Strengthening Financial Management Capacity IDF Grant BACKGROUND AND RATIONALE  For EU accession, Romania has established a comprehensive legal framework for public financial accountability that is aligned with international practices and the EC Financial Regulation. This has also been noted by the Bank's Country Financial Accountability Assessment (CFAA), finalized in December 2003. Romania has received grant assistance from the EU's ISPA, SAPARD, and PHARE (these are pre-accession funds). After accession in 2007, the structural and cohesion grant funds that will be available are: European Regional Development Fund (ERDF), Cohesion Fund (CF), and European Social Fund (ESF). The development of internal control mechanism started with the establishment of the National Fund System for the pre-accession funds.  EU assistance was also provided to the Implementing Agencies through the Extended Decentralized Information System. However, given the large volume of post-accession funds - 50% of which will be for decentralized authorities, adequate financial management capacity needs to be developed for the Ministry of Public Finance (MoPF) and the Beneficiaries. Specifically, capacity needs to be increased in the following areas, as already identified under the CFAA: accounting, reporting, internal control and internal audit. On March 31, 2005, the General Directorate of Managing Authority for Infrastructure (MAI) was created through a Government decision.  The MAI will co-ordinate activities related to the EU's ISPA program and Cohesion Funds, including financial management.  The Romanian Government has also proposed to the EU that the environment and transport activities of the ERDF are also managed by the MAI. OBJECTIVE The objective of the proposed IDF grant is to strengthen the financial management capacity of the Managing Authority for Infrastructure (MAI). This IDF proposal is to support the MAI by taking into account the needs of the MoPF and the municipal Beneficiaries that have to undertake environmental investments.  Given their decentralized structure, these municipalities have greater financial management needs compared to the transport Beneficiaries at the central Government level.  Thus, this IDF will take into account the financial management needs of the municipal Beneficiaries. This proposal has been prepared in full co-ordination with the EU and the MoPF so that activities under the IDF will complement ongoing technical assistance programs related to financial management of EU funds. DESCRIPTION OF ACTIVITIES The MAI is a new entity and its institutional strengthening is to be carried out in a phased manner.  While MoPF will support the development of the entity, the following external assistance has been identified: Dutch grant (managed by the Bank); proposed IDF assistance (this proposal); and upcoming assistance from the EU.  The activities to be supported will be complementary in nature and will last over different periods as indicated below: Proposed IDF assistance:  Assistance to utilize post-accession funds; focus only on the environmental sector and with the municipal beneficiaries; and training on the use of the post-accession funds; The proposed IDF assistance fits in the overall program undertaken by the MoPF to strengthen the MAI.  Activities under the IDF grant will be geared towards the use of the post-accession funds and initiating training on matters related to financial management and project appraisal.  The EU assistance will include activities that will complement the IDF grant activities and implement the recommendations made under the IDF grant.  This is possible since the EU assistance is not yet fully defined and will be long term in nature which will allow the recommendations under the IDF grant to be implemented. The IDF will support two tasks.  Each task comprises: (a) a needs assessment and recommendations on institutional capacity building; and (b) training to implement the recommendations until such time the EU assistance is made available.  The early training, supported under the IDF grant, and practical experience of the MAI in handling the post-accession funds will develop the institutional capacity as envisioned by the MoF and the EU. Task 1:  Financial Management Assessment in MAI Since the MAI is a new entity, technical assistance is required to determine specific financial management needs of post-accession funds to allow effective fund flows to the Beneficiaries. A.   Financial Management Assessment:  This will include (i) assessment of the financial management and control needs in the MAI which will delegate the tendering and contracting functions to the Implementing Agencies and Beneficiaries; (ii) review of the activities carried out by the Implementing Agencies to better define the role and responsibilities of the MAI; and (iii) review of the financial management issues faced by at least four representative Beneficiaries (municipalities) under the ISPA Program.  Most of these municipalities have inadequate capacity to monitor operating costs and physical progress in investments, manage debt and assets, plan for investments, and benchmark quality of services.    As an output of the above work, a report will be prepared that will recommend financial management needs of the MAI.  The report will provide guidance on the training needs of the MAI personnel. The report will also draw from the lessons learned in other EU countries. B.    Workshop and Training:  A workshop will be held with the MAI, the Implementing Agencies, and selected Beneficiaries that will utilize the post-accession funds.  The purpose of the workshop would be to: (i) discuss the Financial Management Assessment (above); and (ii) agree on the recommendations that would have to be implemented by the MAI, Implementing Agencies, and the Beneficiaries. The IDF will also support training activities for the MAI, Implementing Agencies, and the Beneficiaries as per the recommendations of the Financial Management Assessment.  In the training sessions, the experience of EU countries will also be discussed. Task 2: Technical Evaluation of Projects by the MAI For post-accession funds, projects above the threshold of # 50 million and # 25 million for the transport and environment sector, respectively, have to be evaluated and approved by the MAI. The current staff in the MAI are drawn from MoPF that have a financial sector background but are not familiar with technical cost benefit analyses for investments.  Assistance will be required to prepare guidelines for cost-benefit analysis of projects that will be used by the MAI, the Implementing Agencies, and the municipal Beneficiaries to determine economic investments. A.   Guidelines on Cost-Benefit Analysis:  A report will be prepared that will: (i) provide guidelines on performing cost-benefit analyses for water and wastewater projects.  Special attention will be paid for large projects (> # 25 million).  These guidelines need to be drawn up so that investments are economic in nature; (ii) outline the roles and responsibilities (collection of data, performing the analysis etc.) of the MAI, the Implementing Agencies, and the municipal Beneficiaries; (iii) identify the institutional strengthening needs in the MAI, Implementing Agencies, and the Beneficiaries to satisfactorily carry out a cost-benefit analysis based on EU guidelines; and (iv) present a model to perform cost-benefit analysis that will help the authorities to carry out the  evaluation of the projects. B.   Training:  Training will be provided on the use of the guidelines prepared above.  The MAI, the Implementing Agencies, and the selected Beneficiaries will use the guidelines to prepare projects that have been identified for post-accession funds. BENEFITS The above tasks will help Romania to absorb the post-accession EU funds effectively, manage the EU resources adequately, and provide reports to the EU on the use of the funds.  The IDF support will be timely as the MAI has been created in March 2005 and needs technical assistance to rapidly function as an effective entity so that Romania has access to the post-accession EU funds in 2007.    ,, Proposed Use of Grant Funds Costs by Categories    International and local consultant,,US$ 295,000    Audit,,                             US$   5,000    TOTAL,,                             US$ 300,000 TF055764 Assist the Ministry of Economy and Finance/Managing Authority for post ISPA (MA) projects in streghtening its financial management capacity to undertake environmental investments through: (a) Financial Management Assessment capacity in MA by provision of technical assistance to: (i) asses the financial management and control requirements in MA where tendering and contracting functionswill be delegated to the Implementing Agency for transport and enviromental programs and Beneficiares under European Union accesion funds program, and(ii) review the financial management issues faced by Beneficiares under the European Union pre-accession funds programs.  (b) Technical Evaluation of Projects by MA: Provision of technical assistance to (i) prepare guidelines for performing cost- benefit analysis,(ii) delinate the responsibilities of MA, Implementing Agency, and Beneficiares when collecting data and performing analysis,(iii) identify institutional stregthening requirements of MA, Implementing Agency, and Beneficiares to satisfactorily carryout a cost-benefit analysis, and(iv) prepare a model to perform cost-benefit analysis to help the authorities to carry out the evaluation of the projects.