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Updated Project Information Document (PID)
Project Name                KYRGYZ REPUBLIC-Governance Structural Adjustment Credit
Region                      Europe and Central Asia Region
Sector                      Central government administration (100%)
Project ID                  P071061
Supplemental Project
Borrower(s)                 REPUBLIC OF KYRGYZ
Implementing Agency         PRIME MINISTER'S OFFICE
Address                     Administration of the President
Address Government's House, Bishkek, Kyrgyz Republic 720003
Contact Person Mr Akmataliev, Deputy Head of Administration of the
President
Tel. (996) 312 66 61 41  Fax (996) 312 21 86 27    Email
Ministry of Finance
Address 720002, Bishkek, 58 Erkindik boulevard
Contact Person Mr Abildaev, Minister of Finance
Tel (996) 312 66 05 04   Fax (996) 312 66 16 45    Email
Environment Category        U
Date PID Prepared           March 26, 2003
Auth Appr/Negs Date         March 19, 2003
Bank Approval Date          May 15, 2003
1. Country and Sector Background
The Kyrgyz Republic has carried out significant reforms in economic policy since indepenidence.
However, reforms in governance and public sector management have not kept pace with the policy
reforms. Deficiencies in these areas have emerged as major constraints in the ability of the country to
fight poverty. Accordingly, the National Poverty Reduction Strategy (NPRS) gives a high priority to
improving the effectiveness of the State. It outlines a multi-dimensional strategy for this purpose,
covering reforms in democratic institutions, law making processes, the judiciary and law enforcement
agencies, public administration, public expenditure management, civil service and local self Government.
Some of the reforms included in the NPRS fall outside the World Bank's mandate, while some others are
being assisted by other development partners. The proposed Governance Structural Adjustment Credit
(GSAC), would focus on institutional reforms, primarily in the Executive branch of the State. The
GSAC would have two complementary objectives: (a) to improve the transparency and responsiveness of
the public sector and enhance the ability of external stakeholders to hold it accountable; and (b) to
increase efficiency, effectiveness and accountability within the public sector.



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It is recognized that achieving significant, sustainable improvements in governance and public sector
performance in the Kyrgyz Republic will be a long term endeavor. The public administration in the
country is still at the initial stages of development. The capacity of the Government to implement
reforms is limited. Also, institutional reforms in public sector management are intrinsically complex and
difficult, as the World Bank's own record in this area indicates. Therefore, the effectiveness of the State
would have to be built up step by step, through iterative reforms spread over many years.
The Government has taken several initial steps in the last few years. These include implemenltationi of
first generation reforms in public expenditure management under the World Bank finaniced Public Sector
Resource Manageient Adjustment Credit (PSRMAC), creation of a Chamber of Accoulits, adoption of a
modern Public Procuremiienit Law, enactment of a Civil Service Law, retrench1menit of staff at the central
level, reduction in the number of mniistries and State bodies, lauLicilnlig of a concerted action plan to
remove administrative barriers to investment, establishmenit of elected local self Governments,
implementation of major reforms in the healthi sector, increasing public access to information about the
functioning of the State and efforts to encourage participation of citizens and civil society in public
affairs. Annex 2 provides details of the some of the reformis implemented in the recent past. The GSAC
represents a continuation of the reform process. In the areas covered by it, the program is expected to
deepen the reforms that have already been initiated and make incremental improvemlenits in the capability
of the State. It would also prepare the ground for more advanced reforms in the future.
While the experience of the Governmlent in implementing the first order reformis will be extremely
helpful, significant techinical assistance (TA) would be needed to successfully implement the GSAC
program. Important grant-based TA would be provided for many activities by other donors, includinig the
DFID, USAID, UNDP, IMF and EU-TACIS. TA for the remaining activities will be provided through
the Bank financed Governance Technical Assistance Credit (GTAC), whicih accompanies the GSAC.
2. Objectives
The Governance Structural Adjustment Credit (GSAC) would support the Government's program to
strengthen the effectiveness of the State. It has two complementary objectives: (a) to improve the
transparency and responsiveness of the public sector and enhance the ability of external stakeholders to
hold it accountable; and (b) to increase efficiency, effectiveness and accountability within the public
sector. With regard to the first objective, the GSAC would support reforms aimed at (i) improving
personal accountability of political officials and civil servants; (ii) strengthening voice and participation
by improving public access to official information; (iii) improving the interaction between regulatory
agencies and business enterprises; and (iv) strengthening external audit. To advance the second
objective, the operation would support reforms directed at (i) strengthiening public expenditure
management, by establishing a more strategic and transparent budget formulation process, and
strengthening accountability and transparency in budget execution, (ii) improving the internal control
environment; (iii) improving transparency, value for money and accountability in public procurement;
(iv) improving service delivery in the health and education sectors; (v) enhanicing the effectiveness of the
civil service; and (vi) streamlining the structure of Government milistries and agencies.



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3. Rationale for Bank's Involvement
The reforms included in the Government's program are urgently needed to successfully implement the
poverty reduction agenda. The Bank has been actively involved in reforming key public sector
institutions through various operations, including the Public Sector Resource Management Adjustment
Credit (PSRMAC), Institutional Development Fulid (IDF) Grants for development of public
procurement, and projects to reforn the Health sector. Recent economilic and sector work, especially, the
Public Expenditure Review (PER), the Country Financial Accountability Assessment (CFAA), Country
Procurement Assessment Report (CPAR) have also focused on identifyinig critical weaknesses in public
sector management. In the meantime, the Govermiient has undertakenl additional reformis on1 its owIn, or
with the assistance of other donors.
The objective of the GSAC is mainltaini the momenltumii of the reform process and provide a coherent
framework in whiich it could be carried forward. The operation would help deepen the reforms that have
already been implemenited, assist in removing distortions that have crept into some areas over timle,
initiate reforms in a few additional areas and provide leverage for implementationl of ongoinig reforms
that need support at the top levels of the Government. In developing the GSAC agenda, extensive
consultationis have been held withi the Government and the donor community. As a result, there is
considerable consenisus around the program and donors have expressed their willilgiiess to participate in
the program through Grant assistance. Thus, the GSAC will be a vehicle for the Government to mobilize
grant resources for its public sector reform program  Given the Bank's experience in implementing
similar reforms in the Kyrgyz Republic and in other countries, its coulitry knowledge and strong
relationships with counterparts and stakeholders, it would have a significant positive impact on the
quality, pace and realism of the reforms. The Bank will also play a key role in coordinating assistance
provided by different donors.
4. Description
A. IMPROVE THE TRANSPARENCY AND RESPONSIVENESS OFTHE PUBLIC
SECTOR AND ENHANCE THE ABILITY OF EXTERNAL STAKEHOLDERS TO HOLD IT
ACCOUNTABLE
(i,)  Improving Personal Accountability of Political Off icials and Civil Servants
One of the instruments frequently used to promote integrity amongst political leaders and civil servants
who exercise State authority, is to require public officials to periodically declare their own and their
close relatives' incomes and assets and make their declarations public. The obligation to file the
declarations makes it harder for politicians and bureaucrats to hide gains from corruption; imposes an
implicit obligation to explain sources of investment in property; and creates potentially incriminatilig
evidence that could be used against them in future corruption investigations. At the same time, the
publication of the declarations provides the media, civil society and the public with useful benchmarks
against which they can measure the actual life styles of public officials and demand explanations for
observed discrepancies. By increasing the likelihood of detection of corruption, the system dissuades
many public officials from venturing into it. By providing documentary evidence of corruption, it
facilitates punishing those who persist.
Currently, the Election Code, the Law on KR Jogorku Kenesh Deputies' Status and Civil Service
LawArticle 27 of the Election Code of the Kyrgyz Republic (April 29, 1999); Article 37 of the Law on
KR Jogorku Kenesh Deputies Status and Article 13, the Law on Civil Service, 1999. have some
provisions for declaration of income and assets by candidates, deputies to Parliament and civil servants,
respectively, but these need to be improved and expanded. None of the laws requires publication of the
declarations. The declarations filed by Deputies and civil servants are explicitly treated as secret. Also,



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these officials are not required to file any declarations regarding the income and assets of their close
family members. The State Tax Inspectorate, which receives the declarations of deputies and civil
servants does not have the capacity to systematically scrutinize these to identify cases of illicit
enrichment.
The Government is keenly interested in increasing the accountability of persons In authiority, in order to
combat corruption. For this purpose, it proposes to improve the effectiveness of system of declaration of
income and assets By Board, the Government ivill issiue a resolution indicating its intention to submnit
to Parliamenet (a) a draft Lawv on1 Declaration and Publication of Incoine atnd Assets of High State
Officials in the Executive, Juidicial and Legislative Branches of the State, including the President, Prime
Minister, Vice Prime Ministers, Ministers, Depuities Ministers, Judges and Depiuties ofJogorki Kenesh,
and their closefamily inembers; and (b) amnendmnents to the Civil Service Lacm, satisfactory to IDA, to (0)
r equizre declaration of inconme and assets of civil servants and their closeffamily mel71ber-s and (ii) mnake
the declarations of incomes and assets of civil servants available to the public, and declarations of
incomes and assets of their closefamily members available to specified state bodies Italicized text in this
section indicates actions that are conditions of Board Presentation or release of the second and third
traniches.. Before second tranche release, the Lawv o0) Declaration and Publicationi of Incomiie and Assets
of High State Officials and the aforesaid amendments to the Civil Service Lait' will be enacted Before
third tra77che, the Government wvill ensure publication7 of declarations of income and assets of High State
Officials and their closefamily niembers, in accordance with the aforesaid Lalv It will also make the
declarations of income and assets of civil servants available to the public. Appropriate administrative
arrangements, to ensure regular, effective examination of the declarations of civil servants and their close
family members will be implemented to detect conflict of interest and illicit enrichment.
(ii)   Streiigtlening Voice and Participation by Imtproving Access to Official Information.
The availability of relevant and timely information about the functioning of the public sector is an
important pre-requisite for enabling civil society, the media and the public to contribute to policy
dialogue, participate in consultative processes and oversee the performance of public sector entities. The
Kyrgyz Republic has a relatively open Government and is making efforts to increase the transparency of
the public sector and increase public engagement in Governmental activities. For example, public budget
hearings were held to receive feedback on annual budget for 2002. The budget and the Fiscal Bulletin
are published. Web sites of several Government entities have been created to disseminate information on
the internet. However, the penchant for secrecy still survives in several areas of Government and the
quality and accessibility of official inforimiationi remains quite limited, as revealed by surveys of
households and enterprises.
The NPRS places a higih priority on strengthening civic participation in budget formulation and execution
at all levels of Government and in other decisions involving general community interests. It also aims to
increase the ability of civil society to monitor activities of State agencies. For this purpose, the
Government plans to improve public access to information on activities of State agencies and local
authorities. In accordance with agreements with IDA, as part of preparation for Board presentation, the
government has already published annual audited financial Statements and audit reports of 10 largest
joint stock companies with State share of 51 percent or more, for FY 2001; and information on public
procurement contract awards exceeding $20,000 made in 2002. It has also organized a workshop to
disseminate the "Governance in the Kyrgyz Republic" report prepared by the World Bank, based on
service delivery survey conducted in 2001. In addition, by Board, the Government wvill: (i) publish
several other key documents including. the complete annual audit report of the Chamber ofAccounts on
the execution of the republican budgetfor FY 2001, as adopted by the Parliament; the list offirms
receiving tax concessions and exemptions, as an investment incentive; and the list of5O largest



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delinquent taxpayers and energy users. By second tranche, the Government will institute mechanisms,
satisfactory to IDA, for the regular publication of the documents menitioned above, includinig information
about the public sector reform program implementation, results of ongoing monitoring and evaluation of
the health sector reforms.
Before second tranche release the Government wvill (1) enact amenidments to the Laws} on) Guarantees
and Freedom ofAccess to Informati on, satisfactory to IDA, to enhance access of the public to official
information, strengthen the mechanisms of individuals to appeal against denials of requests for
informnation, and provide a system for monitoring of compliance of state bodies wvith the Lawv. It will also
establish a Governmeit Public Informationi Center to provide free access to official informationi of public
interest and to the portal and websites of the Government.
(iii)  Inmproving the Initeractioni betweein Regulatory Agenicies (aind Busi,iess Enterprises
The creation of a competitive business environmienit is one of cornerstonies of the growtlh and poverty
reduction strategy of the Kyrgyz Republic. Howvever, the interactioni betweell the State and enterprises
suffers from various problems that dampen the development of the private sector.
Many regulatory agencies are partially financed by 'special meanis funiding', vihicih includes fines levied
for infractioni of regulations. This encourages these agencies to carry out frequent inspections, with a
view to find faults that could generate revenue for them. The resulting excessive contact betxveeni
inspectors and businesses also generates opportunities for corruption. To prevent misuse of regulatory
and enforcement powers, through a Presidential Decree, the Government has taken a decision to prohibit
formation and use of special means funding of Governmental institutions through receipts from issue of
permits, licenses and certificates and fines imposed throughi inspections, except as specifically allowed
by law. By Board, the Government wvill issue an appropriate legal act, satisfactory to IDA, for this
purpose. The budgetfor 2003 and 2004 wvill be executed accordingly, as a condition of second and third
tranche release, respectively.
On the normative side, there is multiplicity of laws and regulations affecting businesses, many of which
are outdated. There is inadequate participation of the private sector in development of new laws and
regulations. Little assessment of the impact of new regulatory instruments on the business environment
is carried out before they are put into effect. This also encourages proliferation of regulations. To rectify
these deficiencies, the Government has formed an inter-departmental commission in the Ministry of
Justice to review proposals for improvement of legislation. Draft amendments to the Law on Normative
Legal Acts, requiring all draft normative legal acts regulating or otherwise restricting economic entities
to be published, openly discussed, harmonized and studied for their economic, social and budgetary
impact before being enacted, have been submitted to Parliament. Before second tranche release, the
amendments to the Law on Normative Legal Acts, satisfactory to IDA, relating to publication and
discussion of draft Acts regulating activities of economic entities wvill be enacted and by the third tranche,
its provisions will be fully implemented for all Acts, issued after the passage of the Law. Furthermore,
the Government will conduct Regulatory Impact Assessments of three new Laws and three new
regulations, to be agreed with IDA, in accordance with the new Law.
With regard to enforcement of regulations, regulatory agencies have overlapping authority, as a result of
which businesses face multiple inspections by different agencies for similar purposes. Private firms are
often unaware of the regulatory norms applicable to them, as also their rights and obligations when they
are subjected to inspections by State agencies. The mechanisms for addressing grievances of enterprises
against abuse of authority by regulatory agencies are weak.



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To address these problems, before the second tranche, the Government will connect the database of the
Ministry of Justice, whicih contains draft laws, enacted laws, regulations and instructions, to the Internet
to make it publicly available. By third tranche, the Government will enact a Law on Administrative
Procedures, satisfactory to IDA, to, inter alia, institute specific procedures for internal administrative
review of all actions which impose a penalty or burden upon, or deny a request sought by a citizen or
legal entity, and provide the right of appeal to a court, after exhaustion of adminiistrative appeals. With
regard to regulatory activities of specific agencies, by second tranche, the Government will develop and
implement a plan for divesting Kyrgyz Standard of its regulatory and enforcement funictionis to eliminate
conflict of interest. In addition, by third tranche, the Governmenit will develop and implemenlt a plan for
rationalizinig the food and drug inspections carried out by the Sanitary and Epidemiology Service (SES)
and the Pharimi Control Laboratory (PCL), respectively, publicize their rules and regulations and results,
improve oversight of these agencies by the Ministry of Health and create appropriate grievance
mechanissins.
(iv)   Strentgtheniing External Audit
An effective, indepenidenit external audit is essential for enforcing accoulitability in the public sector and
enabling the Parliament to oversee the working of the executive. Significant efforts were made to
improve external audit, under the PSRMAC, including clarification of responsibilities among the various
audit institutions such as the Chamber of Accounts (CA) - the equivalent of a Supreme Audit Institution,
the State Financial Inspectorate (SFI) under the Prime Minister's office and Internal Audit Department in
the Ministry of Finance. The Law on the Chamber of Accounts Law on the Chamber of Accounts of the
Kyrgyz Republic, 1998., established a 13-member CA, reporting to both to the President and the
Parliament. In 2000, the SFI was merged with the Chamber of Accounts with a view to avoid
duplication of functions.
The external audit function, however, continlues to have some deficiencies, as detailed in a recent
Country Financial Accountability Assessment (CFAA). The independence of the CA is compromised by
the fact that President approves its structure, staffing and employee salaries and Ministry of Finance
approves its budget. Besides the Republican budget, the CA is also entitled to receive 10 percent of the
amount recovered to the budget as a result of irregularities detected by it. This financing arrangement
leads to perverse incentives. Further, while the Law requires the CA to 'control' a large number of
financial transactionis, it does not require it to prepare a comprehensive report on the audit of the annual
financial Statements of the Government. There are also no requirements regarding the adoption of audit
standards. The majority of the staff in the Chamber of Accounts was transferred from the SF1 The staff,
though proficient in conduicting compliance audits, lack skills in and exposure to financial audits.
The NPRS includes the Government's objective of improving external audit to strengthen accountability
and transparency in Government spending With this end in view, before release of the second tranche,
the Government will enact amendments to the Lawv on the Chamber ofAccounts, satisfactory to IDA, to,
inter alia, (a) empower the CA to determine its own structure, staffing and employee salaries; (b)
authorize the Budget Comnnittee of the Parliament to review the draft budget proposals of the CA,
instead of the Ministry of Finance; (c) eliminate the provision entitling the CA to receive I0 percent of
the amount recovered to the budget as a result of irregularities detected by it; and, (d) require the CA to
adopt INTOSAI (or ISA) audit standards. The budget of the CA for 2004 and 2005 will be executed on
the basis of the amended law. Technical assistance to strengthen the capacity of the CA will be financed
by DFID.
B. INCREASE EFFICIENCY, EFFECTIVENESS AND ACCOUNTABILITY WITHIN THE
PUBLIC SECTOR



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(i)    Strengthenting Public Expenditure Management
A transparent, well-performing public finance system is essential for good governance and effective
economic management. It ensures that macro-economic discipline is maintained; scarce public resources
are allocated according to the Governmeit's priorities; funds are spent according to allocations approved
by Parliament; transactions are properly documented; and regular reports on the budget are made
available to the Parliament and public, to enable them to hold the Government accoulitable for public
expenditures and performance.
Since independence, the Kyrgyz Republic has made iilportanlt progress in establishilig the basic elemenits
of public expenditure maniagemilenit (PEM) institutions, includinig a legal framework and procedures for
budget management, a basic framework for inter-govermiiental finanice relation, a Treasury system -the
first among CIS, and an external audit functionl. These reformis, however, are only a first step in a long
and continiuous process. Several issues remain to be addressed to ensure the sustainability and effective
functioning of the PEM system. These include: (a) ineffective and unpredictable budget allocations as a
result of weak budget policy formulation processes, (b) inadequate implementation of the
inter-governmental finance system, (c) limited functionality of a manial Treasury system and weakinesses
in budget execution and (d) weak financial and managerial accountability as a result of underdeveloped
internal control systems and inadequate quality of External Audits. The Government's reform agenda on
public finanicial management included in the NPRS encompasses all these issues. The main challenlge is
to deepen the first generation reforms in order to respond to new realities of handling a significanit fiscal
adjustment, allocating resources to poverty reduction programs and addressing the consequences of weak
governance and public administration.
(a)    Establishing a nmore Strategic and Transparent Budget Formitla(tioln Process
The main objective of the reforms in this area will be to remove the structural impediments to a more
strategic and open budget policy formulation. Reforms will aim to improve the Inkages between policy
planning and resource allocation and establish the budget as the mail strategic instrument for
formulating, implementing and monitoring public programs. By strengthening the policy focus of the
budget, the Government will aim to establish a framework for prioritization of public expenditure
programs, and integration of the objectives of the CDF and NSPR within the budget. A more transparent
and strategic policy formulation process is also likely to create a buffer against pressures from vested
interests, which become difficult to resist in a policy vacuum.
The Government has intensified its efforts towards more strategic budgeting. It is making good progress
with the preparation of a simplified version of a Medium Term Budget Framework (MTBF) for
2003-2005, which aims to combine three important elements in budget formulation, the macroeconomic
framework, sectoral strategies and expenditure plans to implement these strategies. However, a
substantial agenda remains to expand and fully institutionalize the MTBF process as the main instrument
for Government's budget policy formulation. Initial actions include (i) consolidation of the economic
policy decision making process; (ii) improvements in the format for presenting the budget to the
Parliament; and (iii) better integration of the recurrent and investment planning processes.
Integrating the decision making process. Economic policy and budget decision making is fragmented
between the Budget Commission The Budget Commission is established every year at the start of the
budget process by decree of the Government and it is chaired by the Minister of Finance. It includes
representatives of the Prime Minister's Office, and several ministers, State committees and
administrative agencies.. The commission also includes representatives of the Legislative Assembly and



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People's Representative Assembly. which reviews and approves the recurrent budget and the
Goskominvest Committee Goskominvest Committee is a permanent committee of the Government that
reviews approves and coordinates foreign financed public investments and economic assistance. It is
chaired by the PM and has the First Vice PM, the Governor of the National Bank, various ministers,
Heads of Regional State administrations, Heads of local self-Governmenits and the Mayor of Bishkek as
its members. wihich reviews and approves the Public Investment Program (PIP) and the Development
Budget (aninual investment plan). Subsequently, both budgets are consolidated (as aggregates) and sent
to the entire cabinet for approval. This practice leads to incoherent decisions withi regard to macro and
fiscal discipline, sector policies and resource allocation, wilicil in turn can underminie the effectiveness of
the MTBF.
The Government has recently established an apex level Economic Policy Counlcil (EPC) for
strengthening economic policy maniagemiienit in the country EPC is headed by the PM and includes key
members of the Governmenit whio also participate in the other two committees. It can also call in other
members of the Government or other institutions, as necessary. Finally, the EPC has the right to consult
the Parliament on most matters of importance.. As the Government budget provides the strongest
measure of the Government's participation in the economy, the authorities are considering merging the
functions of the Goskominvest and the Budget Commission into the EPC This is to ensure that overall
macroeconomic and fiscal policy decisions occur at a point in the policy-making process that allows the
Governmenit to impose fiscally sound, realistic and bindinig budget constrainits and make policy
trade-offs. By second tranche, the Government will issue an appropriate legal instrument and modify
existing legislationfor integrating the functions of the existing Budget Commission and Goskomnnvest i7
the Economic Policy Council
Enabling the Parliament to review budget policy priorities. The fornat in whicih the Governmenit
presents the aninual budget to Parliament is geared towards the economic expenditure items and agency
expenditure levels, rather than sectoral and inter-sectoral policies and priorities. Such format not only
makes it difficult for the Parliament to see what policies the Government is proposing to finance, but also
creates confusionl about the authority that can authorize changes in the budget. It requires Parliament to
approve even unimportant changes in the course of budget implementation, distracting its attention from
major policy issues. Before second tranche, the Government will revise theformatfor presentation to
and approval by the Parlianient of the annual budget law, with the view to (i) make more transparent the
policy prioritiesfinanced by the budget, and, (ii) present sectoral ceilingsfor hvo consecutive years,
based on the MTBF. The Government will also issue a decree that defines rules of virement Rules of
virement define in detail what kind of reallocations/chianges can take place during the budget
implementation and who has the rigit to authorize them based on the provisions of the Law on Budget
Principles..
Integrating recurrent and investment budget planning processes. At present investment and
recurrent budgets are planned separately, to the extent that they are often driven by different objectives
and there is little consideration of recurrent cost implications of investment decisions. Moreover, there is
very little integration betNveen domestic investment planning and foreign investment planning, as the
majority of the investment budget is financed by donors. Budget classification structures are not
consistent between recurrent and investment budgets. In order to better integrate the budget planning
process, by third tranche, (i) the Ministry of Finance will develop and present to the Parliamenet an
integrated budget, for FY 2005, incorporating recurrent and investment expenditures The Governmeit
will also include estimates of recurrent cost implications of all investment projects, in the Medium Term
Budget Framework (MTBF), beginning with the 2005-2007 MTBF.



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Improving Effectiveness of Inter governmental Finances. Improvements in Inter-governmental fiscal
relations are directly linked withi better budget formulation and overall improvements in revenue
generation and expenditure management. The Government has made some progress since 1997, by
defining expenditure responsibilities of various Governmeit levels, establishilig appropriate revenue
assignments and codifying the framework for a system of inter govermilenital transfers between the
nationial Government and the Oblast level, withi support from PSRMAC. The decentralization process
has also progressed with elections of local self Governments (lowest tier of Government) in December
2001.
Implementation of the reforms, however, has been erratic, especially with regard to shifting of
expenditure responsibilities to sub-regional Governments, calculation and allocation of categorical and
equalization grants and the extension of the rules for revenue shar-ing at the lower levels of Govermilenit
Back sliding in several fronts has produced a seriously distorted structure in whicih elements of the
inter-governmental finance system are implemented in a manier, individually and as a whole, that fails to
produce desired outcomes. The implicit overriding objective of the current implemilenitationi appears to be
to provide flexibility to and insulate the Central Governmenit from budgetary risks. This is being done by
shifting those risks to regional and sub-regional Governments, whiichi are the levels less able to
accommodate such risks.
Making the existing rules transparent: One the significant problems faced in the implemenitationl of the
inter-governmental finance system is the non-transparenlt application of the existing rules and procedures
for allocating resources to the regional and especially sub-regional Governments. This has created room
for negotiated, unstable, discretionary and unpredictable budgets at the local level. Local Governments,
especially below the Oblast level, are not aware of how categorical and equalization grants are allocated
to them from the higher levels. In addition, various expenditure responsibilities are shifted to them
during budget implementation, especially in cases whiere they are able to collect more revenues than
planned. Such practices allow room for inefficiencies, discretion and rent seeking in the course of
allocating and executing the budget. To mitigate this problem, the Government has agreed to make
transparent all the existing rules and procedures, as well as the methodology used by the Ministry of
Finance to allocate resources to the local Governments. Before second tranche release, the Government
will develop, publish and make available to all interested parties, especially local Governments at all
levels, the rules and procedures for the calculation of equalization and categorical grants, as well as
other transfers.
Establishing stable tax sharing at the sub-regional level: The Law on the Basic Principles of the
Budget (1997) defines a tax sharing systeimn between the Central Government and the Oblast
Governments. However, below the Oblast level, tax sharing is very unsystematic and usually subject to
negotiations of rayons and cities with. Such a system does not assure any stability or predictability for
the sub-regional Governmenits. In addition, these negotiations and the high level of discretion available
to the Oblast to allocate resources to the sub-regional levels, totally undermine the role of elected local
self Governmenits. Recently, the government has extended the tax sharing system to the rayon level in
Bishkek City and Jalal-Abad. By Board, the Government will extend the tax sharing system to the rayon
level in at least three additional oblasts.
(b)    Strengthening Accountability and Transparency in Budget Execution
The main objective of the Government's reform program on budget execution will be to reduce
discretion and non-transparent practices in the disbursement of the budget funds, by improving financial
planning and cash management, bringing all the accounts of the budget institutions under the Treasury



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control and phasing out non-cash settlements. It is expected that this will not only make budget
execution more transparent, but it will also improve predictability in the financing of government policies
and programs.
Improving financial planning and cash management. The introductioll of a manual Treasury system
in 1996 substantially improved budget execution. However, several weaknesses have emerged, wihichi
undermine the Government's capacities to implement policies and programs and create possibilities for
extracting rents and favors during budget execution. The disbursement of budget funds (spending
authorizationi process) has resulted in an ad hoc system of daily negotiationis betweeni the budget
department, Treasury and spendinig agencies to finance mainlly protected expenditure items Protected
expenditure items consist mainily of vages, pensions, and social security contributiolns.. This comes fi-om
the lack of a proper system for finanicial planniiing and cash manlagemilenit, whilch is essential in a country
with very limited finanicial resources and an uneveni flow of liquidity in the Govermilenlt accounts during
the year. The existence of special meanis accounts and otlier accounts outside the Treasury General
Ledger (TGL) also inihibits good financial planiniig and cash maniagemenit durinig budget implemilenitatioln
The Government recognizes these issues and is taking measures to address them. It has already created a
new Financial Planning departimenit within the Treasury and is workinig oni streamlining the MOF
procedures for authorizinig spending. By Board presentation, the Government will also adopt a
regulation, satisfactory to IDA, that establishes a new procedure for the preparation of the monthily
financial plan. The new procedures for finanicial planning will be implemented before release of the
second tranche
Phasing out extra budgetary operations of Budget Institutions. Lack of appropriate cash
management systems in the MOF and the tight controls imposed on the budget institutions in the use of
cash resources have encouraged the emergence of fiscal operations outside the Government budget, in
violation of the Law on the KR Treasury Law oni the Priciples of the Treasury of the Kyrgyz Republic
passed on May 28th, 1994. Over 40 percent of the aggregate extra budgetary resources at the end of
2000 IMF report " Modernization of the Kyrgyz Treasury and Further Reforms in PEM, June 2002 were
held outside the Treasury Single Account (TSA), probably in cash or other bank accounts. Almost every
central Budget Institution maintains a so called "Special Means Accounts", which, until recently, was
operating outside the TSA. The amount of money deposited in these accounts in some cases is equal to a
Budget Institution's regular budget allocation.
The Government has initiated various actions to control the opening of such accounts, including the
reiteration of the basic provisions in the Annual Budget Law for 2002. However, a more systematic
approach needs to be adopted with regard to controlling extra budgetary fiscal operations of any form.
By second tranche, the Government ivill complete an inventory of extra budgetary accounts and issue a
Government Decree for transferring these Accounts, other than the Social Fund, into the Treasury
General Ledger. It wvill also adopt an Action Plan of gradually transferring these accounts into the
Treasury General Ledger and begin its implenmentation By third tranche, all extra-budgetary accounts
will be transferred into the Treasury General Ledger
Phasing out off-set transactions in the Treasury. There is a widespread use of off-set transactions
within the Treasury for paying utilities and some contractors. Such transactiolis have reached a
magnitude of around 25-30 percent of the annual budget (practically all the utility payments). These
off-sets are legitimized in the Treasury Manual, which permits the settlement of dues between the
Government and the suppliers of goods and services on a non-cash barter basis. While the Government
has designed special accounting rules to record these transactions, they present inappropriate budget



11
PID
management practices and might conceal liquidity problems in the real sectors, such as energy, for
paying tax liabilities to the Government's budget. Moreover they undermine financial planning since the
amounts dedicated to off-sets become by default non-discretionary spending and cannot be reallocated.
By the second tranche, the Government will issue a resolution adopting an Action Plan, satisfactory to
IDA, for phasing out off-sets and non-cash transactions in the budget and the Social Fund, and, by the
third tranche, initiate inmplementation of theAction Plan
Establishing systematic reconciliation between the Treasury records on payments made and
reimbursements received from the agent banks. At present there is no reconciliationi between the
Treasury records on payments made durinig the day on behalf of the Governmenlt and the amounit of
reimbursement to the agent banks for these tranisactionis. This process creates possibilities for the agent
banks to over-report on payments, be over-reimbursed from the National Bank of KR (NBKR) and utilize
the float during the montlh for their oWnI purposes. Apart from the ineffective managemiienit of the
Governmiienet's idle funds, such practice may create possibilities for non-tranisparent use of the funds on
the bank's side as well as conceal difficulties they might have in meeting reserve requirements. A
comparisoni between the Treasury records and the Settlements Saving Company (SSC) (one of the main
agent banks) for the month of December 2001 revealed major differences. At the end of December 2001
the cumulative difference was around 5 millioni soms See Country Financial Accountability Assessment
(2002) for a more detailed description of this process.. The Governmenit has agreed, by Board, that the
MOF will implement a systematic mechaniism for daily reconciliation of Treasury transactionis and
reimbursements from the NBKR.
The improvements in budget execution mentionied above will be complemented by the modernization of
the Treasury with assistance from the GTAC.
r
(ii)  Improving the Internal Control Environnient
While an external audit function is important to provide Parliament and outside stakeholders a means to
hold the executive responsible, within public entities, there is a need for a strong internal audit functioni
to assess financial and operational risks, design appropriate internal control systems to mitigate the risks
and conduct internal audits to assure management that the control systems are workinig and the
organization is operathig in accordance with applicable laws and regulations.
The Internal Audit function in the Kyrgyz Republic is underdeveloped. The Ministry of Finance
continues to maintain a small internal audit unit to carry out compliance tests for treasury transactions.
However, currently, there are no internal audit uniits within the line ministries, except in the Ministry of
Labor and Social Protection. There is a lack of clear legal obligations requiring line ministries to
imiaintain an adequate internal control framework Ad hoc steps taken to ensure financial probity have
proved to be ineffective in preventing abuse and waste of resources, as is indicated by several instances
of non-compliance with laws and fraud/corruption reported by the CA in its annual reports.
The Government recognizes the need to strengthen the internal control environment withini the public
sector Therefore, by second tranche, the Government it will prepare a strategic framework for the
creation of an effective internal audit function in public entities. Based on the framework, by third
tranche release, a Law on Internal Audit satisfactory to IDA, will be enacted and InternalAudit
Departments will be created in at least three Ministries, to be agreed with IDA.
(iii)  Improving Transparency, Value for Money and Accountability in Public Procurement
Procurement of goods, services and works constitutes about 35 percent of budgetary expenditures. An



12
PID
open, competitive procurement process, conducted on a level playing field, has the potential of
significantly increasing the efficiency of this substantial amount of public spending The resulting
savings would have the implicit effect of expanding the envelope of scarce resources, thus, enhancing the
ability of the State to better implement public policies At the same time, it is important to increase the
transparency and accountability in procurement, as this is an area where the risk of corruption is very
high.
In 1997, a Public Procuremiienit Law (PPL) based on the UNCITRAL Model Law was enacted. This law
established a decentralized procuremiienit system, under vlhicll procuremenlt is carried out by individual
public entities; created an indepenidenit oversight body (the State Procuremenit Agency), withi authority to
issue regulations; and established moderni procuremlienit processes. However, as indicated by the Country
Procurement Assessment Report (CPAR), conducted in 2002, the procurement system continiues to suffer
from various organizational, normative, procedural, finanicial and capacity deficiencies.
The State Procuremenit Agency xvas merged with the State Material Reserves Fund in 2001, to form the
State Commission on Public Procurement and Material Reserves (SCPPMR). This has created a
potential conflict of interest, as the agency is now responisible for both procuring for the Reserves and for
supervising itself in connection wvith those procurements. The organizational structure of the SCPPMR
needs to be improved to enlhance its capacity in legal, monitoring and evaluation, and procurement
capacity building functionis The funding iiechailisms of the SCPPMR also needs to be chaniged. While
part of the costs of the agency are met by budgetary allocations, it is also entitled to receive I percent of
notional savings made oni contracts concluded througlh unlimited tenders, creating conflict of ilterest. By
second tranche, the Government will prepare and implement a restructurilg plan, satisfactory to IDA, for
the State Commission on Public Procurement and Material Reserves (SCPPMR), to separate the
procurement function from the State Material Reserves, strengthen the legal, moniitoring and evaluation
and procurement capacity building functions of the SPA, and strengthen the capacity of procuring
entities.
There has been a proliferation of procurement rules issued by different authorities. Sinice 1998, 26
decrees, instructions and orders, dealing with different aspects of procurement, have been issued. Many
of these rules have led to confusion in the division of responsibilities and distortions in procurement
practices. There also appear to be frequent deviations from procurement procedures established by the
PPL, for instance, procuring entities frequently disclose estimated contract values to bidders, extend bid
submission deadlines informally and sometimes negotiate contact prices with selected bidders. Although
the PPL does not stipulate it, the SCPPMR has assumed a direct role in procurement through review of
bidding documents, evaluation reports, contracts, etc This makes the procuring entities excessively
dependent on the SCPPMR and seriously compromises the latter's oversight and supervision
responsibilities.
The efficiency and cost effectiveness of public procurement is also affected by deficiencies in budget
execution. Public agencies enter into contractual commitments based on their approved budget
allocations. But due to cash flow constraints of the Treasury, they do not receive the required funds in a
timely manner. Therefore, payments to contractors are frequently delayed. This discourages enterprises
from bidding for Government contracts, thus, limiting competition. It also raises the cost of goods and
services procured, as contractors factor the cost of potential payment delays in their bid prices. There is
no training strategy or program for providing procurement training to public servants on a regular basis.
As a result, procurement is being conducted largely by untrained and unqualified public officials.
In order to deal with the aforesaid deficiencies, the Government has already confirmed its agreement with
the CPAR Action Plan. By second tranche, the Government will implement the activities pertaining to



13
PID
2003 included in the CPAR Action Plan. These wvould include enactment of anmendments to the Public
Procurenmen1t Law and regulations required to streamline and consolidate ihe regulatoryframework, and
eliminatingfunding of the SCPPMR through 1 percent of notional savings realized in the procurement
process, while providing compensatoryfiundingfrom the Republican budget. By third tranche, the
Government vill implement the remaining activities of the CPAR Action Plan In addition, the
Government will prepare and implement a Procuremenit Training Strategy and introduce an attestation
program for Procurement Officers, to raise the qualification level of persons engaged in procuremenit.
To enhanlce accountability and transparency in the pubi c procurement, as a condition of second and
third traniche release, the Government will carry olut procuremilenit auidits of selected, high value items, to
be agreed with IDA, that affect service qzuality in the Hf ealth and Edlcatin07 sectors (e g selected
pharmacelticals on the List of Essenitial Drugs, text books etc) The audits will verify compliance wvith
the procuremlient rules and regulations, assess value for moniey withi reference to interilationial and
national market prices and recommenid consequenitial remedial actions. The procuremenlt audit reports
will be made public.
(iv)   Improvin7g Service Delivery in the Heilth, Education anmd Social Protection Sectors
Rationalizing expenditure responsibilities. In order to advance reformis in healthi and educationi, there
is a need to have a fresh look at how expenditure responsibilities can be streamlined and made stable
among various Government levels to ensure better service delivery. Before second trancile, the
Government will prepare draft amendments to the relevant legislation, satisfactory to IDA, to streamlinie
and clearly define the functional and expenditure responsibilities in the health sector. By the third
tranche, it will enact the amended legislation, satisfactory to IDA, in health sector and make similar
amendments to legislation pertaining to education and other sectors, as agreed with IDA.
Establishing a system for defining minimum service standards. In order to assure local fulfillment of
regional and national priorities, minimum service requiremenits must be defined for priority services
Without this, there is no basis for determining appropriate financing, or holding sub-national
Governments accountable for the proper execution of expenditure responsibilities. To the degree that
standards currently exist in the Kyrgyz Republic, they are based on physical and facility norms and are
not conducive to assuring any meaninigful level of accomplishment. Especially in the health sector,
where a different financing and service provision system is being implemented, the use of inputs and
physical norms as a means for allocating expenditures has proven outdated. It is important therefore, to
start the development of service standards. Before second trancihe, the Government will issue an
appropriate legal act defining the methodology for developing minimum service standards in the
education sector and refining those in the health sector.
Health Sector: The health sector of the Kyrgyz Republic, similar to those of other transition economies,
is facing the challenge of providing quality health services to the population in the context of shrinkiig
public expenditures on health care, an excessive number of health facilities and personnel and a weak
emphasis on cost-effective preventive and primary healthi care approaches. To address these problems,
since 1996, the Kyrgyz Republic has been implementing a comprehensive health sector reform program,
in a phased manner The Manas Health Reform Program . Key elements of the reform program include.
(i) rationalizing health facilities and personnel; (ii) improving equity in the geographical allocation of
resources, (iit) making the health system more cost-effective by strengthening preventive and primary
health care services, (iv) making providers accountable for efficiency, quality and access at the health
facility level, and (iv) reducing corruption in the health sector. New health care financing (the single
payer reform The single payer system refers to an arrangement where all funds at the oblast level (from



14
PID
oblast, rayon and city) are collected within a single organization (TDMNHIF). The purpose of the single
payer reform is to reduce the fragmentation and duplication among the various levels (oblast, rayon and
city) and streamline the financing and delivery of health services. Since one payer is responsible for
contracting of health services, this reduces administrative costs and also strengthienis the ability of the
MHIF to offer a coherent set of incentives to providers. ), was introduced in two regions in 2001 and in
two more regions in 2002 It extends the output-based purchasing methods of the Mandatory Health
Insurance Fulid (MHIF) to budget funids and also includes the formializationl of hospital co-paymelnts.
lmplementation progress on healthl reformis is satisfactory, but critical challeniges remain The recently
completed Kyrgyz Republic Public Expenditure Review discusses these challeniges is greater details.. In
particular, the organizational changes in primary care have not been supported by a correspondinig shift in
resource allocation from the tertiary to the primary level.
lImplementation of recent reforms in the healthl sector and especially the introductioni of the Single Payer
System requires changes In institutional arrangemenlts for budget management. As noted above, these
chaniges relate to the output-based purclhasinig and pooling of health resources. This new practice is quite
different from the current process of input based budgeting, wher-e healtlh providers (e.g. hospitals) are
financed on the basis of physical norms (number of beds, staff). Althouglh some chaniges in budget
management practices for the health sector have taken place in selected Oblasts, these are based on
temporary regulations rather thanl legislation, and this puts the health sector reformi process in a ratler
tenuous position. Another problem, especially in those oblasts that are implementinig the formal
co-payment policy for hospitalizations, is unplanined and nonl-tranlsparen1t re-allocations from health to
other sectors. Therefore, suitable changes need to be made in the legislative basis for budget
management and other reforms in the health sector, while ensuring that these are consistelnt with overall
budget management and financial accountability systems. By second tranche, the Government wvill enact
a Law, satisfactory to IDA, to provide a sound legal basisfor the single-payer reforms in the Health
Sector In addition, it will issue an? appropriate legal instrunment to revise the budget management
arrangenmentsfor the health sector consistenit with the Laws on/ Single Payer System, Basic Budget
Principles and Treasury.
Since its establishment in 1997, the MHIF has faced the challenge of timely and adequate transfer of
funds from the Social Fund (SF) for employed persons and pensioners and from the Republican budget
for children and persons with social benefits Between 1997 and 2002, the Social Fund has accumulated
arrears to the MHIF of 550 million Soms.. Among all categories, transfers for pensioners is the most
problematic. For example, between 1997-2002, only 18% of planned revenues for pensioners has been
transferred to the MHIF. Pensioners are generally heavy users of health services, and the fact that the
MHIF does not receive adequate funding for this is one of contributinig factors for MHIF financial stress.
By second tranche, the Government will amend current legislation to establish responsibility of the
Republican budget for the financing of allocations for healthcare insuralnce of pensioners and
unemployed.. The 2005 budget will include funds for this expenditure item.
Another problem affecting basic service delivery is local Governmenit contributions to the health sector,
especially from categorical grants (CG) In 1997, categorical grants were introduced as a Republican
budget transfer to oblasts to support the delivery of essential health and education services. However, the
categorical grants were used to cover inputs, especially salaries. Five years into their implementation, the
design of these grants is no longer in compliance with the ongoing reforms in the health sector that has
moved towards output-based purchasing. The lack of concordance between the reforms in the health
sector and the design of categorical grants has meant reduced incentives for the health sector to
rationalize personnel, since they will mean less funds from CGs. Given this situation, it is critical that
health sector allocation under the CGs are pegged to outputs (delivery of services). The resource
allocation formula under the CG is linked to inputs (mainly salaries) and therefore negatively affects



15
PID
health sector allocations which are increasingly moving towards output-based allocations. The design of
CGs needs to be synchronized with the current developments in the health system. By second tranche,
the Government will adopt an appropriate legal act to define capitation-basedfornnizmlafor calculating
categorical grants in the Health sector. Before third tranche, it will imple7ment the newt, categorical grant
forinula.
Despite the progress in the health sector, there have been few changes in the allocation of public funds
towards primary care and regions with the greatest healthi needs. For example, hospitals consume 70
percent of public expenditures, and the geographical allocation of resources is skewed withi Bishkek city
being favored over the other regions. Improvements in allocative efficiency of public funids are needed to
improve the poverty impact of public expenditires on health care. Reallocation is contingenit on the
implemiientationi of the single-payer system in all oblasts and, especially, in Bishkek city Implemilenitation
of thle single payer system in Bishkek is needed to create incentives for supply-side rationalizationi wliici
is needed to reduce the overall envelope of public spending on Bishkek healthi facilities. Rationalizationi
in Bishkek is supposed to free-up resources for improving the geographical equity and incr-ease spendinlg
on public healthi, preventive and primary healthi care services.. Accordingly, by Board, the government
wsill coniplete drafting appropriate legislatlive acts on rationalization of healthfacililies in Bishkek City,
satisfactory to IDA
Education Sector: In principle, local Governments finanlce primary and secondary schlools from their
owni resources. The current practice of financing teachers' salaries under the Republican budget has the
very compelling advantage that it ensures that even the poorest localities are able to pay teachers' salaries
and keep their schools open. But it has a serious disadvantage in that it does not include financing for
textbooks. Textbooks are financed by parents under a textbook rental scheme. Although rental charges
appear modest in an absolute sense, the extremely low level of incomes means that many houselholds
cannot afford the cost of textbook rental, thus preventing children from having textbooks. This is a major
reason for low quality and incomplete school attendance in poor areas of the country - including many
rural areas.
More fundamentally, the practice of financing teacher salary costs under the Republican budget treats
existing teacher costs as non-discretionary and hence tends to legitinate what may be an inefficienit
delivery of education. A preferred basis for central financing of education costs is through a
differentiated capitation system of financing, which pays for education on the basis of the number of
students enrolled in each type of program. Under this approach, it is important that the financing formula
reflect intrinsic sources of higher costs - such as dispersed population, and a higher-than-average density
of students with specials learning needs. But developing such a formula will require preparation in the
form of a careful examinationi of the sources and magnitudes of intrinisic cost differences prior to
implementation of the formula. Another problem is that the current financing formula provides virtually
no financing for in-service teacher training. Failure to fund teacher training is a high-risk and
low-efficiency option, because it means that the education system's most important asset - its teachers -
are not equipped to perform their work effectively, especially in introducing the important innovations
planned under the education reform. To deal with these issues, the Government will undertake studies of
the cost of system-wide textbook provision for pre-university education and the costs of efficient delivery
of pre-university education for different sizes, configurations, and locations of schools. As a condition of
second tranche release, the Government will adopt an appropriate legal act to define capitation-based
formula for calculating categorical grants in the Education sector, and implement the new formula
before the third tranche release
Social Protection: Pension reform in the Kyrgyz Republic is at a critical juncture. The recently



16
PID
completed Public Expenditure Review highlights the need for the Government to clarify priorities among
the multiple objectives of the current pension system, based on the 1997 reformis Proposals for a new,
fully funded pillar within the Kyrgyz pension system have been advocated because of a concern that
incentives for contributors to participate in the current system are inadequate, and a belief that
introduction of a funded pillar could promote economic growtlh by raising the level of savings and
encouraging the development of financial and capital markets. The Bank's techinical assessment of the
proposal for a fully-funded pillar indicates the need for first investigatinlg the prerequisite costs, and
feasibility of this approach in current Kyrgyz circumstances, before taking any irrevocable steps to create
and imiplement a fuLided system. By third tranclhe, the Governmiienet will retain the basic structure of the
curienit pensioni system ulichianlged until: (i) all past and current obligations of the Social Fulid have been,
and are continuilng to be, paid in cash and (for currenit obligations) on time and (ii) the Government has
provided financing and implementationi plans that are satisfactory to IDA for any proposed chaniges in the
basic structure of the current pensioni system.
(v)   Enhantcintg the Effectiveness of the Civil Service
The COun1try is in the initial stages of developing a professional civil service The terms 'Civil Service' or
'Civil Servant' are meant to include permanenit public employees, exercising State authority as managers
and staff in Ministries, State Agencies, State Committees, State Commi1issions, Oblasts, Rayons and Local
Governmenits, as distinguislhed from political appointees, support staff, teachers, healtlicare workers,
uniformed services and workers in State Owined Enterprises. The terms 'Public Service' or 'Pubic
Servant' are used in a broader sense and refer to all persons paid out of the national budget. In 2001,
total State employment was about 300,000, of which about 22,000 were civil servants. . A Lawv on Civil
Service (LCS), enacted in 1999, defines the civil service in very broad terms and covers political
appointees, such as the Prime Minister, members of the Government, nominees of the President and
Deputies of the Parliament and their assistants and advisers, as well as career civil servants. Thus, the
line betweeni permanent civil servants and the political executive is blurred. Political appointments also
extend quite deep down the administrative hierarclhy. Changes in political heads of ministries and
agencies, therefore, lead to large scale chaniges in incumbents at lower levels. The LCS also provides
inadequate protection to career civil servants against politically motivated dismissals. As a result, the
independence, impartiality and quality of advice provided by them to the political executive suffers.
While the LCS and associated regulations have created a basic framework for humani resource
management in the civil service, this framework has not been fully institutionialized. In addition, the
current rules need to be improved in several respects. Remuneration of the civil service, as also of other
public services, remains way below competitive levels. Low salaries lead to low quality of public
services, encourage misuse of regulatory authority and create incenitives for corruption. Turnover of staff
at skilled levels is quite high. Although the Government has carried out retrenchment of staff in the past
years, there still appears to be scope for further rightsizinig. While new skills are sorely needed to equip
civil servants to handle the evolving role of the State, no systematic traininig needs assessment is carried
out Most training is ad hoc and depends on donor funding. Finally, the lack of adequate institutional
arrangements for managing the civil service is a major deficiency. The capacity of the Civil Sector
Division in the President's Administration, which performs this function, is extremely limited, as is the
capacity of the personnel departments of ministries and agencies.
The Government is keenly aware of the need for a well-qualified, professional civil service, that would
assist it in formulating and implementing policies for effective governance and poverty reduction. It has
taken various measures in the recent past towards this objective. Merit-based competitive recruitment
was launched in 2001; the compression ratio of salaries in the CS was increased to improve motivation; a
process of assigning Class Ranks to civil servants was initiated in 2001; in order to trim the size of the



17
PID
civil service 1,200 civil servanits were retrenched in 2001 and 1750 civil servants and managers in
budgetary entities are expected to be retrenched in 2002; a Presidential decree on Ethics of Civil Servants
was issued and Ethiics Commissions were created at the level of the President's Administration and other
Ministries and Central agencies. In continuation of its efforts, by Board, the Government will Initate
discussion of draft amendments to the Lawv on Civil Service ivith relevant stakeholders By seconid
tran1che, the Government witll. (i) enact amendments to the Lawt, on Civil Service, satisfactory to IDA,
wvith a viewv to separate political appointees and career civil servants, increase competitiveness in
recruitment and proinotion, redtuce political inteiference in personnel management decisions; improve
incentivesfor peiformance and integrity anid improve institional arrangemnentsfor management of the
civil service, (ii) ensure that all persons appointed to "Main " anid "Lead" positions in 2003 are
r ecrluited anidpromiioted, in accordance ivith the Civil Service Law, and (i ii) implemenit an Action Plan
for rightsizinig of staff in state adminiistrationi bodies, based on functionial reviews completed in 2002. By
third tranche, the Government wvill (i) establish the Civil Service Management Agency (CSAIL) and
ensure that it isfiully operation7al, by appointing management and staff pr-ovidinig adeqluate budgetary
r esour ces, anid developing ru-iles and regulationsfor the functioning of the agency; (ih) enisure that all
personis appointed to "Main " and "Lead" positionis in 2004 are recriuited and promoted, in accordance
iwith the Civil Service Lait'; (mii) implemenit an Action Plan for r ightsizinig of staff in state adininistration
bodies, based on functional reviews completed in 2003-2004 and (iv) implemenit a revised remuneration
structure for the civil service.
(vi)  Streaniliniiig Structitre of Governiteiit Ministries naid Agentcies
The State in the Kyrgyz Republic, like all other FSU couLitries, inherited a wide range of functions.
While its role has shrunk since then, its span of activities continues to be too large relative to its
resources and capacity. The roles and responsibilities of Government at the central, oblast, rayon and
local level are not entirely clear. At the central Government level, there is duplication and overlapping of
functions between the President's Administration and the Office of the Prime Minister, between different
ministries and between different units, departments and agencies under individual ministries. At the
regional level, there is a superimposition of a Presidential admilistrative netvork over regular
Government organizations, leading to ambiguity about the authority of the governors and the mniistries
over subordinate organizational units and their accountability for service delivery.
In addition to the functional review of the Ministry of the Health mentioned above, the Government has
carried out functional reviews of the organizational structure of the Ministries of Education and
Agriculture and Water Resources, with a view to rationalize the organizationi structure and remove
duplication of functions. Other ministries and agencies are in the process of carrying out their own
funictional reviews, with assistance from DFID and UNDP. By second tranche, the Government will
extend Functional Reviews of Ministries of Health and Education and two other Ministries, to be agreed
with IDA, to cover their oblast and rayon branches and affiliated agencies, such as the Mandatory Health
Insurance Fund, and, by third tranche, implement the reorganization plans in the Ministries of Health
and Education, and in two other ministries, as agreed with IDA.
5. Financing
Total (US$m)
BORROWER                    $0.00
IBRD
IDA                         $20.00
Total Project Cost          $20 00



18
PID
6. Implementation
The program will be implemented by a Coordination Council (CC). It is chaired by the Deputy Head of
the President's Administration and the Vice Prime Minister is the Deputy Chairmani. The Minister of
Finance, as xvell as other officials of the Government, will be members of the Coordination Counlcil. A
Project Management Group (PMG), reporting to the Council will be established to facilitate and
coordinate implementation of the reform programii, including the management of technical assistance.
The PMG will subimiit progress reports to the Governmeit and the IDA, one monith after the end of each
quarter. Techinical Committees, wilose member-s would be drawn from line managers and staff, will be
formied to guide and coordinate the techinical aspects of the reforms and ensure buy-in at the operational
level These Committees would be supported by full-time project coordinators. Implemenitation of the
program will be supervised through at least twvo IDA supervision missions every year. Follow up actions
between missions will be taken by staff based at headquar-ters and at the Resident Mission at Bishkek.
Strong donor coordination will be mainitainied during project implementation. This would take the form
of joint review of TORs for important consultanlcies witil relevant donors; coordinationi of TA activities
to ensure that inter-linked activities are completed on time; exchanlge of supervision reports; joint
supervision missionis, wherever feasible; and discussions with development partners durling each
supervisioni mission.
7. Sustainability
Improvemilenits il public sector performance take a long tine to materialize and are vulnerable to
opposition from vested interests. Strong, sustained political commitimienit is therefore absolutely
necessary. Waning of political support can significantly slow or even derail the reforn process. The
limited institutional capacity of the Government also poses a serious risk Further, the proposed reforms
involve a large number of Government agencies, stakeholders and donors. Deficiencies in coordination
betweeni these actors could also seriously affect implementation. In order to mitigate these risks, the
government's own reform agenda, as spelled out in the NPRS, has been made the core of the GSAC
reforms, so as ensure ownership. The operation requires the Government to undertake several measures
before Board presentation, to demonstrate its commitment to reform. Also disbursements have been
back-loaded. Significant technical assistance will be provided to augment the Government's capacity A
broad- based project coordination and management structure has been created to ensure active
involvement of relevant stakeholders and close coordination of different activities. Notwithstanding these
measures, the overall risk of the operation will remain high. This is due to the inherently difficult nature
of institutional and governance reforms, which are subject to a number of, difficult to control, political,
social and economic variables. The higih risk, is however, matched by potentially high rewards
8. Lessons learned from past operations in the country/sector
In most of the former FSU countries, it is important to complement structural adjustment operations with
technical assistance projects. Due to limited capacity, it is very difficult of the governments to develop
and implement policy reforms without adequate technical assistance. Keeping this in view, the GTAC
has been designed as a vehicle to support the implementation of the GSAC.
Reform of public sector institutions is a long, complex and difficult process, that requires sustained
efforts in multiple directions. Progress is often slow and erratic. Notwithstanding this, in-depth
institutional reform is the only way lasting improvements in performance can be achieved. The
challenges posed by the reforms for the Kyrgyz Republic are recognized both by the government and the
Bank. However, given what is expected of the public sector for implementing the CDF and INSPR, the
project is designed around an integrated approach to address some of the major institutional deficiencies
of the public sector.



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A review Civil Service Reform A Review of World Bank Assistance Operations Evaluation Division, The World Bank Report # 19599,
dated August 4, 1999 of Bank-supported Civil Service Reform (CSR) projects found that these projects were
largely ineffective in achieving sustainable results in downsizing, capacity building and institutional
reformFor the Europe and Central Asia Region, 80% of completed project involving downsizing and 100% of projects involving capacity
building were rated satisfactory 50% on ongoing or recently completed project involving capacity building wvere found satisfactory (Annex 6 of
report ibid). This was, in part, due to political difficulties in implemenltinlg CSRs and, in part, due to a
technocratic approach that failed to mainstreaii inistitutional analysis and develop a coherent framework
for interveninig in adminiistrative systems. The reviewv recommended the follovinig measures to improve
results in this area. (a) capacity building interventions should be systematically linked to job descriptions
aild imnonitorable performance of civil servants and their Units, (b) reformis should be preceded by
institutionial assessment of admniistrative systems and analyses of labor mar-ket trends, in addition to
budget scenarios, (c) adequate thime should be allowed for implemenitationl, (d) a participatory approach
should be followed to nurture reforn constituenicies, and (e) the feasibility of introducinig results-based
management should be explored. In designinig the civil service strengtheninig sub-componienit of the
project, these recommendationis have been kept in minid. Refinemeit of job descriptions and
development of a performance evaluationi system wnvill be carried out as part of the project; assessment of
civil service deficiencies carried out by the UNDP and EU-TACIS have been taken into account and
studies under the PHRD grant for GSAC are being conducted to further assess administrative systems
and labor market conditions; a five year time horizoni has been adopted to facilitate institutionalizationi of
the reforms; and broad consultation with stakeholders have been carried out and will be continued during
project implemenitation. The project focuses on getting the basic institutionial framework and
management systems relating to the civil service right. At this stage, introduction of sophisticated
results-based maniagement in the Kyrgyz Republic seems premature. This could be part of the next phase
of reforms.
Public sector reform processes can be very demanding on the organizationis and persons who implemenit
them. Therefore, it is important not to overload the reform agenda. Keeping this in view, the scope of
the project has been limited by exclusion of judicial and tax and customs administrationl reforms, that
were considered initially.
Line managers are often too busy with urgent issues, to focus attention on medium term reform efforts.
Yet their involvement in the reform process is critical to success. Therefore, it is important to have
project management personnel who are devoted to the reform process full tine and can obtain inputs of
line managers at critical points in the reforn process, while maintaininig the momentum of project
implementationi. Project management arrangements have been designed withi these considerations in
view.
Effective change management requires strong stakeholder involvement. For this purpose a continuous
communication campaign would be conducted to apprise stakeholders of the intents and purposes of the
reform, incorporate their opinions and advice in developing project activities and allay unfounded fears.
Information technology (IT), if used effectively, provides an excellent opportunity to improve
transparency, efficiency, accessibility and service delivery of the public sector. However, investments in
IT need to go hand in hand with more fundamental institutional reforms. The project will use IT to
underpin institutional reforms in budget execution. Since information system procurement can be
challenging, technical assistance from the IMF would be mobilized for the computerization of the
Treasury. In addition, an IT Specialist would be recruited in the PMG and support from the Bank's IT
experts would be also be mobilized.



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9. Environment Aspects (including any public consultation)
Issues  : The operation will have no direct impact on the enviroinenlt. For the purpose of OD
4.01, it has been placed under Category C, which does not require an environmental assessment.
10. Contact Point:
Task Manager
Jit Bahadur S. Gill
The World Bank
1818 H Street, NW
Washington D.C. 20433
Telephone (202) 473-6771
Fax: (202) 522-2751
11 For information on other project related documents contact
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