on accounting and the MOF instructions (covering accounting, reporting, and budget formulation) are the main reference documents for accountants in the education sector. The ministry does not customize accounting instructions to take into account the specific nature of the MOES, its structures, or functions. 3.30. Because of financial constraints, the accountants of MOES and ayil okmotus have few opportunities to upgrade their professional skills. Beyond bookkeeping, their capacity to perform the full range of accounting functions is limited. 3.31. Recommendations on accounting system There is need for substantial capacity building effort at all levels for accounting staff, including computer literacy, basic accounting, budgeting, internal financial controls, internal audit, and reporting. Accounting staff need to not only focus on compliance with rules and regulations, but also to consider the more generic aspects of financial management processes, including using financial management as means of providing information for decision-making. In addition, the following actions would help strengthen accounting in the education sector: Develop a training program on accounting. The objective would be to upgrade qualifications and skills of accounting staff at various levels, including rayon and ayil okmotus. Such training could include Training of Trainers (TOT) to ensure that training would be continuous. Realistically, the MOES would need resources to provide such training at the central and local levels. Discourage the current practice of assigning procurement responsibility to accountants, especially in the regions. This creates substantial risk of conflict of interest. Automate current processes and procedures that are done manually. To avoid potential redundancy in accounting systems, the choice of software should be done in consultation with Treasury. C. Current Expenditure Systems and Flow of Funds 3.32. In order to implement the Law on Nutrition, the MOF began financing the provision of food for primary school children in the first through fourth grades as of 2006. This represents a socially protected funding line in the republican budget. The funding was initially targeted at schools in highly mountainous regions, but it was extended to all other regions from September 2006 onward. The funding is provided in the amount of 5 KGS (US$0.14) per student. Education Fiduciary Capacity Assessment 3.33. Annexes 4 and 5 show actual education expenditures from the republican and local budget funds. Despite the authority granted to ayil okmotus to attract any locally available resources, they do not have the means to finance these investment expenditures by themselves (other than for salaries and food). In 2006, about 45 percent of local budget revenues consisted of transfers from the republican budget. 3.34. The volume of categorical grants was increased in 2007 as shown in Figure 4. 35 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools Figure 4. Allocation of Categorical Grants of the Republican Budget, by Region Reallocation of categorical grants by regions 600000 1 500000 Osh 400000 Jalal-Abad Issyk-Kul 300000 Naryn Talas 200000 Chui Bishkek city 100000 Batken town 0 Osh city actual planned 2006 2007 3.35. Figure 5 shows the allocation of equalized grants of the republican budget by regions. Figure 5. Allocation of Equalization Grants of the Republican Budget by Region Reallocation of equalized grants by regions 140000 120000 100000 1 Osh 80000 Jalal-Abad 60000 Issyk-Kul Naryn 40000 Talas 20000 Chui Batken 0 actual planned 2006 2007 Education Fiduciary Capacity Assessment Table 3. Allocation of Republican Budget Funds among Institutions in the Education Sector Actual for Actual for MOES Headquarters FY2006 FY2007 Salary 6133,90 4871,30 Fees of the Social Fund 1216,60 983,70 Expenditures related to business 211,30 4,00 trips Utilities expenditures 0,00 998,60 Rent 0,00 40,58 Purchasing of equipment, 270,00 0,00 materials Transportation expenditures 240,00 0,00 Other utilities expenditures 88,50 0,00 Other purchasing of equipment 108,00 0,00 and materials Other current expenditures 1413.9 (communication/telephones) Total: 9682.2 6898,18 Actual for Actual for 2007 MOES: subordinated institutions 2006 (preliminary) of education Salary 194334,00 272960,60 Fees of the Social Fund 39707,60 54774,80 Expenditures related to business 464,10 360,40 trips Utilities' expenditures 43633,90 45525,00 Rent 0,00 48,50 Transportation expenditures 571,50 385,00 Purchase of other services 86204,50 127357,00 Current other expenditures 0,00 56293,20 Buildings and constructions 3088,30 12065,10 Equipment and machines 0,00 100275,40 Other purchasing of equipment 43302,90 0,00 and materials Purchase of medicine 366,40 0,00 Food 29480,60 0,00 Other utilities expenditures 2160,20 0,00 Scholarships 56750,50 0,00 Major repairs 29670,70 0,00 Total: 529735,20 670045,00 MOES: subordinated Actual for FY Actual for institutions of science 2006 FY 2007 Salary 38821,40 56042,70 Fees of the Social Fund 8152,40 11494,90 37 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools Expenditures related to business 367,50 278,90 trips Utilities expenditures 0,00 100,00 Transportation expenditures 126,00 50,00 Purchase of other services 0,00 2156,10 Current other expenditures 0,00 777,10 Buildings and constructions 0,00 3000,00 Equipment and machines 653,60 4147,30 Other purchasing of equipment 932,40 0,00 and materials Scholarships 756,30 0,00 Total: 49809,60 78047,00 MOES: subordinated institutions Actual for Actual for of culture FY2006 FY2007 Salary 858,00 763,80 Fees of the Social Fund 180,30 156,60 Utilities expenditures 32,,30 0,00 Rent 0,00 29,80 Current other expenditures 6,00 0,00 Other purchasing of equipment 2750,00 0,00 and materials Total: 3826.60 950,2 Source: Data received from the MOES and MOF (not audited or certified for accuracy). Financing of primary and secondary schools 3.36. Average annual number of students in general schools in 2005-2006 school year amounted to 1094 thousand people. The average budget spending per 1 student does not exceed 2229 Kyrgyz soms. From this amount, not more then 2000 soms or less then 10 soms per day is spent for educational purposes and salaries of teachers (excluding utility costs), based on calculations per 1 student. The budget of general education institutions is formulated based on old net indicators per 1 classroom- set, number of administrative and supporting personnel, expenditures for maintenance of infrastructure and other items. Because of the low flexibility of local budgets in regions, schools do not exert any influence in the budget formulation process and in the expenditures structure for their maintenance. Expenditures financed in the form of grants from the republican budget include: teachers' salaries, meals (5 KGS or US$0.14 per student) for all students in primary school (grades 1-4), repairs and maintenance of secondary and primary schools, as well as utility costs. During last 2 years expenses for procurement and printing of textbooks, and school rehabilitation and maintenance were funded out of Centralized Fund of Poverty Reduction (Centerra). All other expenditures of rural schools are financed from the budget of ayil okmotus. Schools subordinate to city authorities are financed from cuty budgets, schools subordinate to rayon authorities are funded out of rayon budgets, while schools under the ayil-okmotu jurisdiction are supported out of ayil-okmotu budgets. Table 4 Structure of expenditures from the state budget for secondary education in 2006 (mln som). Education Fiduciary Capacity Assessment Oblast Total including: Salary and in % to Utility Costs in % to Other in % to contributions total total total Chui 432,0 296,0 68,5 92,3 21,4 43,7 10,1 Talas 111,1 104,6 94,2 3,5 3,1 3,0 2,7 Naryn 188,3 184,3 97,9 0,4 0,2 3,6 1,9 Issyk-Kul 229,8 176,1 76,6 51,0 22,2 2,7 1,2 Jalalabad 423,8 400,6 94,5 10,2 2,4 13,0 3,1 Batken 178,6 178,3 99,8 0,1 0,1 0,2 0,1 Osh 488,3 455,6 93,3 15,5 3,2 17,2 3,5 Osh city 107,4 75,4 70,2 26,1 24,3 5,9 5,5 Bishkek city 278,9 203,6 73,0 49,9 17,9 25,4 9,1 Total 2438,3 2074,6 85,1 248,9 10,2 114,7 4,7 3.37. The regulation on extra-budgetary funds grants educational institutions (primary, secondary, and out-of-school) the right to provide additional educational services on a paid-basis, such as advanced lessons or supplemental teaching. These funds are controlled by tutorial councils and parental committees. Each school has a special account where the funds from republican budget are deposited. They maintain separate accounts for extra-budgetary payments (also referred to as "special means"). 3.38. According to recent changes in regulations, the budget has two levels--republican and local. As shown in Figure 6, funding from the republican budget goes directly to the rayon level. These funds are distributed within the Central Treasury to a network of regional branches. In compliance with the Law on Central Treasury, the Treasury is responsible for the completeness of funds transfer as well as timely receipt by the state entities. Local ayil okmotus receive funds in a timely manner on socially protected expenditures (such as salaries, food, and maintenance) from Central Treasury branches in time. There is, however, some delay--often up to 30 days--that may be attributed to delayed republican budget approval by the Parliament. Annexes 1, 2, and 3 illustrate the schemes on funds and information flows within the educational sector. Figure 6. Funds Flowchart--Local and Republican Budgets 39 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools 5HSXEOLFDQ EXGJHW FDWHJRULFDO JUDQWV HTXDOL]HG JUDQWV UHSD\DEOH ILQDQFLQJ 2EODVW EXGJHW FDWHJRULFDO JUDQWV 7UDQVIHUDEOH HTXDOL]HG JUDQWV IXQGV 5D\RQ EXGJHW ,QFRPH WD[HV IURP OHJDO HQWLWLHV ([FLVH WD[HV RQ LQWHUQDO SURGXFWV ,QFRPH WD[HV IURP SHUVRQV RWKHU VWDWH WD[HV DQG LQFRPLQJV FDWHJRULFDO JUDQWV 7UDQVIHUDEOH HTXDOL]HG JUDQWV IXQGV $L\O 2NPRW\ EXGJHW &LW\ EXGJHW /DQG WD[ /DQG UHQW WD[ 6WDWH GXWLHV /RFDO WD[HV DQG WDNLQJV 1RQWD[ SD\PHQWV 6SHFLDO IXQGV RI ORFDO EXGJHW RUJDQL]DWLRQV 3.39. Local sources of funds are channeled directly to the banking accounts of the ayil okmotus and the small town administrations. There are also some delay with local funding related to the budget approval by local keneshes. However, such delays are infrequent--because local authorities have more power to influence the release of local budget funds. Republican budget funds can only be released by the Treasury. 3.40. It should be noted that the recent transition to a two-level budget process has certain benefits for local level authorities. They now have more flexibility in the management of the available funds. There is also a greater sense of ownership of the funds by the local authorities, which enhances accountability and transparency in their use of the funds. Figure 6, above, depicts the flow of funds from the republican and local budgets. Internal control environment 3.41. As in most budget organizations, there is strong focus on compliance with regulations. The concept of internal control is not appreciated, even among the managers who are responsible for establishing an effective internal control environment. No internal control procedures or manual exist Education Fiduciary Capacity Assessment in the MOES. There are no internal audit departments in the MOES or in oblast and rayon administrations. 3.42. The regional educational departments report only to Central Treasury and MOF because they receive funds directly from the Treasury. Given the current practice in which rayon educational divisions do not report to MOES on financial aspects, the MOES does not exercise any internal control function at the local level. Moreover, there are no regulations requiring MOES to exercise such a function. Control is exercised by the Accounting Department and Economic Department of the MOES, but only on the funds for MOES headquarters that are received from the republican budget. The management of MOES does not envisage an expansion of its functions, at least not in the foreseeable future. At minimum, a mechanism should exist that would allow MOES to receive financial information for the entire education sector, including the availability of local funds (if for statistical purposes only). This would promote better understanding of the financial implications of implementing education sectoral programs. 3.43. Recommendations on internal control An internal audit unit is needed in the MOES. This recommendation should be considered in the context of ongoing reform efforts by the MOF to establish an internal audit framework across the public sector. The MOES internal control unit would review procedures in the MOES and its subordinated institutions. It would provide continuous advice to the ministry on improvements needed for an effective internal control framework as well as recommendations on more efficient use of financial resources. The unit should be able to conduct internal audits at levels of headquarters, rayons, and individual schools. Such reviews would need to be coordinated with the MOF to avoid disruptive and duplicative inspections. Rayon administrations and ayil okmotus need internal manuals on financial management. These would be based on the instructions provided by the MOF, but expanded to cover all the sources of funds at the local level. These manuals should be approved jointly by the MOF and MOES. The MOF would take the lead in providing training on internal control for the headquarters of MOES and ayil okmotus. Financial reporting 3.44. Preparation of financial reports and related information is the responsibility of the Accounting and Economic Units of MOE. The Accounting Unit and Economic Unit produce a full set of financial statements, including a balance sheet and an actual-versus-budget report to the Treasury. The MOES does not prepare consolidated financial reports to monitor and analyze finance performance. However, the Treasury receives both the entity financial reports as well as the financial reports for the entire education sector from the MOES and directly from the regions. The MOES appears not to use these reports (its own or those of schools) for any management decisions. Instead the reports appear to be prepared mainly to comply with rules and regulations issued by the Treasury. Currently, the objective of the reporting at the MOES level is to meet external reporting requirements that focus mainly on budget execution, statistical needs, and tax information. Because the MOES does not have any control over funds channeled to education facilities directly by the Treasury, there is no incentive to receive and analyze financial reports of the regions. 3.45. At the local level, schools report on a quarterly basis to Tax Inspection (balance sheet and cash flow statement). They report annual and monthly statements on salaries and paid social fees to the Social Fund. They report monthly labor statements with actual number of staff to the State Statistic Committee. They submit balance sheet and cash flow statement to ayil okmotus city financial departments. It is recognized that schools do not currently have financial autonomy. They are 41 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools financed from local budgets, and Ayil-okmotus report to fiscal and statistical authorities on their behalf. 3.46. The ayil okmotus city accountants report on a monthly and quarterly basis, depending on requirements. These reports are submitted to Tax Inspection (balance sheet and cash flow statement); Social Fund (the documents as indicated above); the State Statistic Committee (the documents as indicated above); rayon financial divisions (local and republican budget performance, Forms A-2 and A-4 of the MOF); and ayil okmotus (local and republican budget performance Forms A-2 and A-4). Annex 8 provides greater detail on the scheme for reporting within the education sector. 3.47. Recommendations on financial reporting As noted above, the MOES does not currently prepare consolidated financial statements for the entire sector. Such reports are probably available in the MOF. However, MOES needs a mechanism so that consolidated financial information for the MOES and its subordinated institutions would be available for strategy development and decision-making. Implementation of the MOF Treasury system and a review of financial information requirements of the MOES are essential in order to design a reporting system that would support such consolidation. The MOES should design its own reports that conform to the MOF reporting formats that meet its own needs for internal decision-making, analysis, monitoring, and overall supervision of the sector. Tracking of expenditure information at school level should be explored. Coordination with Treasury is vital to explore possibilities of using its data for education sector financial reporting, taking into account the ongoing modernization of the Central Treasury information system. In conjunction with the MOF, the MOES should develop a scheme for Training of Trainers (TOT) for local finance specialists. Capacity building for ongoing local training is needed to improve the reliability and accuracy of the local financial information, which is now tabulated manually for the most part. A TOT program is considered the best option in the area of finance and accounting across the sector. Trained specialists are needed who can combine their knowledge of local circumstances with an understanding of modern financial management systems. Trained specialists under this program would visit and organize training for all oblasts and at least half the rayon education departments. External audit 3.48. External audit of the educational sector is conducted by the Chamber of Accounts (COA), the Supreme Audit Institution. There are inspections carried out regularly by Tax Inspections, the MOF, as well as by the Social Fund of the Kyrgyz Republic. While the MOF inspects usage of republican funds, other inspections target the local budget performance. Upon completion of inspections, every institution is required to prepare an official document describing all weaknesses and problems. 3.49. With regard to performance of local budget funds, the ayil okmotus report monthly and quarterly to the local kenesh. The number of inspections of the ayil okmotus is insufficient taking into account the absence of an internal audit structure in MOES. The regional COA carries out one audit annually. In certain schools, parents' councils provide additional financing to schools from their own resources. To ensure the integrity of spending, these councils generally carry out their own inspections, which can take place at any time during the year. It is expected that fulfillment of the recommendations on internal control (above) will supplement the work of external auditors and thus strengthen overall control and accountability at the local level. Information systems Education Fiduciary Capacity Assessment 3.50. Accounting and reporting are done manually at all levels of the education sector. Computer literacy is low at both national and sub-national levels. Manual recordkeeping and reporting imposes significant risk on timelines and accuracy of financial information. Because of limited financial resources and low staff capacity, it may not yet be feasible to introduce a computerized financial system in all education departments. However, the MOES understands this situation, and has already drafted a "project intent" document that envisages computerization of accounting in the sector on a phased approach. 3.51. Recommendations on information systems There is a need for the review of the MOF treasury system and MOES financial reporting requirements in order to develop a mechanism for generating consolidated financial information using treasury system. Donor assistance may be required to computerize the accounting system at various levels, based on the "project intent" document. D. Procurement Capacity in the Education Sector 3.52. The assessment team, along with the members of the counterpart team, reviewed the organization and conduct of public procurement in the MOES, Jalalabad and Naryn oblasts; the rayons of Bazar-Korgon in Jalalabad and Kochkor in Naryn; two city schools in both oblasts; two schools in rural area of Bazar-Korgon and Kochkor ayil okmotu; and the ayil okmotu administration. General procurement environment 3.53. Ineffective implementation of the May 2004 PPL, which authorizes procuring entities, such as MOES, to carry out their own procurement is a major weakness of the Kyrgyz public procurement system. While a comprehensive legal framework is in place, the system suffers from deficiencies in actual practice, as illustrated by the benchmarking described in Chapter 2 (Section E), above. Deficiencies include absence of proper guidance to procuring entities; lack of procurement organization and capacity; undesirable procurement practices; poor budgetary allocation processes; inadequate external and internal controls; and an anticorruption agenda that has not been implemented. 3.54. The PPL clearly assigns procurement oversight and support roles to the SAPPMR. The SAPPMR is, however, unable to fulfill these roles efficiently and objectively. It lacks adequate capacity. Its involvement in actual procurement conduct, which is the responsibility of procuring entities, conflicts with its oversight role. The SAPPMR therefore provides little guidance to procuring entities to ensure effective implementation of the PPL. The agency has yet to prepare and disseminate a comprehensive implementation regulation and manual for use by procuring entities. Procuring entities at all levels of government are poorly organized. Some still conduct procurement through permanent tender commissions contrary to the requirements of the current PPL.. Furthermore, qualified procurement professionals are generally in short supply. Consequently, procurement is being conducted by unqualified staff with rudimentary training from the National Procurement Training Center. The net result is weak implementation of the PPL and poor practices from procurement planning to contract management. 3.55. Procurement planning should begin with the budget formulation, but planning in fact is often simply a listing of items and their estimated costs for budgeting purposes. Multiyear procurement planning is not utilized. Even after the national budget is approved, adequate procurement plans are not prepared. Making existing plans public would help providers of goods, works, and services prepare better responses to tenders as they are launched, fostering optimal competition. Procuring entities receive funds late in the fiscal year, giving them insufficient time to conduct economical and efficient procurement. Information provided in tender notices is sometimes incorrect and misleading; bidding documents sometimes are not easily available to interested bidders; allowable bid preparation time is 43 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools too short; technical specifications are poor; contract award decisions are frequently based on the lowest price instead of the lowest evaluated price; tenders are cancelled without notice or justification; contract management practices are slipshod; contracts are sometimes terminated without any justification; and so on. These poor practices, combined with a complaint resolution mechanism that appears to lack objectivity and transparency, have not helped in building trust in the system by providers of goods, works, and services. Ministry of Education and Science 3.56. The organization and functions of public procurement in the Kyrgyz Republic is decentralized to procuring entities at the central(?), regional, district, and local levels of government. This means that the MOES conducts procurement of goods, works, and services for itself and for its affiliated institutions at the central level. The administration of oblasts, rayons, and ayil okmotus conduct procurement at the local levels. The oblast-level administrations no longer conduct procurement for the education sector, but are responsible their own needs. Public schools are also excluded from involvement in procurement decision-making, except for the rayons where per capita financing has been introduced. 3.57. The RMSPU in the MOES conducts procurement of goods, works, and services for the education-related entities reporting directly to it. The department includes a staff that carries out procurement among many other assigned tasks. This staff works with the other departments of the MOES and does not appear to meet MOES procurement capacity needs. The MOES Capital Construction Department is responsible for construction of new schools and rehabilitation of existing ones, as well as other facilities for which MOES is responsible. Both these departments are weak in procurement planning, preparation of bidding documents, bid evaluation, contract awards, and contract management. Other departments do not directly deal with procurement and therefore have even less capacity in these areas. Procurement can be conducted efficiently only when end-users and procurement staff work together. For this reason, department managers and those who prepare technical specifications must both understand applicable procurement laws and regulations. Currently, there is little interaction between the MOES and oblast, rayon and local levels administrations on procurement matters. 3.58. Higher education in the Kyrgyz Republic is provided by 30 state institutions and 10 financially independent private institutions. Financial plans of the higher educational institutions, including procurement, are reviewed by the Economic Unit and RMSPU of the MOES . Financial plans are to be prepared according to strategic plans for higher education, and they are to be updated and approved annually. State-owed institutions conduct procurement in accordance with PPL. The current practice is to have permanent tender commissions. 3.59. Recommendations on MOES Strengthen the RMSPU. At least two staff members should be appointed to be responsible for procurement of goods and services. Their job descriptions should specify procurement as their main activity, as well as the relevant procurement qualification and experience. Make the CCD responsible for all procurement of civil works, including those financed by international and bilateral donors. For this purpose, strengthen the capacity of this department through the addition of qualified staff. In collaboration with the National Procurement Training Center, deliver regular procurement training to the Department of RMSPU and CCD; the heads of MOES departments; and the staff of MOES affiliates, including higher education. Training should cover the whole management cycle, including specialized training in planning, preparing bidding documents, designing evaluation criteria, and preparing technical specifications. Education Fiduciary Capacity Assessment Prepare a procurement manual and standard bidding documents specific to the education sector, including goods, works, services, and textbooks. These should be based on the standard documents from SAPPMR. The manual should include guidance on the use of the documents. Provide training in international procurement to the staff of the departments of Monitoring and Public Procurement and Capital Construction, as well as all MOES department heads. This should be done with a view toward gradual assumption of all procurement responsibility under international and bilateral donor-funded projects. Require educational institutions under MOES to use ad hoc tender committees rather than permanent tender committees. Explore means (for example, a website) to strengthen interaction between MOES and oblast, rayon and ayil okmutu administrations. This would help the sector in sharing knowledge and disseminating important documents, including regulations and publication of tender notices. Oblasts, rayons, and ayil okmotus 3.60. Oblast administrations do not procure for the education sector beyond their own office supplies, equipment and furniture, and rehabilitation of buildings. Rayon administrations carry out procurement for the schools for which they are responsible. Ayil okmotus procure to fulfill the needs of their own schools. Procurement at the oblast, rayon, and ayil okmotu level is generally handled as a side job by accountants from the Department of Accounting and Administration. A permanent tender committee usually operates at each level. In the ayil okmoto, tender committees sometimes include school principals in procurement decision meetings. The use of local accountants for procurement necessarily sets up a potential conflict of interest. Permanent tender committees not only encourage the development of undesirable relationships with potential goods and service providers, they violate the current PPL. In general, ayil okmotus centrally procure food items for their schools and state institutions. They rarely involve school directors in procurement decision making, and no procurement professionals are involved. Those who deal with procurement are generally unaware of the new PPL that is in force. 3.61. Local administrations have insufficient capacity to comply with the PPL and to deal with the full cycle of procurement planning, designing evaluation criteria, preparing technical specifications, and administering contracts. 3.62. Recommendations on oblasts, rayons, and ayil okmotus Oblast, rayon and ayil okmotus should stop using accountants to carry out procurement. They should appoint qualified procurement staff or designate staff with the necessary qualifications and experience for training. Design a procurement training program for the public officials at regional and local levels who carry out procurement for the education sector. NPTC should design and deliver by this program. Discontinue the practice of using permanent tender committees for procurement. Support and control systems 3.63. SAPPMR has a branch in each oblast to support procuring entities at oblast, rayon, and ayil okmutu levels. These branches organize procurement training for public officials from time to time. However, the content and the frequency of the training are not adequate. They are also responsible for overseeing procuring entities compliance with the PPL. These offices apparently spend substantial time reviewing tender documents, evaluation reports, and contracts and issuing permits, functions that 45 3. The Education Sector - The Ministry of Education, Administration, Rayons, ayil okmotu, and Schools are not attributed to the SAPPMR or its branch offices by the PPL. There is generally low awareness among public officials on public procurement legislation or changes to the regulatory framework. High cost of training in procurement, i.e., fees charged by the NPTC, deter oblast, rayon and ayil okmotu administrations from sending sufficient staff for such training. 3.64. Only a few procuring entities (such as the Ministry of Health and MOF) have internal control systems. External auditing is conducted by several state bodies: SAPPMR, the Chamber of Accounts (COA), MOF, and the Office of the Procurator. COA ensures external audit of procurement operations. The COA has a central division and three regional territorial divisions. These are 126 staff at the central level, and around 40 staff at the regional divisions. The COA audits all state bodies yearly. Procurement audit is only one aspect of the multifaceted COA control program. COA capacity to conduct audit is weak, and staff lack proper training in procurement. Reports are also not made public. 3.65. The Normative and Inspection Unit within SAPPMR has four staff members who carry out external audit of procuring entities once every two years. The Statute on Order of Conduct of Control Activities (No. 24) governs their work. SAPPMR auditors have received some training in procurement. The Division on Internal Audit (DIA) under the MOF has the mandate for controlling execution of the state budget. However, DIA auditors are not sufficiently informed about procurement requirements and control systems to conduct quality audits. According to its mandate, the Office of the Procurator (OP) carries out control of government bodies for compliance with state legislation, including public procurement. OP inspectors survey an institution's activities once a year, including auditing of public procurement. The inspectors do not appear to be knowledgeable about public procurement procedures. The Treasury in MOF also verifies procuring entities' compliance with the PPL when they request contractual payments with the procurement documents. The National Agency to Combat Corruption has been established to fight both demand-side and supply-side malfeasance, including bribery and collusion. However, no special measures are in place to detect or prevent corruption in public procurement. Several anticorruption programs and measures exist in principle, but implementation is lacking. 3.66. Recommendations on support and control systems Establish and strengthen internal and external controls of procurement at all levels of government to ensure economic and efficient use of public funds. Design and deliver, in collaboration with the NPTC, procurement training programs to the staff of internal and external control agencies. Ensure that SAPPMR branches become more actively involved in capacity building and oversight activities, rather than hands-on involvement with review of actual bidding documents, evaluation reports, contracts, and so forth. Private sector The supply side (i.e., providers of goods, works and services from the private sector) is improving but still weak. Despite good progress over the past decade, the (domestic?) construction industry/firms still fail to qualify for large contracts. Manufactured goods are mostly imported. For the education sector, they are mostly procured internationally with donor financing. The consulting industry is in its infancy. The needs of the education sector, especially at local levels, include food items and rehabilitation of school facilities. These are now fulfilled primarily by local shop keepers and small contractors. Education Fiduciary Capacity Assessment 4. CASE STUDIES OF SELECTED EXPENDITURE ITEMS 4.1. Given their fiduciary importance, particular attention was paid to selected expenditure items--salaries, food items, textbooks, and utilities and maintenance. The following case studies briefly summarize reviews conducted in the regions of Naryn and Jalal-Abad. Recommendations are made for improving the controls associated with each of these items. In addition to the specific expenditure items, special attention was also paid to higher education. A short case study is also provided on financial management and procurement arrangements for the Kyrgyz National University (KNU).9 A. Salaries 4.2. Salaries comprise up to 70 percent of the budget allocation for the MOES headquarters, and up to 40 percent of the budgets of MOES subordinated institutions (see Table 4, Section C, "Current Expenditures and Flow of Funds"). They comprise up to 20 percent of the entire educational sector budget (see Annex 4, "Local Budget Performance in the Regions.") The vast majority of education sector employees are school teachers. According to reports from Naryn and Jalal-Abad, salaries are received from the republican budget in a timely and complete manner. Salary levels, bonuses, and other payments are set by government resolutions and decrees. At the time of this assessment, the MOES had plans to increase the salaries for teachers by about 30 percent, which is in line with the general salary increases across the public sector. There are several additional sources of funding, depending on the type of school (gymnasium or regular secondary school). In gymnasium, for example, schools parents contribute funds that are managed by the school administrations. The funds are used to supplement teachers' salaries, in addition to other expenditures. For example, the secondary schools in the town of Shopokov (Table 5). For 2006, 71 percent of salary funding came from local fund of town administration, and 29 percent from republican budget. However, such proportions differ according to the level of income of the local administration. Table 5. Educational Expenditures, Town of Shopokov, 2006­07 (in thousands KGS/a ) Average % of 2006 2007 budget performance Total education expenditures of 7098,8 11092,5 100 Shopokov, including: Salary 4369,9 6595,7 60,3 Food 273,3 625,8 4,9 Maintenance 200,6 522,6 4,0 Note: US$1 = KGS35.19 (Source: Information provided by Shopokov City Administration) 9Information provided by the KNU during discussions with the Team 47 4. Case Studies of Selected Expenditures 4.3. Rayon education departments employ accountants to calculate manually the salary for teachers in ayil okmotus/town administrations. These data are then transferred to the rayon administration. School directors or their deputies prepare tariff sheets each year for all teachers, including the hours allocated to MOES training categories. During preparation of tariff sheets, the school directors and ayil okmotus/town administration accountants take into account the qualification of teachers, their length of service, diploma type, and professional teaching category. Tariff sheets show average salary for each teacher. These are used for salary calculations for the academic year. 4.4. It should be noted that the present manual calculation could be automated, since all components of salary are based on standard percentages or fixed amounts. Local IT consultants could help develop a user-friendly salary calculation model using Excel or Microsoft Access. Automation would improve accuracy, save time, and simplify internal and external audits. Basic automation would facilitate the adoption of salary notifications for staff, which at present are not routinely issued. 4.5. The actual number of teachers' working hours is confirmed by the time sheets filled by deputy directors and approved by directors. According to an MOES order ("Methodological Recommendations on Formulating the Tariffs for Additional/Paid Educational Services for Primary, Secondary and Out-of-School Education Institutions"), teachers may receive additional compensation from "parents' funds" for additional or specialized teaching. However, the order does not establish fixed tariffs (rates) for additional services, only the methodology for formulating the tariffs. The school administrations establish tariffs, which are then approved by the MOES. This risks tariffs being fixed in an arbitrary or nontransparent manner. 4.6. Usually schools use a bank account opened directly by the school, or a banking account managed by the town administration. There is a dedicated person paid by parents who deals with banking accounts. The procedure for salary calculation is the same as for calculation of salary paid from republican and local funds, described above. As noted, schools do not generally have their own accountant. The same person often serves as accountant and cashier in the secondary school, thus undermining internal control related to payments. 4.7. The ayil okmotus/town administration accountants of primary and secondary schools prepare the reports on salary for the Central Treasury, because salaries are funded by the republican and local budgets. These reports are also submitted to Social Fund, tax authority, National Statistics Committee, and local administrations. In addition, the schools report to parents, especially in cases where funding is provided by the Parents' Fund. 4.8. Internal control for salary calculations is more or less effective in the sense that additional payments and bonuses are strictly documented. However, there are no regular checks of the calculations themselves. In the absence of such checks, there are risks that salaries could be paid to ghost teaches. The team was informed that external audit is conducted annually by the Chamber of Accounts (COA). When conducted, these inspections generally cover all sources of funding, not just funds from the republican budget. The team did not, however, receive actual reports from previous audits. The team could therefore not determine specific issues discovered by the auditors, nor if or how such issues were actually resolved. 4.9. The team became aware of the MOF report showing problems with salary administration in several oblasts. The report is based on inspections conducted in 2007 in Chui and Batken oblasts, and Osh and Jalal-Abad cities. It reveals cases of double payment of salaries, overstaffing in some schools, excessive provisions for overtime payments and payment of Education Fiduciary Capacity Assessment salaries to ghost employees.10 It underlies serious internal control weaknesses at the local level, including schools that require urgent attention. 4.10. To avoid misuse of funds allocated for salaries and wages, the MOES should conduct periodic reviews at regular intervals. Such reviews could be conducted as part of an internal audit function that currently does not exist within the MOES. In the future, internal auditors would compare timesheets and salary calculations against physical evidence of the teachers, confirming that salaries and wages are paid to existing teachers. 4.11. Certain deviations were noted from the acts of the COA on the audit of Bazar-Korgon Ayil Okmotu. These deviations were mainly due to the insufficient and untimely financing of the food supplement and the lack of the strong control mechanism over the calculation and payout of wages. 4.12. Recommendations on salaries and wages A mechanism is needed to verify the existence of teachers and other education sector staff--for example, internal auditors and/or rayon education departments. The results should be documented and should be part of regular reports submitted to the Ministry of Education. Basic automation is needed for salary calculations, using spreadsheets or Microsoft Access. Rayon level accountants would then enter all required data into the salary model, and the model would automatically calculate the salary figures, including net amount to be paid and taxes. Payroll sheets also could be printed from the system and maintained for record and audit, while payment notifications would be printed and issued to employees. To the extent possible, the responsibilities of accountants and cashiers in the secondary schools should be separated. B. Food Items 4.13. In accordance with Law No. 467 ("Organization of Nutrition for Students of General Educational Schools," dated October 23, 2007), the Ministry of Finance has started to finance expenditures on food for primary pupils in first through fourth grades. This expenditure is categorized as a priority and, therefore, is a protected social item of public expenditures. The funds are to be allocated first to the schools in mountain regions; and from September of each year, for all regions of the republic. Five KGS (approximately US14 cents) are allocated for each pupil to procure one roll and one hot drink of milk or tea. During fiscal 2006, a total of 300 million KGS (approximately US$8.3 million) was allocated, representing about 8 percent of annual education sector expenditure. 4.14. Schools plan the expenditure for food based on the number of first through fourth graders, and on established tariffs. This plan is prepared by the authorized person (usually the head of the household department), or in rare instances, by the school accountant. The plan is approved by the director of the school and submitted to rayon/city department of education, which submits it to the MOES for approval. The MOES, in turn, consolidates data for the republic and submits the plan for financing to the MOF for final approval. A copy of the calculation for food items is also submitted to the relevant ayil okmotus. 10Report submitted by the Minister of Finance to the Collegiate Meeting of the MOF, April 2008. 49 4. Case Studies of Selected Expenditures 4.15. The Central Treasury transfers MOF-authorized funds directly to the Central Treasury regional accounts. Local ayil okmotus receive the funds for financing of food items from regional departments of the Treasury. The cashier or accountant of ayil okmotus makes the payment for procured food items in cash or by bank transfer, depending on the legal status of the supplier. If the supplier has a bank account, the payment is made by bank transfer according to the terms of the contract. 4.16. It is to be noted that accounting documentation, including procurement files prepared by ayil okmotus (or in some cases by the schools), do not always meet the required standards of financial reporting. In the majority of cases, schools independently procure raw materials such as flour and sugar to prepare the food items in their kitchens. Procurement is done by tender commission of ayil okmotus, which in most cases includes the director of the school. The main procurement method is through request for quotations but in remote rayons, and because of the lack of enough competition, direct contracting is oftentimes used. Another reason for low competition is the relatively small amounts of the proposed contracts. 4.17. Recommendations on food items In collaboration with MOES, ayil okmotus should explore the possibility of employing accountants to handle basic accounting functions at this level. Bank transfers should be used to pay the suppliers of food items. To maintain transparency, parents' representatives (not just directors) should participate in tender commissions under ayil okmotu. Upon agreement with MOF, MOES should develop unified accounting documentation for expenditures on food items. C. Textbooks 4.18. Because considerable resources for staff and maintenance of secondary school infrastructure are allocated from the budget, purchase textbooks for students do not receive the appropriate priority. The "Strategic Study on Textbook Availability", carried out under the Rural Education Project, financed by the World Bank, collected more systematic data on usable books for 50% of schools in the country. The figures show about 40 percent availability of textbooks in Kyrgyz, about 53 percent availability of textbooks in Russian, and about 68 percent availability of textbooks in Uzbek. Before May 2006 schools were provided with textbooks by charging parents with the average rent of 10-15 som per 1 textbook. The average family expenditure for textbooks per student was 150 som a year. Rent payments formed library funds at school level which were annually renewed and enlarged. Students were provided with textbooks through libraries. Overall amount of funds collected through textbook rental scheme and available to the education system amounted to about 150 million som a year. A portion of the rent payments collected were transferred by schools to form centralized library fund under the MOES. In 2005 total collections amounted to 26 million som. Due to the centralized nature of the funds, the ministry ensured publication and supply of textbooks to schools with education in national languages, small schools in remote rural and high-mountain areas, and poor regions of the country. The textbook rental payment was fully cancelled during 2006-2007 school year. Only 100 million som was provided from the 2006 budget, which at that time covered only 50% of all Education Fiduciary Capacity Assessment secondary education needs in textbooks, taking into account their deterioration and new school curriculum. 4.19. According to the MOES, between 2001and 2005, about 120 textbook titles were printed and procured, amounting to 4.01 million books. This however was still insufficient. In 2006/2007, the MOES printed and procured 67 titles, totaling to 1.2 million books that cost KGS 67.9 million (about US$1.9 million). This was funded from various sources, including from the Textbook Rental Scheme (TRS) funds, Centerra funds, and the World Bank. In 2007/2008, the MOES printed and procured 39 titles of textbooks, totaling to 1.6 million copies that cost KGS 98.5 million (about US$2.7 million). This was funded from Centerra Funds and the World Bank- financed Rural Education Project (REP). Total volume of the textbook expenditures from the republican budget and special means in 2006/2008 amounted to about KGS 166.4 million. 4.20. The MOES is responsible for the development and printing of textbooks. There are no clear procedures set forth in procurement manuals, instructions, or bidding documents for procurement of textbooks. In 2006/2007, KGS 98,562,000 was spent through single-source contracting for the development and printing. The comparative analysis and the most recent procurement carried out by the project implementation unit of the Rural Education Project shows that substantial savings could be achieved through printing of textbooks in neighboring countries. 4.21. Recommendations on textbooks The MOES should develop and implement a transparent procurement process for supplying textbooks. The MOES should also increase the competitiveness of the process through advertising widely in the local and regional press. Textbook- specific bidding documents should be developed. The cancellation of textbooks rental scheme in secondary schools, and taking into account their high retail prices and limited budget allocations, create an urgent need to take measures in providing all students with textbooks. D. Utilities and Maintenance 4.22. The MOES has budget provisions for utilities such as garbage collection, electricity, water, heating, and telephone. The budgets are based on norms and actual invoices from previous suppliers. All the utilities expenditures for primary and secondary schools are covered under the republican budget. Expenditure on utilities and maintenance represented approximately 12.5 percent of the total expenditures for 2006 year (see Annex 4), with combined financing from local budgets. According to the information from school administrations in the regions, school maintenance and utility expenditures are regularly under budgeted. The predetermined norms are usually unrealistic, since they do not completely cover the need for school maintenance that accumulates year to year, resulting in continuous deterioration of school facilities. The total volume of financing for utilities and maintenance expenditures amounted to KGS 330.8 million in 2006, which represented about 4 percent of the total education expenditure including the regions. Maintenance expenditures for secondary and primary schools were funded in the amount of KGS 240.9 million, including KGS 57.2 million financed by republican budget. 4.23. The lack of school maintenance is of serious concern. In Kochkor and Bazar-Korgon rayons, only 173 schools (out of 2,123 schools in the country) were maintained with the budgetary funds. According to MOES information, another 312 schools were maintained through donor assistance. Ayil okmotus manage the budgeting and actual payment for utilities 51 4. Case Studies of Selected Expenditures and maintenance, with limited involvement of the school administrations. Sometimes the supply of utilities is interrupted for months, even though the full-year budgeted amounts were transferred to suppliers at the beginning of financial year. Rural schools sometimes receive only 3 or 4 hours of electricity a day. MOES and local education departments often increase budgeted amounts for the next fiscal year in order to cover the liabilities (arrears) accrued for utilities. The 2006 budget execution reports indicate that budgeted amount for the utilities were fully utilized. However, they provide no indication of accrued liabilities as of the end of the year. In general, financing of utilities and maintenance expenditures do not cover the schools' needs because of low availability of local financial resources. 4.24. Recommendations on utilities and maintenance The MOES should prepare and implement a clear policy for maintaining school facilities and for financing utilities. Discussions should be held with MOF on the need for adequate budgetary resources in this area. Funds that are allocated need to be released in full during the financial year. The MOES should devise a mechanism to transfer financial resources to utility suppliers based on actual utilities delivered, rather than transferring funds in advance based on budgeted amounts. In conjunction with the ayil okmotus, MOES should develop mechanisms to accurately project actual funding needs for utilities and maintenance. E. Higher Educational Institutions 4.25. This brief case study is based on the information provided by the Kyrgyz State National University (KSNU). KSNU is the largest university in the republic, with about 19,500 students, 1,500 teachers, and 500 administrative staff. The financial management function is the responsibility of the Accounting Division, comprised of 18 accountants, an IT specialist, and 4 cashiers. There is an internal audit function, but with just one auditor. 4.26. As with other higher educational institutions, the republican budget provides funds only to finance teacher salaries and student scholarships. This funding covers only about 64 percent of actual teachers' salaries, including the Social Fund fee. The remaining 36 percent is financed from KSNU's own resources. These consist of tuition fees received from students, rental fees (for example, rooms used to sell the textbooks), and donor assistance. No information was provided on how much donor assistance the university actually receives. 4.27. Republican budget funds are deposited by MOF into the university's account in the Central Treasury. Payments from students (contract fees) are made to cashier offices designated to receive such payments. The university administration collects cash at the end of each working day and transfers it to Central Treasury. Payments to suppliers of services and equipment are made in cash and through bank accounts. The university does not have an account in a commercial bank for its own funds. Cash payment appears to be the practice at other public universities as well. This risks potential misuse of cash available to an institution on a temporary basis--for example, funds available from the time between collection of student contract fees and subsequent deposit to the Central Treasury. 4.28. KSNU prepares two drafts of the budget based on normative documents (Law on Education, dated April 30, 2003; Government Decree No. 637, "Order of Forming Paid services."). The draft budgets include expenditures to be financed from the republican budget as Education Fiduciary Capacity Assessment well as the university's own funds. The calculations are based on empirical data and established norms. The budget is prepared by the Accounting Division and approved by rector. It is supposed that the budget covers only expenditures necessary for minimum educational processes. It is expected that a similar situation exists at other republican institutions. Available budget funds could not sufficiently finance the long-term educational programs. In order to implement such programs, the institutions must approach prospective sponsors, including donors such as JICA, for assistance. 4.29. The university provides budget performance reports to the MOES on monthly and quarterly basis. These reports on the performance of republican and the university's own budgets are provided both separately and in consolidated form. MOES receives the reports on republican budget performance. The reports are also provided quarterly to the Central Treasury, the Social Fund, and the National Statistical Committee. Moreover, at the end of each fiscal year in December, the university holds "open hearings" on budget performance issues. 4.30. As mentioned, there is an internal audit function within the structure of the university. The internal control functions are implemented by the management while the internal auditor carries out periodic reviews. The auditor prepares an auditing plan for approval by the rector. The internal auditor prepares recommendations and reports directly to the rector, who then directs implementation by the relevant divisions. (The mission was not provided with any internal audit programs or actual reports. This information is based solely on discussion with university officials.) 4.31. KSNU is the pilot institution that has created an internal audit unit; but how much can realistically be accomplished with only one auditor is unclear. Like the accounting staff, the auditor lacks professional certification or specific internal audit experience. She does not appear to have access to informational resources that could help her to improve her skills or knowledge of internal audit. For the time being, limited financial resources make it unlikely that she will receive further training. 4.32. External audit is conducted by the Chamber of Accounts. Tax Inspection, the Trusteeship Council, and the Anti-monopoly Committee carry out other inspections at least once a year. The Chamber of Accounts and Anti-monopoly Committee issue reports that highlight weaknesses observed and recommendations on how to address them. The Bank team did not review the latest report by the Chamber of Accounts. This required specific authorization from the rector, which the team was unable to obtain. 4.33. The KSNU is responsible for its own procurement. The Financial and Accounting Department of the university is delegated this responsibility. All the procurement is carried out through the tender committee, which involves the technical experts from the relevant departments. The Higher Education Department of the MOES is represented on the committee. Procurement is conducted in accordance with the current public procurement law and regulations. 4.34. Recommendations on higher educational institutions There is need to improve accounting and audit capacity by organizing training in the relevant disciplines. Capacity building at the local level should aim at increasing the understanding of the internal control processes by the management of institutions of higher education. 53 4. Case Studies of Selected Expenditures Bank accounts are needed not only to process republican funds but also for the universities' own funds. This would reduce potential misuse of cash funds and would allow for more timely payments from students and to suppliers. The university should develop a manual for internal audit that provides the methodology for conducting internal audits. Based on approved internal audit program, the internal auditor should carry out periodic reviews of systems and procedures and make appropriate recommendations for improvement. Technical assistance would be needed to develop audit manual and methodology. The university staff involved in procurement, including heads of department, should further develop their procurement skills. For this purpose, the Kyrgyz Regional Procurement Training Center should design and deliver specialized training on procurement planning, preparation of bidding documents (especially technical specifications), evaluation of bids, and contract management. 5. Action Plans for Capacity Building 5. ACTION PLANS FOR CAPACITY BUILDING 5.1. Many of the fiduciary weaknesses discussed in this report reflect broader weaknesses of the country's Public Finance Management (PFM) system and its public procurement system more generally. Problems in the education sector cannot be isolated from the need for broader PFM reforms, such as the introduction of MTBF. Such reforms can be--and to some extent are being--introduced in parallel. However, this report focuses on actions that can be taken in the short-term in the MOES and in the medium-term across the broader education sector. The sooner that such actions are implemented, the sooner that MOES will be able to carry out effective public procurement with budgetary resources and manage resources economically and efficiently. Moreover, enhanced capacity in both procurement and financial management will provide international and bilateral donors the necessary assurances that funds invested in the education sector will lead to the intended results. Building capacity in financial management 5.2. The present assessment discusses what's wrong, what's right, and weaknesses that need to be urgently addressed in the area of financial management. Budget execution is still undermined by lack of budget credibility and unpredictability in the availability of funds for commitment of expenditures. Although the MOES, like all budget entities, prepares modified accrual-based financial statements, consolidated financial statements are not prepared and budget outturn is monitored only on a cash-basis. Thus, the extent of unpaid liabilities is not clear; expenditures are consistently underreported; and prospective donors risk that funds being used to discharge debt rather than to finance agreed-upon program priorities in education. As discussed in Chapter 2 and Chapter 3 and illustrated through the case studies in Chapter 4, significant improvements are urgently needed in fiduciary capacity, and in the closely related areas of financial reporting, internal control, and external controls, including a general need to adopt modern IT systems across the full range of education-related institutions. Without such actions, both national resources and potential support from international(?)donors will be at risk. Building capacity in procurement 5.3. Public procurement at the country level suffers from ineffective implementation of the May 2004 PPL. While a comprehensive legal framework is in place, the system suffers from deficiencies in actual practice as well-illustrated by the benchmarking described in Chapter 2 of this report. Deficiencies include: absence of proper guidance to procuring entities; lack of procurement organization and capacity; undesirable procurement practices; poor budgetary allocation processes; inadequate external and internal controls; an unimplemented anticorruption agenda; and a weak supply side that mistrusts the procurement system. Procuring entities at all levels of government are poorly organized. Some still conduct procurement through permanent tender commissions in disregard of the current PPL, which requires each entity to make one of its departments responsible for purchasing and build its procurement capacity. Furthermore, qualified procurement professionals are generally in short supply. Consequently, procurement is being conducted by unqualified staff with rudimentary training from the National Procurement Training Center. The net result is weak implementation of the PPL and poor practices from procurement planning to contract management. MOES-level reforms 5.4. At the MOES level, the RMSPU conducts procurement of goods, works and services for the education-related entities reporting directly to it. The department includes a staff who carry 55 Education Sector Fiduciary Capacity Assessment out procurement as one of many other concurrently assigned tasks. The MOES Capital Construction Department is responsible for construction of new schools and rehabilitation of existing ones, and other facilities for which the MOES is responsible. Both these departments have weak capacity in the procurement cycle management, including procurement planning, preparation of bidding documents, bid evaluation, contract awards, and contract management. Other departments do not directly deal with procurement and therefore have no capacity in this area. On procurement matters, there is little interaction between the MOES and oblast, rayon and local levels administrations. Oblasts, rayons and ayil okmotu reforms 5.5. The Procurement structure at the oblast, rayon and Ayil Okmotu levels comprises of an accountant usually belonging to the Department of Accounting and Administration and a permanent tender committee for each level. The use of accountants for carrying out procurement creates a conflict of interest and use of permanent tender committees does not only create potential for establishment of undesirable relationships between providers of goods, works and services, but is also in violation of the current PPL. Ayil Okmotus centrally procure food items for their schools and state institutions. They rarely(?) involve school directors in procurement decision making. There are no procurement professionals. Those who deal with procurement are generally unaware that a new PPL is in force. Mostly, accountants conduct procurement as a side job. The capacity of the regional and local administrations to conduct procurement in compliance with the PPL is weak. The Phase 1 Action Plan Based on the findings in this assessment, two action plans are proposed to build fiduciary capacity. The Phase 1 action plan--the fiduciary capacity-building action plan for the MOES, for 20008-09--is described in detail in Annex 11 of this report. Table 6 provides a summary of the Phase 1 action plan. 5. Action Plans for Capacity Building Table 6. Phase 1 Action Plan to be implemented by the MOEs during 2008-2009 Action Impact 1 Streamline budgeting process, as part of annual Improved budget formulation that budget formulation, based on the medium- responds to sector strategy and term strategy of financing the education programs, and result in enhanced sector, and train staff to prepare annual budgets transparency and efficiency of the based on sectoral needs. budget process. 2 Develop mechanism for consolidated financial MOES will have a clear view of annual information for MOES and subordinated budgets executed against agreed targets institutions 3 Modernization of accounting and reporting. Enhanced efficiency, timeliness, and Computerization of accounting processes and reliability of accounting transactions financial reports with in-built controls and financial reporting 4 Internal and external controls. Introduce basic Economic and efficient use of public controls over primary and secondary education funds for intended purposes records, including payroll and contract management 5 FM capacity training. Design and Deliver Improved skills at central and local Training-of-Trainers Program for financial levels and sustainable capacity building management and accounting in financial management 6 Computerization. Install in MOES an automated Timely and accurate record keeping and accounting system for management of donor reporting for donor-financed activities funds as a first phase towards full automation 7 Implementation support. Recruit local FM and Added FM and procurement capacity procurement consultants to support MOES in for MOES to assume FTI 2 implementation of FTI 2 implementation responsibility 8 Procurement. Strengthen the RMSPU for Effective procurement organization and procurement of goods and services; and the capacity in the MOES Capital Construction Department for civil works 9 International procurement. Provide training in Enhanced MOES capacity in conducting international procurement to MOES international procurement procurement staff 10 Procurement training. Train MOES staff in Awareness among MOES staff of public procurement, including fundamentals of requirements of public procurement law international procurement 11 Provide office and training equipment for Strengthened technical capacity of the RMSPU and office equipment for CCD department for carrying out procurement effectively 12 Transparency. Strengthen the MOES website Effective interaction with other education sector institutions at all levels; knowledge sharing; and dissemination of procurement and other information 57 Education Sector Fiduciary Capacity Assessment The Phase 2 Action Plan Annex 12 includes the phase 2 action plan, which is directed towards the education sector at the rayon and ayil okmuto levels. The actions contained in this action plan should be implemented for the years 2009-2010. The implementation of this action plan will not only result in economic and efficient use of budgetary resources for the education sector at regional and local levels but will also contribute to the development of the education sector through effective use of SWAp. Annex 12 presents elements of this plan in greater detail. The key points are summarized in Table 7. Table 7. Phase 2 Action Plan for Education Sector to be implemented during 2009­10 Action Impact 1 Accounting and financial reporting. Introduce a Enhanced capacity to consolidate robust accounting and financial reporting financial information, and improved system integrated across educational sector reliability of accounting and reporting, institutions and multiple levels and better management of resources 2 Internal audit. Create internal audit units in the Improved controls at all levels in MOES and other education-relevant institutions education sector for economic and at regional and local levels efficient use of public resources 3 Program and Annual Budgeting. Introduce Improved budget formulation that program budgeting, along side annual budget responds to sector strategy and formulation. Train staff and streamline programs. This would enable the MOES preparation of annual budget using the program- to monitor budget execution for the based approach. The annual budget will need to whole sector and, enable efficient data be reconciled to the program budget as part of the collection for better decision making. MTBF process. 4 Procurement Manual and SBDs. Prepare a Efficient and uniform procurement procurement manual and standard bidding practices in theeducation sector documents customized for education sector. 5 Procurement training. Design and deliver Enhanced capacity of public procurement training for public officials serving procurement officials education sector at Oblast, rayon and ayil okmotu levels Implementation of action plans 5.6. In order to implement the Phase 1 and 2 action plans, it will be necessary for the MOES to establish a team of senior officials headed by a Deputy Minister to serve as an oversight committee. It is recommended that the Strategic and Analytical Work Unit (SAWU) of the MOES be made responsible for day-to-day implementation and coordination of activities under the two action plans. For this purpose, this division should enhance capacity by adding at least one dedicated consultant with the necessary office equipment. The RMSPU should support the SAWU in implementing the two plans. The SAWU will also be responsible for coordination with the education sector related regional and local government bodies and schools. In addition, services of international and local consultants for implementing different fiduciary capacity building activities will be required, as shown in the plan. It is expected that the FTI grants funds will be used for financing the implementation of the two action plans. Efforts should be made to explore the possibility of obtaining the necessary financial support from other donors as well. 5. 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d 35,90 80,70 al 13 206 108,6 660,5 32 419,7 707,2 539 77 552 34 898,7 5 7 1 mrof Jal Aba 24 12 32 57 in e th n seef'd sse gni no d d se n ngisa s n of of rpose se rch train pi dna seda unF urti sinub to antne e n pu antne tatioro s pu urti snae B tatio to ciali rsha sg snoit m Descriptio yralaS al nde esah s rc mpi slairet esah off in ucr al rc tritio mpi slairet esruitd sp nde iliba skr l:at ce:ru ociS xp edicin pen erht xp E related trip Pu equ ma Pu m Nu Special equ ma tran ex Utilitie O E related state olhcS ildu B nstoc Reh wo ecipS To So 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 # s Annexe ectorS no aticud E of re ctu rutS al on zatiin gar Ot rren Cu 6. xen An Unit State l Unit and and Unit Annex cige work and, ent tiona nts al advisor rattS ticy ternanI Rehabilitation, Relations procurem stmeevnI e Anal Monitoring nc Assistant Minister ie Sc Minister and ion at e uc Ed attS of of yr yra e HR attS, Unit Unit Sector g and inist M ecretS eht galeL ce Division ountinc onomic servi Protocol Ac Ec of e urtcur R St E 67 TSI ional N y Minister at and MI y school of ganiz Deput Preschool, Secondar school, education Division Or Out we N 7. x nne A education Division y Professional ar et Minister iumg y ecr Colle Deput and nd- ress-SP -a cal nce,eicS ation ntific ie echnit nnovI information Department Sc s Annexe 5 cte,snosr ers rko w pefo ce.na of tax m undF or me coni number perf 7 Social 'sn iii), ontne axt sdnuf m 3 3 1 w e eshc to all stratioini on 4 atetS d bran mS m cisxe)ii ad ns Fun al oni s,eititnel F2& mrof (7),se tax ga in Social reg Sector no le on al calitsi lan of g e (ray attS catiou )noisiv xat ents m rtino s MoE ed di tuo state rep e 1 il m ucation Ed attS ) Ay Ok meocni)i:no Committe n arters n eshc gn 2 rtiope olidatedsno olidatedsno thi C C eadqu ectio bran wi sp al R-) ­ ­ (h in (2 (4) (6) ingt xa oni MoE T reg pore 2 t R as lan 1 ial onti )sr sn s obl , 6 catiou rte MoE ed visioid oolhcS eesf inanc spec qua F in undF 8. ax y x T (head ursaer eshc ecn ,seef dnuF al cioS nne A Tlar bran 1 rformaep d al s' pai nt oni Social fund & Ce reg na paid ers licb rko pu . ers, w re yrus )sr erhtruf dnala rko on w ed of stne ea rte atni loc on erb me Tr 1 m 4 ral qua eli A mun atts be & ed 2 A Cent (head atdi 4 May ontne rmsoF F olsno O statem M ­ C.- ­) 11 (1 (3) (5) f r Annexes ing ide fo afts al to on of s unt s and es. s ed; ovrp ff et e ance ern in of rm la MF MF ted sta int gnit and acco on rat of set budg ctor enabl leg pag esi anismh tion al easr tuso try ra d sic the .F ni of ic se lor branch m is ctin nisi ancen ec ec iont inc . to rfoep te ba use for fi ed ent pol onit doog ontc m nisti ury ok d 's fut once ant MO ce il rts Min al rol ort di earc inf admf easr sis ling lvo pm educa ay by ion af en puter ents and ting nt ern adm st af as inv elo Standard coun ducaerof Tl MOES of eporl sec aul st S enhan co on be E enab int s ring com ith to te eht tuso rat lopeeved the ting emriu ely dev iv ac m es en ayrfo nda cia catud be E w of has FM yt tion and req MO ci ntse ra nanif ot onito ternanI of oun d. sis s of act nda ions equa dur th okli Cenl le s ion s of acc oft capa elop uttit mt sse ishe esti ad ay onai ro nisti mr shil try bal is ework se bl tor reo ri ev eh stab ainr eh m D proce ins and Streng the reg T depar adm copy Report prope Educat E Min fram T proce T esta annua audi Build be prio etc. awl by by by gap by Analysis ap ancei A A A ndateda law ndateda law andated law N N N G andated m m m mplo m C Not Not Not Not agementna e of st e n M of eca eht ry st ion us or 69 tio of not as ion nii ons.i at avhton ial se ryt for do ions Lack. to M latu ited educ do tic educar nisi sti well ucat ith ents Lim el uting ady w re inanc fo ers ed catifi M .e eht egr as d erti lev F 9. acrp sf un mt on int al tion ed exec an onit al mit par ern es enfo ented. .y tuo qual ade x tran in log m ally rip sd ehtfo m sr MOES del stro eporr uncft rul rep conc ewi ing ok rm e nne rrentu ortces plem A C escd of ed il unt ar fun funds iona e.loh is no at udia ith erv ic hti and e at ial w imt if powet ers w ff echnot atht rt a lid al ovl no acco w ffats s s ion ien naga anc sta ing aytaf educ as ion. fin ern ia is te af e spec ic m odern on e or conso int tly lyp or st sion elay m No D suff Educat and Headqua ray hav sect No Educat No Mos com Financ sect of MF ills. adequa sk Financ deci l esi ent rts ngik on calol e of lic po and, edia aff.ts th plem lin at in kr po use rel sei ctinuft rem MF e im or ia stem teg udi ffats ed ies. ting iv to anc ects sy for of process hma S ect rats Al ing ity lvo nce coun ser s. 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