Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 40422 - ET PROJECTPAPER ON A PROPOSEDADDITIONAL FINANCING INTHEAMOUNTOF SDR 137.05 MILLION (US$215 MILLIONEQUIVALENT) TO THE FEDERALDEMOCRATIC GOVERNMENT OF ETHIOPIA FORTHE PROTECTIONOF BASIC SERVICES PROJECT November 30,2007 HumanDevelopmentI11 CountryDepartmentEast3 Africa Region This documenthas arestricted distribution andmaybeusedbyrecipients only inthe perfonnance oftheir official duties. Its contentsmaynot otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective October 31,2007 Currency Unit = EthiopianBirr (ETB) ETB9.09 =US$ 1.00 US$1.56936= SDR 1.00 FISCALYEAR July 8 -July 7 EFYOO=IDAFY 08 EFYO1=IDAFY09 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank BOFED Bureauo f Finance and Economic Development CIDA Canadian International Development Agency CSRP Civil Service Reform Program DFID Department for InternationalDevelopment, UK Government DP Development Partner DLDP District Level Decentralization Program EBS Enhanced Basic Services Program EFY EthiopianFiscal Year EMCP ExpenditureManagement and Control Program ESMF Environmental and Social Management Framework FMR Financial Management Report FTAPS FinancialTransparency and Perception Survey GAVI Global Alliance for Vaccines and Immunizations H C Health Center HSDP Health Sector DevelopmentProgram ICAS InterimCountry Assistance Strategy IFR Interim(Unaudited) Financial Report ITN Insecticide-Treated Nets JBAR Joint Budget and Aid Review KfW German Development Bank LIG Local Investment Grant MA Management Agent M C B Ministryo fCapacity Building MDG Millennium Development Goal MDTF Multi-Donor Trust Fund MOFED Ministryo fFinance andEconomicDevelopment MOH Ministryo fHealth MTR Mid-Term Review NBE National Bank o f Ethiopia OFAG Official o f the Federal Auditor General PASDEP Plan for Accelerated and Sustained Development to EndPoverty PBS Protection o f Basic Services Project PDO Project Development Objective PEFA Public Expenditureand Financial Accountability PSCAP Public Sector Capacity BuildingProgram FOROFFICIAL USE ONLY RPF Resettlement Policy Framework SDPRP Sustainable Development and Poverty Reduction Program SNNPR Southern Nations, Nationalities and Peoples Region SPG Specific Purpose Grant UNFPA UnitedNations PopulationFund UNICEF UnitedNations Children's Fund WOFED Woreda Office o f Finance and Economic Development Vice President: Obiageli Katryn Ezekwesili Country Director: Kenichi Ohashi Sector Director: Yaw Ansu Sector Manager: Laura Frigenti Task Team Leader: Trina Haque This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. FEDERAL,DEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCINGFORTHE PROTECTIONOF BASICSERVICES CONTENTS I. Introduction.............................................................................. 1 I1 1 8 Proposed Changes....................................................................... Rational for Additional Financing.................................................... Background for Additional Financing................................................ I11 Iv 10 V. Project Costs and Financing........................................................... 13 VI. Project Implementation, Financial Management, and Procurement Arrangements. .......................................................................... 13 VI1 Consistency with CAS................................................................. 16 VI11. Ix. Economic Analysis o f Financing Gap............................................... 16 X. Environmental Assessment........................................................... Appraisal o f Restructured and Scaled-up Project Activities...................... 18 18 XI. Expected Outcomes................................................................... 19 XI1. Benefits and Risks..................................................................... 19 XIV. XI11. Financial Terms and Conditions for the Additional Financing................. Credit Conditions and Covenants................................................... 25 25 SCHEDULES Schedule A : Estimated Project Cost and Source o f Financing ............................ 27 Schedule B: FinancingPlan and Disbursement Schedule ................................ 28 Allocation and Disbursements o f Additional Financing................... 29 Schedule C: Procurement Arrangements.................................................... 30 Schedule D: Timetable o f Key Project Processing Events and Project Team........... 38 Schedule E: Performance Indicators......................................................... 39 Schedule F: Financial Management and Disbursement Arrangements................. 45 Schedule G: Environmental and Social Safeguards Management Arrangements...... 58 Schedule H: Grant ............................................................................. Monitoring and Evaluation Framework for the Pilot Local Investment 61 Schedule I : Economic and Fiscal Analysis for the Pilot Local InvestmentGrant .... 63 Schedule J: Millennium Development Goals............................................. Additional Financing for Component 2: Promotingthe Health 68 MAP: IBRDNo.Country Schedule K: at a Glance............................................................. 69 33405 PROJECTPAPERDATASHEET Responsible agency: Federal Ministry o f Finance and Economic Development, Federal Ministry o f Health Revised project development objectives/outcomes [If applicable] The original development objectives o fthe projecthave not beenrevised. Does the scaled-up or restructuredproject trigger any new safeguardpolicies? If so, indicate which one(s) For the Pilot LIG Subcomponent, the Safeguard Policies for Environmental Assessment OPBP 4.01 and Involuntary Resettlement OPBP 4.12 are triggered inthe context o f the support for the construction o f small-scale civil works implementedthrough the multi-sector Specific Purpose Grant (SPG) from the Federal Government. The Environmental and Social Management Framework and a Resettlement Policy Framework have been completed and disclosed incountry. For Component 2, SafeguardPolicy for Pest Management OP4.09 i s triggered inthe context o f the indoor use o f insecticides. The Guideline for Malaria Vector Control and the Guidelines for Indoor Residual Insecticide Spraying have been prepared and are inuse. These guidelines have been disclosed. For Additional Financing [ ] Loan [ ] Credit [ XI Grant For Loans/Credits/Grants: Total Bank financing (US$m.): US$215.00 million Proposed terms: IDA Grant Financing Source Local Foreirn 1 Total Borrower 1,159.23 IBRD/IDA 32.00 215.00 African Development Bank 55.00 Canadian InternationalDevelopment Agency 20.86 20.86 Department o f InternationalDevelopment, UK 126.99 10.00 136.99 Government (DFID) European Commission 189.00 7.04 196.04 KfWGermanDevelopmentBank 14.00 14.00 The Netherlands Government 7.00 7.00 ITotal 1,727.22I 76.90 I 1,804.12I I. Introduction 1. This Project Paper seeks approval of the Executive Directors to provide additional financing in the amount o f SDR 137.05 million (US$215 million equivalent) to the Federal Democratic Republic o f Ethiopia for the Protection o f Basic Services Project (the Project or PBS), presently financed under the first IDA Grant No. H224-ET. This i s the first additional financing proposal for this Project and for which a second IDA Grant i s proposed. 2. The proposed additional financing would largely provide for the financing gap associated with the completion o f Component 1 - Promoting the Delivery o f Basic Services by Sub-national governments, and Component 2 - Promoting the Health Millennium Development Goals, supported through the Project. In addition, additional financing i s also sought for restructuring to scale up project impact through the implementation o f a new and complementary activity related to the delivery o f basic services, termed the Pilot Local Investment Grant (LIG). The Project's development objectives would remainunchanged. 3. Funding to initiate the LIG window would expand the mechanisms available to better achieve the project development objective. While the existing Component 1 reimburses Government for recurrent costs related to basic service delivery by regional and local (woreda) governments, the LIG would finance a pilot effort to increase both the quality and quantity o f capital investment by local governments and thereby scale up the Project's impact and development effectiveness in the delivery o f basic services. The Basic Services and Pilot LIG Subcomponents would thus complement each other. 4. The proposed additional financing would largely finance: (i)Regional and local government delivery o f basic services in education, agriculture, health, and water supplyhanitation; (ii)capital investments at local government level to improve the quality and quantity o f basic services delivery; (iii) high-impact health commodities and strengthening o f the health system; and (iv) various institutional capacity building activities, consulting services and training to further advance concepts and issues o f transparency and accountability at local administration levels while also strengthening monitoring mechanisms. 5. The PBS enjoys support from several other development partners, including the African Development Bank, CIDA, DFID, EC, the Irish Government, KfW, and the Netherlands Government. To date, approximately US$580 million in donor commitments have been secured from these partners for the PBS, either through co-financing o f the IDA project or direct financing. 11. Backgroundfor AdditionalFinancing 6. Context. The IDA-financed Protectiono f Basic Services Project (PBS) was approved on May 25, 2006 and became effective on June 2, 2006. The closing date i s currently June 30, 2008. The total amount o f the IDA Grant i s SDR 149.60 million (US$236 million equivalent with exchange rate gains) o f which SDR139.8 million or about 94% has been disbursed. The PBS i s an instrument that the Government and eight development partners including the Bank have developed following the concerns on governance in the aftermath o f the May 2005 elections, which led to the suspension o f direct budget support. The development objective o f the PBS i s to protect and promote the delivery o f basic services by sub-national governments while deepening transparency and local accountability inservice delivery. 1 7. Recent Macroeconomic Developments. The macroeconomic context i s showing stronger prospects today than at the time when the PBS was initiated. Given the size o f aid flows associated with the PBS across all partners, the strength o f the macro economy remains o f key interest. PBS partners, including the World Bank, have supported the need for a strong macroeconomic dialogue with Government and with the participation o f the IMF. Following the recent agreement between the Government and the International Monetary Fund for the Fund to undertake two macro surveillance missions per year, the first two reviews have been conducted in March and November 2007 respectively. According to the reviews, real GDP grew by 11.6% in FY06, with a projected growth o f 11.4%for FY07. The macroeconomic outlook seems favorable, with strong macroeconomic policy implementation, yet there are risks as the country remains vulnerable to external shocks. The rate o f inflation has picked up inthe last year, and i s averaging close to 17.8% per year (as o f end o f M a y 2007). This i s due mainly to fuel price increases and aggregate demand pressure. 8. As per Government authorities, macroeconomic stability remains a high priority. Accordingly, the National Bank o f Ethiopia (NBE) introduced changes to monetary policy effective July 4,2007. The NBEincreased commercialbanks' reserve requirement from 5 percent to 10 percent, as well as the minimum deposit rate (applied for savings deposit) from 3 to 4 percent per annum. Government sources also disclosed that they are undertaking a study on the causes-o f inflation so as to effectively avoid macroeconomic instability. The recent measures taken by the NBE i s expected to contribute to curbing inflation as well as lowering the excess reserve in the financial system and contributing to the stability o f the foreign exchange market. Furthermore, the Government i s enhancing its domestic revenue mobilization efforts, and this i s expected to further lower the need for deficit financing. 9. Project Components. The Project currently supports four components: 10. Component 1 on Promoting the Delivery of Basic Services by Sub-national governments, supports the delivery o f basic services provided by Regional and local governments ' through the: (a) financing o f sub-national delivery o f basic services; and (b) monitoring o f (i)the level and timeliness o f fundingallocations for the Government's inter-governmental block grants to ensure additionality targets are met, (ii) the fair application o f distributional rules; and (iii) actual spending levels on basic services and its distribution. 11. Component 2 on Promoting the Health Millennium Development Goals provides predictable financing for those critical inputs for primary health service delivery that cannot be efficiently funded at woreda level through the block-grant supported under Component 1. It supports three types o f activities: (i) procurement and distribution o f critical health commodities; (ii)capacity building; and (iii) strengthening o fprocurement and logistics. 12. Component 3 on Strengthening Governance Systems on Financial Transparency and Accountability supports activities at the RegiodCity Administrations, woredas and kebele levels that significantly enhance transparency around public budget procedures (budget preparation, expenditure and audits). It also aims to foster broad engagement o f citizen representative groups and citizens more broadly on public budget processes and service delivery by institutionalizing various budget literacy tools. It aims to establish the foundation for strengthening participatory budgetingwithin the Government's decentralized governance structures. 13. Component 4 on Social Accountability supports capacity building for, and piloting of, selected approaches to strengthen voice and client power o f citizens and civil society organizations in the context o f decentralized service delivery and to build the capacity o f citizens 2 to engage in public budgeting processes. This component aims specifically at building demand- side governance capacity on public budget issues among citizens and civil society organizations. It is financed by a Multi-Donor Trust Fund administered by the World Bank and i s implemented usinga non-government Management Agent. 14. Status of Project Implementation. The Mid-Term Review (MTR) o f the Project was completed in May 2007. Outcomes o f the MTR confirm that both the Project's achievement o f development objectives and overall implementation progress are satisfactory. A further Review was completed inmid-November 2007, confirming continued positive performance. Highlightso f implementationprogress are presentedbelow by component, the overall results achieved, and the partnership framework underpinning the PBS. There have been no changes to the original objectives o f the Project. 15. Component 1: Promoting the Delivery of Basic Services by Sub-national government. The four principles or "tests" o f additionality, fiduciary responsibility, fairness, and accountability have been fully or substantially met consistently, as verified via five reviews conductedjointly by the Project's development partners since effectiveness inJune 2006. 16. Additionality. Fromthe base year FY05 untilFY07 the Government has increasedits own source fundingto sub-national governments -which provide the bulk o fbasic services -by about 21% per year on average, in dollar terms, and i s budgeted to increase another 35% between FY07 and FY08. Total funding for the sub-national government levels i s expected to reach about U S 1 . 5 billion in FY08, with about 70% of this from Government's own resources and the remainder from PBS partners. This i s a very large increase compared to the base year (FY05) value o f US$635.5 million for total funding from all sources to these levels. As a result, total sub-national government spending on basic services in education, health, agriculture and waterhanitation i s expected to double from a base year value o f US$505 million in FY05 to US$1,023 million inFY08 (see sector breakdown inFigure 1below). Figure 1.RegionalRecurrent and CapitalExpendituresfromTreasury SourcesonBasic Services (EFY1997 2000) - Education Agriculture Health NaturaI Resources (incl. Water) El EFY97 Pre-Actual 0 EFY98 Pre-Actual lEFY99Pre-Actual 64 EFY 2000 Budget Note: Based on current data inEFY 2000 budget, which includes alarge unallocatedamount relatedto salary adjustments. It is expectedthat muchof this amountwill bereallocatedto basic service sectors so recurrent spending on basic servicesin EFY 2000 may exceedthe amounts indicatedabove. 3 17. Fairness. Rigorous analysis o f public spending data has confirmed that the Federal Government and Regional Governments have shown no systematic bias against woredas that voted for the opposition in2005, Moreover, the House o f Federation has approved a new formula for distributingFederal grants to the Regional states which addresses disparities and the perceived bias in per capita allocations under the previous formula. The application o f the new formula started with EFY2000, and has resulted ina narrowing o f the Regional per capita gap already: For example, the gap between the minimumand maximum per capita allocations fell from 640 Birr (Amhara: 112 Birr, Gambella: 752 Birr) in EFY99 to 506 Birr (Oromiya: 164, Gambella: 670 Birr)inEFYOO. 18. Fiduciary. The 2006 Public Expenditure and Financial Accountability (PEFA) assessment, conducted as part o f the PBS agreement, has been completed at the Federal level and in seven Regions including Afar, Benishangul-Gumuz, Dire Dawa, Gambella, Harari, Oromiya, and Tigray. The findings show particularly good performance on the credibility o f the budget, comprehensiveness and transparency. The report also identified areas o f improvement and the Government committed to incorporate appropriate actions in its Expenditure Management and Control Program (EMCP). The 31d and 4th quarterly reports from the PBS Continuous Audit at Regional and woreda levels have been completed, bringing the total number o f sub-national entities audited to 227 since the inception o f the PBS. The results continued to show strong internal control systems especially on the payroll side, with continuing weaknesses in fixed assets and stores management. 19. Independently, the National Audit Office o f the United Kingdom visited the country recently and made a positive assessment o f the current PFM practice in general and in the implementation o f the PBS in particular. Major observations o f the mission include: the effective functioning o f the decentralized system in basic service delivery through setting priority, allocating more resources for basic services, giving more attention to M & E, budget disclosure, and inengaging communities at sub-national levels. 20. Accountability. Local transparency and accountability initiatives remain at early stages but are gaining momentum. A major effort under the PBS is the widespread publication and posting of regional and woreda budgets, the first initiative o f its kind in Ethiopia and which has served to catalyze transparency and accountability at local administration levels. MOFED's fiscal data continues to be made available via its website (www.mofaed.org) for independent review. Steps are also underway to introduce tools, e.g. laypersons' budgets, service delivery templates for posting in schools and health posts, which will make public budget and expenditure information much more accessible for the average Ethiopian citizen. Work on the Financial Transparency and Accountability Perception Survey (FTAPs) i s advanced and i s expected to generate new nationally representative information on how Ethiopians view their local service providers and the budget decision-making process. The tri-partite Steering Committee o f Government, CSOs and donors (including the World Bank) overseeing PBS Social Accountability activities have met numerous times, jointly tahng forward this agenda. Demonstration projects are underway on participatory budgeting in education and quality o f service provision inwater and sanitation. 21. Although Component 2 on Promoting the Health Millennium Development Goals experienced initial slow start-up mostly related to the need to resolve differences in contractual requirements o f the World Bank and UN agencies (UNICEFLJNFPA), implementation i s now underway. Major packages for critical health commodities (i.e. ITNs, vaccines, ACTS, contraceptives, cold chain equipment, indoor residual spraying) have been procured. Distribution o f these commodities to the regions i s ongoing. Work to undertake the following pieces o f 4 analytical work have been initiated: (i) Mapping Malaria Epidemic Risk Areas in Ethiopia for Indoor Residual Spraying (IRS); (ii)Strengthening Epidemic Response System; and (iii) Quantitative Services Delivery Survey (QSDS). In addition, a logistics and supply system strategy has been approved and i s in the process o f implementation to further strengthen the supply chain management system. The Procurement Agent has been recruited and i s expected to be on boardby the end o f December 2007. 22. Component 3 on Strengthening Governance Systems on Financial Transparency and Accountability has supported several o f the initiatives described above. This includes the Continuous Audit exercise via the Office o f the Federal Auditor General (OFAG), recruitment of a total o f 103 accountants and 65 IT experts throughout all Regions and the Federal level to strengthen BOFEDMOFED accounting and reporting capacity; the procurement o f the several budget transparency and literacy activities to be implementedat regional and woreda levels as the baseline o f the Financial Transparency and Accountability Perception Survey (FTAPS); and the unprecedenteddisclosure ofbudget information via the web and newspapers for public use. 23. For Component 4 on Social Accountability, as noted above, the Steering Committee charged with providing strategic oversight o f social accountability initiatives i s fully operational and i s working well. A Management Agent - GTZ International Services - has been recruited, and has taken on the primary responsibilities for the day-to-day management and coordination o f Component activities. An international learning event on social accountability was conducted in mid-July 2007, with about 200 CSO participants. Two demonstration projects have been launched, and the selection o f the large-scale (multi-region) pilot initiatives are expected to be completed by the end o f November. Almost 50 local CSOs have submitted proposals, an integral part o f which has been letters o f commitment by local woreda administrations. 24. Results Achieved. A key aim o f the PBS was to contribute to sustaining the improvements achieved inmajor development indicators inrecent years, and avoid any roll-back o f gains that might have arisen in the aftermath o f the 2005 elections. The findings confirm that this objective has been fully met, and that highimpact interventions are yielding positive results (details on the key performance indicators are provided in Schedule E). Figure 2a: Net EnrolmentRatesin PrimaryEducation Figure 2b: Pupil-per-Teacher Ratio 100 90 70 S 80 0 'a,C 60 70 2 CI 2& 60 c 50 CI 0 s 50 40 -52 E 40 I- -'$e f 30 30 z" c 20 20 n 10 10 0 0 Grades 1-4 Grades 1-4 Grades 5-8 Grades 5-8 Grades 1-4 Grades 5-8 (Girls) (Boys) (Girls) (Boys) 1 -97 (Baseline) EV98 (Year 1) a EFY99 (Year 2) 1 5 28. Regarding the number o f health extension workers (HEWs) deployed per rural Figure 4: Health Extension Workers EFY97-99 kebele - a key measure o f human resources I --- required for local health service delivery - the EFY98 and EFY99 targets have been 15,000 surpassed.A total of 17,653 HEWs have been deployed, and around 6,118 more HEWs are 10,000 under training and will be deployed in the coming several months. Inaddition, MOH data 5,000 show a decreasing percentage o f health posts experiencing stock outs o f injectable 0 contraceptives, with this indicator showing clear 1997 1998 1999 improvement inEFY98 beyond the target set by the MOH. 29. Rural access to potable water within 1.5 k m s i s estimated to have increased fi-om 41.2% in EFY98 to 46.4% of the rural population in EFY99. While representing a significant improvement, the implication still i s that over half the rural population must travel long distances to access safe drinkingwater. 30. Inthe agriculture sector, the cumulative number of woman headedhouseholds receiving and using extension packages almost tripled over the past two years from 130,000 in EFY97 to 380,000 inEFY99, while falling short o f the target o f 450,000. 31. While overall performance was strong as noted above, the Mid Term Review in May 2007 showed the need to review some o f the indicators in order to be able to assess performance on an annual basis by using administrative data. This has necessitated modification to existing indicators, plus substitution o f some by others that are more appropriate. These changes can be found in Schedule E. 32. Partnerships.Partnerships have been crucial to achieving results at scale (see below). Box 1. DevelopmentPartnerships- A Cornerstone of the PBS The PBS has built a strong partnership across the international donor community. IDA'S original financing o f US$236 million for the PBS has thus far leveraged donor financing o f approximately USS580 million from 7 other partners -AfDB, Canada, DFID,EC, Germany (KfW), Ireland, and the Netherlands, bringingthe total committed financing for the PBS from partners including the Bank to US$816 million. Approximately 77% o f donor funds are channeled through Bank-administered Multi-Donor Trust Funds and the remaining 23% i s provided through direct financing to Government in a harmonized framework. DFID i s planning an additional contribution o f GBP 60 million simultaneous with this proposed IDA additional financing, and CIDA i s processing about US$21 million equivalent additional. Finally, the latest partner to join the PBS i s Spain, which has initiated a "debt for development swap" with the Government o f Ethiopia, with the resources being channeled to PBS activities. The PBS resources, especially under Component 1, combines with Government's own resources and supports existing national systems o f management, service delivery, monitoring and evaluation. The national results reported inthe preceding section could not have been achieved at this scale and rapidpace without these partnerships. 7 33. The Borrower i s in compliance with the dated covenants for the Project. 111. Rationale for Additional Financing 34. Duringthe PBS Mid-Term Review, the Government requestedadditional financing from DFID, the World Bank, and other partners to continue support to the PBS for Ethiopian Fiscal Year (EFY) 2000 (subsequently revised to also cover the first two quarters o f EFY 2001) while preparations would be undertaken for the design o f a next phase o f support for the medium-term. 35. Financing gap. Inaddition to closing the financing gap in EFY 2000, part o f the PBS Additional Financing will be used to retroactively close the unforeseen financing gap under Component 1 in EFY 1999. This gap was caused by the delay in some o f the expected donor financing in EFY 1999, which resulted in a higher contribution to the Federal block grant by the Government than initially expected. Additional financing i s also requested in order to address the financing gap associated with the completion o f Component 2 - Promoting the Health Millennium Development Goals, supported through the Project, where, in particular an unexpected financing gap has emerged in the fight against malaria. The original IDA Grant allocation for the PBS has been 94% disbursed as o f mid-November 2007. Thus, while the closing.date o f the existing PBS Project i s June 2008, the bulk o f resources have already been exhausted. 36. Scaling up impact. Additional financing is also being sought to scale up Project activities through the implementation o f a new and complementary activity - the Pilot Local Investment Grant (LIG) in order to enhance the impact and development effectiveness o f the project. The ultimate objective o f the Government i s to introduce LIG as a national, performance-based capital grant. This would represent a new component in the existing intergovernmental fiscal system. The objectives o f this new capital grant would be to increase the quantity of capital investment by providing additional money specifically earmarked for capital investment, and to improve the quality of that investment by making access to LIG funds conditional on meeting certain performance criteria. 37. While the existing Component 1 (the proposed new Subcomponent l(a)) reimburses Government for recurrent investments related to basic service delivery by regional and local governments, the Pilot LIG would finance capital investment at the local level. The Pilot aims to develop a better understanding o f the constraints to capital investment by local governments and the most effective ways to address them. Broadly, these constraints comprise adequacy o f funding, appropriateness o f systems, and availability o f capacity. An improved understanding o f how these constraints interact to affect performance will enable them to be appropriately addressed in the design o f the National LIG which i s expected to follow the Pilot. Additionally, the Pilot LIG will facilitate the implementation o f new national systems and standards for capital investment including planning and project selection, safeguards, and procurement, which are seen as important for addressing existing constraints to quality capital investment. 38. Inthe PBS Project Appraisal Document, the description of Component 1anticipated LIG as an additional mechanism to broaden the dialogue on local service delivery and to provide incentives for sub-national governments to select, implement, and maintain better capital investment projects. Good progress in implementation o f Component 1 permits this more comprehensive and advanced approach to local service delivery to be introduced at this time. 39. Alignment with partners. Another key element underpinning the request for additional financing i s to allow IDA to harmonize its financing cycle with the consortium o f donors 8 providing support to the program, especially to the Basic Services Sub-program delivered via sub-national governments (PBS Component 1). While most partners have indicateda preliminary willingness to continue PBS financing into the medium term, the next full operation i s expected to be approved starting FY09. It i s envisaged that over the course o f the next 7-10 months, Government, IDA, and other partners will jointly prepare a f i l l follow-on operation to the PBS (currently proposed as the Enhanced Basic Services Program) for Board approval in Q1 IDA FY09 (EFYO1). This will enable the development and timing o f the next phase o f support to the PBS to be synchronized across financing partners. This approach i s seen by both Government and donors as an important step in the ongoing effort to harmonize donor engagement around the PBS, allowing for a more consistent and coherent donor-Government dialogue on the decentralization, basic service delivery, and accountability reform agenda going forward, and reduce transaction costs for the Government. 40. Evolutionof AdditionalFinancingby Component and the Medium-Term.While the implementation o f other PBS components are expected to be completed by December 2008, the first year o f the planned two year Pilot LIG i s expected to be completed by June 2009. A second year o f the Pilot i s planned to be financed from the proposed Enhanced Basic Services (EBS) program which i s expected to succeed PBS. In order to complete the first year of the Pilot LIG, the proposal for Additional Financing seeks to extend the closing date o f the PBS by 12 months to June 2009. 41. Consequently, it should be noted that IDA'SPBS Additional Financingperiod i s expected to have a short overlap with the proposed EBS program. The staggering o f financing instruments and actual financing (by component) is illustratedbelow. PBS & Additional Financing:Components& Disbursements 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 EFY1998 EFY1999 EFY2OOO EFY2OOl I EFY2OO2 I EFY2003 I PBS PBS Additional Financing EBS (proposed) ComDonentla P PBSComp 1 i Addl FinancingComp la >. EBS Comp l a (Proposed] COmDOnentlb P Addl Financing Comp l b i PBSComp2 z Addl Financing Comp 2 P EBS Comp 2 (Proposed) Comrronents i PBSComp3 2. Addl Financing Comp 3 w EBS Comp 3 (Proposed) 9 IV. Proposed Changes 42. Although the Project development objectives would remain unchanged and the existing components retained, a new subcomponent for the Pilot LIG would be added as Subcomponent I(b) to reflect scaled-up project activities. The closing date for the IDA financing would be extended by an additional one year from June 2008 to June 2009. 43. Component 1: Basic Services Program. This component will be amended to include the following two subcomponents: 44. Subcomponent l(a): Promoting the Delivery of Basic Services by Sub-national governments, Subprogram A (AjDB: US$55.00 million equivalent; DFID: US$124.00 million equivalent; EC: US$186.28 million equivalent; Kfl: US$14.00 million; GoE: US$1,159.23 million equivalent; and IDA: US$I65.00 million equivalent). Originally prepared as Component 1, Subcomponent l(a) will continue to support the delivery o fbasic services (inhealth, education, agriculture and natural resources, including water) provided by regional and local governments. Additional resources will be provided to local governments through the federal block grant transfer system fot agreed work plans covering the period EFY 2000 (IDA FY08) through the second quarter o f EFY 2001 (IDA FY09). Part o f the additional financing will also be used to retroactively close the unforeseen financing gap in EFY 1999, which was caused by the delay in some o f the expected donor financing. Progress would be monitored through the implementation o f semi-annual Joint Budget and Aid Reviews (JBARs), including performance on the four core PBS "tests". 45. Subcomponent l(b): Pilot Local Investment Grant (LIG) (IDA: US$20.00 million equivalent). This i s a new activity o f the PBS Project. Subcomponent l(b) will support the introduction, on a pilot basis, o f a multi-sector Specific Purpose Grant (SPG) from the Federal Government, for capital investment in the following sectors: health, education, agriculture, natural resources (including water) and roads. The ultimate objective o f Government i s to introduce a National LIGprogram, which would be a performance-based SPG with access criteria established inareas relevant for improving the quality o f capital investment at the local-level. 46. The objective o f the Pilot LIG would be to better understand the constraints at the local level to increased and improved capital spending and to support the development o f policies and instruments to address these constraints. While vertical planning processes within sectors are deemed to be relatively strong in Ethiopia, less emphasis has been placed on strengthening the horizontal sector coordination mechanisms at the local-level, and particularly in ensuring that the outcome o f this process reflects citizens' views o f needs and priorities. Therefore, one area o f particular focus for the Pilot will be to test a new national system for local-level participatory planning and budgeting. Additionally, the Pilot LIG will support the rolling-out and testing o f new national standards for procurement and environmental screening o f capital projects. The objective would be to determine how effective these new systems are in increasing the quality o f investment in the context o f significant increases inthe funding available for capital expenditure. The results from the Pilot LIG will be used to shape the National LIG Program. The ability to adequately learn lessons from the Pilot LIGprogram therefore becomes paramount. A monitoring and evaluation framework has been developed for the program with this inmind.An overview o f this isprovided inSchedule H. 47. The proposed additional financing o f US$20 million for the Pilot LIG would be transferred to eligible regions according to the intergovernmental Block Grant Formula (as i s the case under Subcomponent l(a). Regions eligible to participate in the pilot program will be those 10 that have implemented reforms under the Government's Expenditure Management and Control Program as o f the start o f EFY 2000. These reforms are deemed important for effective fiduciary control o f the program at local and regional level. The Regions would then provide funds to a total o f approximately 50 local governments, over an initial period covering one fiscal year, yielding an average capital grant o f about US$450,000 per year for a typical woreda. The funds transferred to local governments would represent about 30% o f their total budget. By comparison, the current median share going to the capitalbudget i s around 9% (see Schedule Ifor a discussion o f existing capital budgeting and spending trends). This suggests that the Pilot LIG could represent between a three to fourfold increase incapital spending inLIGpilot woredas. The value o f LIG resources as a percentage o f the total woreda budget i s a key parameter for the Pilot LIG design. The objective would be to provide woredas with a substantial increase in their capital budget as compared with current trends, within the bounds o f increases that mightbe expected in the coming years while at the same time not overwhelming existing systems and capacity. 48. The Pilot will involve a start-up phase in EFYOO (IDA FY08) including rolling out o f training and completion o f annual planning activities at the woreda level. Disbursements to woredas will commence following this in the next fiscal year (EFYO1). Since the SPG i s a standard fiscal instrument in Ethiopia, the funds will flow through regular fiscal channels, managed by the Federal MOFED and Regional BOFEDs. 49. For this new Subcomponent, additional institutional arrangements and implementation procedures have been designed and will be available in an Operational Manual. Since LIG funds will flow through regular fiscal channels it will be monitored through existing systems established to report on public spending. The reporting already required for PBS will be augmented inorder to track capital spending at the local level. 50. Component 2: Promoting the HealthMillenniumDevelopment Goals, Subprogram B. (CIDA: US$20.86 million equivalent; DFID: US$lO.OO million equivalent; EC: US$7.04 million equivalent; IDA: US$29.00 million equivalent; and the Netherlands: US$7.00 million equivalent). Progress on procuring critical health commodities has been substantial, such that by the end o f the first year o f the project (May 2007), 89% o f the funds made available by donors for Component 2, had been utilized. Additional financing will continue the thrust o f the PBS toward malaria control, reducing infant mortality through vaccines, improving the delivery o f primary health services, family planning, and strengthening the health system, and will cover the shortfall incommodity support and system strengthening. 51. Critical commodity support. Based on gap analysis, there i s an estimated shortfall o f US$16.9 million for the fight against malaria, including ITNs, equipment for malaria diagnostics, Indoor Residual Spray, distribution o f malaria behavior change toolkits, and training o f community health workers, which has not been covered by Government, existing PBS or other external financing, including the Global Fund. PBS additional financing will cover US$8.0 million required for replenishment o f long-lasting ITNs, US$2.1 million for Indoor Residual Spray (subject to the successful completion o f an assessment o f vulnerable areas and populations), US$1.2 million for malaria diagnostics, and US$1.3 million for behavior change toolkits. This will leave a shortfall o f about US$4.3 million, which will be covered by own sources of MOH. In addition, there i s an estimated shortfall o f US$6.3 million for vaccines, o f which it i s estimated that US$4.8 million will be supported from GAVI and UNICEF. Given this expected support, IDA will finance the gap o f US$1.5 million in 2008. Further, MOH calculates a shortfall of US24.5 million for medical equipment for 1,140 primary health centers until the end of EFY2002. Duringthe Pre-Appraisal mission, IDA agreed to allocate US$8,2 million o f the PBS Additional Financing for the procurement of equipment for 384 health centers that will be 11 ready by end o f EFY2001. The status o f construction o f new Health Centers will be reviewed again in October 2008, and the allocation for HC equipment will be revised accordingly at that time based on a reassessment o f the number o f health centers for which rehabilitation and construction will be completed by December 2008 and for which no funds for equipment have been secured. Finally, a gap o f US$7.5 million i s estimated for family planning and contraceptives, against which IDA Additional Financing will cover US$5.5 million. 52. System strengthening and capacity building. Central to the achievement o f targets under MDG4 and 5 is the uptake and utilization of health goods supplied by the health system. The key to ensufing sustainability and effectiveness lies in the development and strengthening o f the various institutions and processes that form the superstructure on which the various aspects o f production, finance, delivery, organization and management rest. MOH estimates that significant systemic support will be needed for accelerating and sustaining malaria control and reducing infant mortality through widespread vaccine coverage. In particular, it i s estimated that US$4.5 million will be needed for system strengthening to support the ongoing initiatives on malaria control and reduction o f infant mortality, specifically through training o f community health workers, transportation and distribution support, strengthening procurement systems, improving the planning process and effecting behavioral change among consumers o f health services in order to increase utilization. Of this, US$1.2 million will be covered by IDA'S additional financing. 53. Component 3: Strengthening Governance Systemson FinancialTransparency and Accountability, Subprogram C. (DFID: US$2.99 million equivalent; EC: US$2.72 million equivalent; and IDA: US$l.OO million equivalent). Building on the experience during the ongoing PBS operation, this component would help scale up local initiatives to further advance issues o f financial transparency and accountability at local administration levels. It would also continue to further strengthen BOFEDMOFED accounting and reporting capacity. Additionally, a number o f studies, including an investment process review focusing on planning and budgeting, procurement, and environmental screening, and an assessment o f the technical quality o f infrastructure will be financed to build a robust system for the effective monitoring and evaluation o fthe Pilot LIG. Fundingwill also be provided to carry out a post procurement review of the Pilot LIG activities for the initial year o f implementation. Through this component the PBS will also continue to support local initiatives on transparency and accountability, and will set aside specific resources to this effect. Fiduciary risk will continue to be minimized through the implementationo f the Continuous Audits at sub-national levels, bi-annual Public Expenditure and Financial Accountability (PEFA) reviews, and carrying out semi-annual (formerly quarterly) reviews o f budget performance under the Joint Budget and Aid Reviews (JBARs), by the FederaVRegional Government and PBS development partners. An additional ex-post procurement review o f local-level capital investment in LIG pilot woredas will help address fiduciary issues related to the new Pilot LIG. 54. Component 4: Social Accountability (no IDAjinancing; CIDA, DFID, EC, Irish and Netherlandsjinancing of US$6million total via a Multi-Donor Trust Fund managed by the World Bank). Pilot social accountability initiatives envisaged under this component are expected to be implemented as planned. These initiatives were assessedfrom the outset as requiring more start- up time owing to the nascent state of civil society organizations and the accountability and citizen "voice" agenda in Ethiopia. Thus, Component 4 was originally scheduled to be implemented through the end o f FY09, one year longer than the original PBS project. 55. Activities under this Component are expected to accelerate significantly over the period FY08-FY09 as national capacity building activities develop knowledge o f these demand-side 12 strategies, and with the implementation o f a number o f large scale pilot programs supporting participatory planning and citizen service review initiatives being well underway. Progress made under these initiatives will be closely monitored and will inform the design and implementation o f additional accountability programs by civil society organizations and possible extension o f the life-span o fthis Component. V. ProjectCosts andFinancing 56. The total project cost, including taxes and duties, i s estimated at US$1,804.12 million, with the following breakdown: AfDB: US$55.OO million equivalent; CIDA: US$20.86 million equivalent; DFID: US$136.99 million equivalent; EC: US$196.04 million equivalent; GoE: US$1,159.23 million equivalent; IDA: US$215.00 million equivalent; KfW: US$14.00 million equivalent; and the Government o f the Netherlands: US$7.00 million equivalent. 'Foreign expenditures are estimated at US$76.90 million or 4.3% o ftotal project cost. 57. A breakdown of the proposed IDA financing for PBS components under the Additional Financing i s provided below. Schedule A provides detailed analysis o f estimated project costs. ProposedIDA Additional Component/ Subcomponent FinancingAmount (US$ million equivalent) Component1: Basic ServicesProgram o Subcomponent l(a): Protecting the Delivery o fBasic 165.00 Services by Sub-national governments (Subprogram A) o Subcomponent l(b): Pilot Local Investment Grant 20.00 (Subprogram D) Component2: Promoting theHealth Millennium Development 29.00 Goals (Subprogram B) Component3: Strengthening GovernanceSystems on Financial 1.oo Transparency and Accountability (Subprogram C) TOTAL : 215.00 VI. ProjectImplementation,FinancialManagement, andProcurementArrangements 58. ImplementationMechanisms. Both the implementation mechanisms and institutional arrangements will largely be the same under the Additional Financing as those o f the existing Project. At the Federal level, Ministry o f Finance and Economic Development (MOFED) in general, and its Macroeconomic Policy and Management Department, in particular, will be responsible for the PBS as a whole and will be the executing agency for Components 1 (both Subcomponents l(a) and l(b)) and 3. At the regional level, Bureaus o f Finance and Economic Development (BOFEDs) will continue to be responsible for coordinatingproject implementation. At local level the Woreda Finance and Economic Development Offices (WOFED) and Urban Administration Offices of Finance would be responsible for managing and coordinating day-to- day implementation o f activities executed. The Office o f the District Level Decentralization 13 Program (DLDP) o f the Ministry o f Capacity Building at federal level and its line bureaus at regional and local levels will continue to closely collaborate with MOFED and its Bureaus inthe overall coordinationand implementationo f Component 3. 59. As mentioned above, the Macroeconomic Policy and Management Department o f MOFED will be responsible for the implementation o f the new Pilot LIG Subcomponent, with support from BOFED and WOFED staff at the regional and local levels respectively. Activities under the Pilot LIG Subcomponent would be organized and runby regional governments who, in turn, will report onthe use o fthe SPGto the Federal Government. Localreportingwill bebased, to the maximum extent possible, on the realization o f existing reporting obligations to woredas. These same local governments would be the target for a number o f capacity buildingactivities, to be closely coordinated with the Ministry o f Capacity Building and the Public Sector Capacity BuildingProgram(PSCAP) co-financed by IDAand anumber o fother partners. 60. Component 2 will continue to be managed by the Federal Ministry o f Health (MOH) at the level o f the Department o f Planning. MOH has developed an institutional fkamework for monitoring and follow-up o f the implementation o f the Health Sector Development Program by establishing a Central Joint Steering Committee and Regional Joint Steering Committees at federal and regional levels, respectively. These committees will continue to oversee the implementation o f core activities under this Component. 61. FinancialManagementArrangements.Financialmanagement arrangements will be the same as for the original project since they are workmg well. These are described in Schedule F. Specific arrangements for the new Pilot LIG Subcomponent are highlightedbelow: 62. Annual Planning Cycle: The Pilot LIG will be an annual program synchronized with the Ethiopian fiscal year based on the inter-governmental Block Grant formula. In preparing the Federal budget, an allocation for the LIG would be proposed for each region. Based on these figures recipient woredas will include LIG resources on the revenue side o f their budget. Incorporation o f the LIG within woreda budgets i s important for promoting integrated planning and capital budgeting at the woreda level. This system will follow the existing time-line for determining the allocations o f the block grant as part o f the budget cycle in the inter- governmental fiscal system. 63. Flow o f funds and reporting: The following budget, reporting, and flow o f funds process i s envisaged: The Federal Government will create a LIG SPG as a proclamation in the Federal budget, under MOFED, which will include allocations by region o f LIGresources. Funds flow will institutionally follow Channel 1; from MOFED to BOFED, and from BOFED to WOFED. Regions will be allocated a portion o f the annual financing for LIG, which will be deposited in the existing Regional treasury account with a new code in the budget proclamation to enable clear tracking. The allocation formula will follow the Block Grant formula. BOFEDswill determine individual woreda allocations for LIG (as per MOFED guidelines) and will inform each WOFED o f these LIG allocations. Woredas will include LIG resources in their budgets (to be approved by the woreda council) as a separate source o frevenue. 14 (vi) BOFEDs will transfer resources to woredas to the Woreda treasury account. No separate LIG bank account will be opened at Woreda level, and LIG financing will be pooled with other woreda revenues. (vii) LIG financing will be spent and accounted for following the same rules and procedures as for the regular woreda budget. (viii) Disbursement to woredas will follow existing rules for disbursements from regional to woreda level for the capital stream o f the Block Grant. After the initial advance, disbursements are made to woredas basedon the cash requirement forecast. (ix) WOFEDs will produce consolidated expenditure reports, as they do now, and will send to BOFEDs.No separate reporting will be requiredfor the LIGat woreda level. (x) BOFEDs have the responsibility to report to MOFED, by Pilot LIGworeda, LIGRegion to woreda disbursement data and total capital spending aggregated for Pilot LIG woredas in eligible sectors (based on the expenditure reports they receive from WOFEDs). (xi) MOFED will consolidate the regional LIG expenditure reports and submit them as part o f the LIG . 64. Audits: Consistent with its constitutional and legal mandate, the Office o f the Federal Auditor General (OFAG) will continue to audit the use o f all funds provided via the PBS Project through GOE's public financial systems. It will also undertake an enhanced continuous audit o f the regions' use o f PBS funds and the timeliness and accuracy o freporting. 65, Procurement arrangements under the proposedAdditional Financingwill largelybe the same as the arrangements under the ongoing Project and these are described in Schedule C. For the Pilot LIG Subcomponent specific additional measures will, however, be required. These are described below. 66. Inthe public sector inEthiopia, procurement at Federallevel is governed byproclamation no. 430/2005, `Determination procedures o f public procurement and establishing its supervisory agency proclamation o f the Federal Democratic Republic Government o f Ethiopia' dated January 12,2005 and the Federal Public Procurement Directive o f July 2005. These procedures have been reviewed by the World Bank as part o f the evaluation o f procurement reform and were found to be satisfactory. 67. Following the federal structure o f the government, procurement at regional and woreda level is governed by codes enacted by the respective regional governments based on the model law prepared by the Public Procurement Agency and issued by the respective regions. At the start o f EFY 2000, the new procurement codes have been enacted by Amhara, Benishangul-Gumuz, SNNPR, Oromiya, and Tigray regions, and the City Administration o f Addis Ababa. 68. The main outstanding issue inpublic procurement, especially at the local level, i s the lack o f capacity. The main areas o f concern include: (i)building procurement capacity including having trained and qualified procurement officers in place and an appropriate institutional and decision making structure, (ii) ensuring that awareness i s created on the applicable procedures and rules at each woreda including availability o f standard procurement documents, and (iii) Monitoring and Evaluation o f procurement activities including procurement reviews. PSCAP can help address a significant part o f these issues as part o f the support to the ongoing procurement reform program. 15 69. Under the Pilot LIG the investments would be relatively small and widely dispersed. Regions selected for the Pilot are those who have adopted new procurement codes based on the model law prepared by the Federal Government, and training will be provided to all pilot LIG woredas in application o f this new law and associated standard bidding documents. An ex-post procurement review will be conducted on a sample basis by using consultants, and if significant deviations from agreed procedures are found a suitable remedy will be applied. VII. Consistencywith CAS 70. In January 2007, the Government finalized its Plan for Accelerated and Sustained Development to End Poverty (PASDEP), Ethiopia's five year second PRSP and development plan covering the period through 2010. Building on the development strategies pursued under the SDPRP, the PASDEP maintains a strong emphasis on human development as the basic building- block for broad-based and inclusive growth. PASDEP reinforces Government's pro-poor spending on basic services - education, health, agriculture, and natural resources (including water) - which are fundamental to achieving Ethiopia's MDGtargets and for which expenditures are projected to increase significantly. Increases inpublic spending on basic services in the past two years have been fueled in part by increased block grant transfers to regional governments, supported by IDA and other development partners under the Protection o f Basic Services Program. Governance i s a cross-cutting issue and the PASDEP places an emphasis on institutional strengthening to address Ethiopia's governance agenda. Similarly, PASDEP highlights key areas o f focus to further strengthen and build capacity to support ongoing district level decentralization. Ethiopia's PASDEP was discussed and endorsed by the Bank's Executive Directors inAugust 2007. 71. The Bank's Interim CAS (ICAS FY06-FY07), while pre-dating the formal approval o f the PASDEP, i s built to support its main objectives. The PBS i s a core part o f the ICAS and a major contributor to the central objective o f the ICAS, supporting Government in developing, achieving consensus with citizens on, and implementing a strengthened program o f institution buildingand governance reform that will help accelerate Ethiopia's effortsto reduce poverty. 72. The Bank's strategy in Ethiopia i s being updated with the preparation o f the CAS, and will be presented to the Board by FY08 43. The CAS (FY08-FY10) will continue and consolidate support to the PASDEP. The proposed additional financing for the PBS supports the service delivery, governance, and harmonization and partnerships pillars of the proposed new CAS, and allows for a scaling up o f the impact and development effectiveness o f the PBS program. VIII. EconomicAnalysisofFinancingGap 73. The economic and financial analysis provided for the PBS showed high economic rates o f return for spending on the sectors covered by the PBS - education, health, agriculture and natural resources including water. That analysis remains relevant for this request for Additional Financing, since the same sectors will be covered for Component la. The PBS has defined basic services spending as spending undertaken by subnational governments (excluding Addis Ababa) on the PBS sectors. Restrictingthe definition inthis manner ensures a focus on pro-poor spending funded by the PBS, since spending by lower-level governments are responsible for primary and secondary service levels which tend to be more accessible to the poor than higher service levels. 74. A key rationale for the PBS remains its focus on additionality as one of its core principles. Steps are taken to ensure that PBS funds are truly additional to government funds in 16 the provision o f basic services, and do not simply displace government funds that would then be freed up for use for other purposes. The government has made a commitment to increase funding for Federal block grant transfers to regional governments - the main source o f funding for regional governments' spending including on basic services - from 9.56 billion Birr in EFY99 to 13.56 billion Birr in EFYOO. This i s a large increase and would in turn ensure a sharp rise in spending on basic services. 75. However, for the government, this commitment i s conditional on PBS donors commensurately increasing or at the very least maintaining their funding levels for PBS Component 1 in EFYOO relative to EFY99. The World Bank provided US$lOO million for PBS Component 1in EFY99. Under the proposed Additiopal Financing, the bulk o f resources totaling US$165 million will be allocated to Subcomponent l(a) - Promoting the Delivery o f Basic Services by Sub-national governments for the whole o f EFY 2000 and the first two quarters o f EFY 2001. Other donors like DFIDand EC will also provide similar or slightly higher levels of funding(calculated for a year rather than 18 months) for Subcomponent l(a) inEFYOOrelative to EFY99. This will enable the government to meet its commitment o f providing 13.56 billion Birr o f block grant transfer funding to the regions in EFY 2000. Similar levels o f significant increases inthe total block grant amount and Government's own financing is expected inEFY 2001 as per Ethiopia's latest Medium-Term Expenditureand Fiscal Framework spanning EFY00-02. 76. A target level of 13.56 billionBirr for Federalblock grant transfers to the regions inEFY 2000 is thus one o f the performance indicators for the Project. With this very large increase in funding for regions from Federal block grants which is their main (but not only) source of funding, it is estimated that basic services spending in EFY 2000 will be much higher at 9.18 billion Birr (equivalent o f US$1.02 billion) inEFY2000, as compared to EFY99. Insum, funding from the World Bank and other donors for PBS Subcomponent l(a) in EFY 2000 will leverage a large increase in government funding and thereby result in a very large increase in the total amount o f spending on basic services inEFY 2000. 77. An additional issue that was analyzed was with respect to the possibility o f whether the large increases inthe inter-governmental fiscal block grants which are supported by the PBS, may lead to disincentives for Regional revenue mobilization. The analysis suggests that this i s unlikely to be the case. First,the Government enacted presumptive tax reform two years ago to give small businesses (including in agriculture) an incentive to do well. As expected, the short term impact in EFY98 (IDA FY06) was a decline in revenue collected by Regional administrations. In the medium to long term, however, the reform i s expected to have a positive impact on revenue throughbroadening the presumptive tax base (as the informal sector turns formal). Second, in light o f the recent agriculture-led economic growth, Government has revised upward the tax rates on small business and the agriculture sector. Given the favorable economic conditions noted in EFY 99, the tax rate adjustment, and efforts taken to mobilize more resources, Regional tax revenues in EFY99 (excluding Addis Ababa) exhibited significant improvement. Third,the revisedFederalblock grant distributingformula introduced inthis FY correctedthe potential disincentive effect on Regional tax effort. According to the new Federal formula, block grant allocation to Regions are not a function o f the amount they collect (no direct link and thus, there will not be an offset between Regional tax effort and the Federal block grant). 17 Rather, it provides incentive to Regions to collect more so that they can enhance their effort to finance Regional spending under their jurisdiction. 0 It may also be noted that an Annual Tax Conference is held between Federal and Regional governments, and a semi-annual consultation forum, where various issues related to revenue mobilization across different tiers o f Government are ironedout. 78. The Pilot LIG Subcomponent is beingimplementedinorder to understand the constraints to increasing the quality and quantity o f capital investments to support the delivery o f basic services. The results will be incorporated in a National LIG program tentatively part o f future operations. The economic benefits o f LIG would be manifest inbetter choices and more efficient implementation and operation o f local infrastructure. Application o f well designed systems for planning, budgeting, contracting and operation can significantly increase the returns to public investment. As important, the adoption o f processes which increase the accountability o f public spending lead to increases in allocative efficiency which simply means that the benefits are the ones most desired by the citizenry. Given the present low levels o f capital investment by woreda administrations relative to their responsibility for service delivery, good economic returns from additional investment are likely and they can only be enhanced by the adoption o f processes to improve quality and accountability. Schedule Isets the context for this process. IX. Appraisalof Restructuredand Scaled-UpProjectActivities 79. Additional Financing will largely provide for the financing gap associated with the completion o f Component 1 (the new Subcomponent l(a)) - Promoting the Delivery o f Basic Services by Sub-national Governments and Component 2 - Promoting the Health Millennium Goals, supported through the project. A full review o f the original project was conducted as part o f the Mid-Term Review o f the project in M a y 2007. The Pilot LIG Subcomponent under Component 1 intended to support the scaling up o f the Project's impact and development effectiveness in the delivery o f basic services i s a new activity and has been the subject o f significant discussion and design with Government for some time. A PHRD Grant has been under implementationsince March2006 (when the LIGwas expected to constitute a stand-alone operation) to support development o f a National LIG subprogram and this has financed a number o f critical preparatory activities including the development o f a draft Operational Manual. Review and finalization o f this project documentation satisfactory to IDA will be a Condition o f Disbursementfor this subcomponent. X. EnvironmentalAssessment. 80. The environmental classification o fthe ongoing Project remains a Category B. 81. For Component 2. Project implementation will involve medical waste and use o f insecticides which raise safeguard issues. The Ministry o f Health has adopted physical designs for standard health centers and health posts that provide for the proper handling o f wastes and avoid environmental contamination. Small incinerators are also being usedby health centers for burning contaminated materials. Insecticides are used indoor and the potential for contaminating the outside environment i s limited in scope. The Malaria Control Program has developed four .Residual guidelines namely: a) Guidelines for Malaria Control in Ethiopia; b) Guidelines for Indoor Spraying; c) Storage and Responsible Handling o f Insecticides for Malaria Vector Control; and d) Indoor Residual Spraying Training Manual. These guidelines have been distributed and are in use. Malaria control supervisors in each spray site have the responsibility to ensure adherence to the guidelines and supervisors from regional malaria control offices 18 regularly check on the proper implementation o f the guidelines. The guidelines have been updated to capture the recent developments. No significant negative impact i s anticipated as long as agreed safeguardmeasures are implemented. 82. The new Pilot LIG Subcomponent will support construction o f small-scale civil works through the multi-sector specific purpose grant (SPG) from the Federal Government. These works will be identified and managed by woreda governments and are expected to be similar in scale and scope to those implemented in a number o f other Bank projects in Ethiopia. An Environmental and Social Management Framework (ESMF) in conjunction with a Resettlement Policy Framework (RPF) have been completed and disclosed. The safeguard procedures will be inputsto the Project ImplementationPlan and will include a set o f innovative Technical Planning Guidelines for about twenty types o f investments within the existing mandate o f woredas. These Guidelines will serve as a common practical tool at the local government level to improve project selection and technical implementation o f the eligible public works inclusive o f environmental and social considerations. 83. The ESMF and RPF described above are new. The parent Project did not originally require an ESMF/EA or an RPF. Given the Project's original scope, it had a health care waste management plan which was disclosed in the Info Shop as the EA. The new LIG activity, however, does trigger the safeguard policy on involuntary resettlement, for which an RPF has been completed. XI. Expected Outcomes 84. A joint comprehensive review o fthe Project's Results Framework was carried out during the Mid-Term Review completed inMay2007. The review o fProject outcome indicators showed (i)goodprogresstowards the initially settargets but(ii) theneedtoreview some ofthe also indicators in order to be able to assess performance on an annual basis by using administrative data. The Additional Financing will draw on the Results Framework agreed during the MTR as additional resources will largely be used to finance costs associated with the completion o f Component 1 (the new Subcomponent 1(a)) and Component 2. 85. Ingeneral, the expectedoutcomes as agreed duringthe MTRwill not change nor will the monitoring techniques. During the period o f implementation for PBS these procedures have been twice tested and have served well. Some strengthening and adjustment o f specific measures have been agreed but the results framework i s deemed satisfactory. Additional financing for the new Pilot LIG Subcomponent has its own indicators that focus on the success o f the SPG inpromoting more and higher quality sustainable investments at the local level. 86. The proposed indicators and targets for the Additional Financing are presented in Schedule E. XII. BenefitsandRisks 87. The principal benefit to be derived from the proposed Additional Financing i s the continued support to the drive to reachthe MDGs via scaling up o f basic services provided at the local levels. Furthermore, the proposed financing would sustain the momentum created duringthe implementation o f the ongoing PBS operation for the transparency and social accountability agenda. Finally, by broadening the agenda to include funding for capital spending it i s expected that the quality and efficiency o f spending on service delivery will continue to increase. 19 88. For the existing PBS components, the risks associated with engagement and commitment o f donors and Government, governance and accountability, technical design, fiduciary performance, etc. have decreased as assessed via the successful implementation o f the four PBS tests over the course o f FY07 and the first half o f FY08, including the MTR. While the risks associated with the financial management dimensions were rated as substantial during the preparation o f the ongoing PBS, mechanisms and controls which have been introduced- such as the Continuous Audit, PEFA, etc. - have mitigated these risks. A full fiduciary risk assessment has been carried out, and the findingshave been usedto review the FMriskratings accordingly. 89. Regarding risks associated with the Pilot LIG Subcomponent, a major impediment to better capital spending at the local level remains uneven capacity. However, the proposal to commence with a pilot greatly mitigates this risk as the learning process i s focused on carefully designing and testing the various elements o f capacity related to capital spending in order to determine what i s actually needed for local governments to increase the quantity and quality o f investment. A second risk i s that the participatory approach to planning and budgeting actually leads to a loss o f accountability due to capture by local elites or to selection o f capital investments that are not consistent with the achievement o f important national goals. On both counts the proposed subcomponent mitigates these risks by developing for the pilot a standardized and closely evaluated method of capital budgeting, planning and project selection and assures full compatibility with sector policies through the use o f Technical Planning Guidelines that are themselves derived from sector line ministries. Sustainability o f the benefits o f capital projects i s always a risk because o f the difficulty that local governments have in attracting and paying necessary staff and in funding other recurrent costs. This risk will be mitigated by providing guidance to local governments participating inthe pilot to so that the necessary commitments are made intheir budgets to cover these required costs. 90. In order to respond to governance concerns, the PBS operation has been designed to include more timely and detailed reporting on the use o f resources, explicit monitoring and oversight o f the fairness o f the transfers, monitoring o f service delivery results at the regional and sub-national levels, and the introduction o f measures to reinforce and enhance local accountability to support Government's commitment to distribute resources for basic services equitably. In addition, PBS supports the development o f accountability mechanisms on both the government and citizens' sides that are expected to be scaled-up duringthe period covered by the additional financing and beyond. 91. Several measures are implementedto promote good governance, including: 0 Semi-annual (formerly quarterly) JBAR reviews on overall Programperformance, following the PBS "tests" four o f additionality, fairness, accountability and fiduciary responsibilities; 0 Disclosure o f public budget information at Regional/City Administration and Sub- Regional Levels; 0 Capacity buildingfor improved financial transparency inMOFEDs, BOFEDs, Zonal Administrations and OFAG; 0 Enhancing the understanding of budget and public expenditures amongst citizens and CSOs, and strengthening their capacity to engage inthese processes; 0 Public disclosure by service facilities o ftheir annual budgetshesourcing levels, and on agreed performance standards and indicators as established at woredahegional levels; 0 Implementationo fFinancial Transparency and Accountability Perception Study; 0 Implementation of the Social Accountability pilots under PBS Component 4; 20 Implementation o f site visits at kebele and service facility levels; and Implementationo f continuous audits. 92. The Pilot LIG requirements in this area build upon existing systems, regulations and practices, particularly those that have been developed with regard to PBS. The main components o f the governance and accountability framework are: Financial reporting and audit requirements will buildon and be combined with the rest o f the PBS. The reporting o f capital spending, by woreda, i s available but only reported in aggregate under current PBS reporting. Capital spending that the Pilot LIG eligible woredas have undertaken will now be reported separately for the set o f Pilot LIG woredas. Communication and demand-side accountability i s at the core o f the LIG objectives o f making woredas more responsive to their citizens for capital spending, and in providing local citizens with more say in determining infrastructure priorities. Several o f the elements o f the Component 3 initiatives o f PBS would directly reinforce LIG; posting o f budgets, improved knowledge o f citizens about the budget process and participatory planning, as well as o fplans for capital projects are obvious items. The Financial Accountability and Transparency Perception Survey (FTAPS) implemented under Component 3 o f the PBS will also provide a mechanism to assess how effectively accountability i s working in terms o f the responsiveness o f local- planning processes to citizens' priorities and citizens' perceptions o f whether or not they are adequately consulted by their local authorities. A ResultsFramework has been constructed integrated with the rest o f the PBS. 93. Overall risk assessment. In summary, the PBS additional financing i s considered to be o f moderate risk. The original PBS program was considered to be high risk, but given the considerable progress in implementation achieved over the past 14 months, and demonstrated commitment by both Government and partners, the risk rating was reduced in May 2007, when the Mid-Term Review was conducted and re-confirmed inthe course o f Appraisal in July-August 2007. 94. Regarding country-level risk, tensions between Ethiopia and Eritrea continue at heightened levels, the Ethiopian military has launched an offensive to subdue a rebel movement inthe Ogadenregion, and Ethiopiantroops remain engaged in Somalia. There is the riskthat an escalation in any o f these situations could have a deleterious impact on the implementation o f the PBS program. Such an impact could be expected especially in the areas o f Ethiopia bordering Eritrea and Somalia, but also more generally, since open conflict will pose demands on the overall budget and likely draw high-level attention away fkom addressing challenges related to program implementation. 21 Descriptionof Risks Probability/ Impact Mitigation I (Low, Moderate, Substantial, High) `on of Basic Services Deterioration inpolitical 1MIM I0 Joint donor political and economic governance environment analysis facilitating common position resulting incalls for on governance and scenario planning suspension o f PBS 0 Inclusion o f governance indicators in instrument, and donor new PRSP (PASDEP) matrix and coalition may weaken enhanced dialogue on governance 0 Strong pro poor bias o f PBS instrument 0 Development and implementation o f joint communications strategy 0 Wide range o f donors involved in design and preparation 0 regular consultative events (missions, reviews) planned during - implementation End-users may not apply L/L 0 "fairness" principle used to evaluate funds to basic services or adherence to rules at several stages allocate it in a fair 0 expenditure reporting will be used to manner assess whether funding for basic - services was maintained as agreed Productionlag-time and MIM 0 UNICEF andUNFPAprocurement procurement delays for are being used for the bulk o f the critical commodities in critical commodities given long- the Health MDG standing purchase agreements and Performance Facility proven procurement capacity o f both 0 For all other inputsthe Government i s contracting a private agency to handle procurement; this agency's mandate will include strengtheningthe procurement capacity o fthe Federal 4 Unevenpolitical MIM 0 Consensus building activities commitment and implemented as part o f project institutional incentives implementation, and via other could work against initiatives increased disclosure and 0 Awareness-creation at each level downward accountability 0 Identification o f "champions" for change 5 Citizens may not feel SIM 0 Direct support to CSOs under free or be comfortable to Component 4 to strengthen voice and participate indemand- engagement side accountability activities 6 Accountability may be LIM 0 Food Security Programadherence to weaker inprograms not fiscal rules to be monitored. covered by the protection o fbasic services 22 Description of Risks Probability/ Impact Mitigation (Low, Moderate, Substantial, High) 7 L/M 0 Reporting requirements have been procedures may be too builton existing systems to the extent burdensome, leading to a possible slowdown or halt in Timinghas been implementation synchronizedcoordinated to minimize transaction costs 0 Adequate time lag for reporting expenditure Reducedfrequency o f review missions to minimize transactions costs 8 Key entities may lack capacity to carry out Incremental training and capacity obligations building supportedby the project Additional support provided under Component 3 Financ '1Management 9 Quarterly and annual SIS Reporting format and channel are financial reports are not based on the existinggovernment prepared on time. system 10 Audited financial SIS The capacity o f the Auditor General i s statements are not being strengthened. submitted to donors on A specialContinuous Audit o f sub- time resulting innon- national entities o f program compliance transactions i s being carried out and reported quarterly by the Federal Auditor-General. InFY07 this included about 200 sub-national entities Pilot L :a1Investment Grant 11 Limitedcapacity at the - - HIM 0 Pilot approach focuses o n learning to local level for ensuring test various elements o f capacity and quality capital support programs to address investment, particularly deficiencies planning and procurement I environmental screening to assess 23 Descriptionof Risks Probability/Impact Mitigation (Low, Moderate, Substantial, High) whether national systems are applied and the impact this has had on the overall process. As part o f the FTAF's, assess how effectively accountability i s working interms o fthe responsivenessoflocal planning processes to citizen's priorities and perceptions o f whether or not they are adequately consulted by their local authorities. Carrying out a capacity survey to develop detailed understanding o fthe initial conditions and capacities for ensuring successful implementation o f capital investments inpilot woredas 12 Participatory approach to WM Development o f a standardized and planning and budgeting method o f capital budgeting, planning, actually leads to a loss o f and project selection to be closely accountability due to monitored and evaluated. capture by local elites Planning approach also ensures full compatibility with sector policies through the use o f Technical Planning Guidelines that are derived from sector line ministries. 13 Risk to sustainability o f MIM Local government's rapidly increasing the benefits o f capital block grant i s creating additional fiscal projects because o f the space for recurrent costs. difficulty inpaying Woredas participating will receive recurrent costs for training and monitoring with respect to operations and covering costs o f O&M. maintenance (O&M) 14 Financialreporting on ExistingGovernment financial capital investments from reporting guidelines are being pilot woredas is delayed supplemented with specific guidance to Regionslpilot woredas regarding recording and reporting requirements Politic 15 Lack o f separation o f HIM PSCAP implementationincluding Party and State support to Civil Service Reform 16 Lack o f Government MIM Separate donor managed trust fund Commitment to Social and implementation o f Component 4 Accountability Review o f implementation during quarterly revikws 24 Impact Low Moderate Substantial High Probability Low 2 6,7,12 Moderate 1,3,4,8,13,16 Substantial 5 9,10,14 High 11,15 XIII. FinancialTerms andConditions for the AdditionalFinancing 96. The Additional Financing will be provided as an IDA Grant. The Country Financing Parameters allow for up to 100% project financing, including taxes. The financing parameters also allow for recurrent cost financing where required provided that the implications o f recurrent cost financing on Ethiopia's fiscal situation and debt sustainability are taken into consideration. 97. Retroactive Financing. Government has requestedretroactive financing for up to 20% o f the total amount o f Additional Financing for all eligible expenditures that have been incurred after January 7, 2007 and up to the date o f the grant signing. Refer to Schedule F for details. XIV. CreditConditionsandCovenants Conditionsfor Effectiveness 0 Submission and adoption o fthe revised PBS Operational Manual, satisfactory to the Association. 0 Agreed TOR for the PBS Annual Audit. Conditionsfor Disbursements For Subcomponent 1(a) on Promoting Basic Services Delivery by Sub-national governments, and Component 3 on Strengthening the Governance Systems on Financial Transparency and Accountability: (i) submission o f annual sub-national budget for basic services comprising Subprogram A satisfactory to the Association; (ii)satisfactory completion o f the Joint Budget Aid Review (JBAR); and (iii) submission o f the Interim (Unaudited) Financial Report (IFRs). For Subcomponent l(b) on the Pilot Local Investment Grant, the (i) submission and adoption o f an Operational Manual, satisfactory to the Association; and (ii) submission o f IFR. For Component 2 on Promotingthe HealthMillenniumDevelopment Goals, the submission o f annual work plan satisfactory to the Association; and (ii) submission of IFR. FirstReview inApril 2008 Semi-annual JBAR Continued dissemination o f budgets and JBAR information 25 0 Completion of field work for "Quantitative Services Delivery Survey" (QSDS) by end April 2008 and dissemination of findingsby endJune 2008 0 Completion of field work for Indoor Residual Spraying (IRS) by endApril 2008 0 Completion of "Financial Transparency and Accountability Perception Survey" (FTAPS) field work by endFebruary 2008 and dissemination of findings by endApril 2008 0 Project Report Second Review in October 2008 0 Semi-annual JBAR 0 Continueddissemination of budgets and JBAR information 0 Project Report Third Review inApril 2009 0 Semi-annual JBAR 0 Continued dissemination ofbudgets and JBAR information Follow-up of FTAPS startedby May 2009 0 Completion of apost procurement audit review covering a minimumof 25% of Pilot LIG woredas by May 31,2009. Project Report 26 SCHEDULEA FEDERALDEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCINGFOR THE PROTECTIONOF BASICSERVICES ESTIMATED PROJECTCOSTS (in US$million equivalent) Category Local Forei Total 1. Component 1 1 (i)Deliveryof BasicServices(SubprogramA) 1,703.51 1,703.5 1 (ii) InvestmentGrant(SubprogramD) Local 15.OO 20.00 2. Component 2: HeathMDGPerformance Facility 3.50 70.40 73.90 (Subprogram B) 3. Component 3: Financial Transparency and 5.21 1S O 6.71 Accountability (Subprogram C) TotalProiectCosts 1.727.22 76.90 1.804.12 SOURCEOF FINANCING (in US$million equivalent) Government 1,159.23 - 1,159.23 Total: 1,727.22 76.90 1,804.12 4.3% 27 SCHEDULEB FEDERALDEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCING FOR THE PROTECTIONOF BASICSERVICES FINANCINGPLAN (in US$million equivalent) Project Cost by Component IDA GOE DONOR TOTAL 1. Sub-National Basic Services (i) Sub-nationalBasicServices 165-00 1,159.23 379.28 1,703.5 1 (Subprogram A) (ii) LocalInvestmentGrant 20.00 20.00 (Subprogram D) 2. HealthMDGs Performance Facility 29.00 44.90 73.90 (Subprogram B) 3. Financial Transparency and Accountability 1.oo 5.71 6.71 (Subprogram C) Total Baseline Cost 215.00 1,159.23 429.89 1,804.12 Contingencies TotalProject Costs 215.00 1,159.23 429.89 1,804.12 Interest During:Construction Front-endFee TotalFinancingRequired 215.00 1,159.23 429.89 1,804.12 DISBURSEMENTSCHEDULE (in US$million equivalent) I IDA FY I FY 2008 I FY2009 Annual 130.00 85.00 Cumulative 130.00 215.00 28 SCHEDULEB ALLOCATION AND DISBURSEMENT OF ADDITIONAL FINANCING Protectionof Basic Additional % of expendituresto be Category Services Grant FinancingAmount financedfor (OriginalProject) (in SDR) SupplementalGrant Amount 1. SubprogramA Such percentage of Eligible Expenditures as the Associationmay determine for EFYOO 2. Subprogram B Suchpercentageof Eligible Expenditures as the Associationmay determine for eachEFY 3. Subprogram C 1,400,000 640,000 Such percentage of Eligible Expenditures as the 4. SubprogramD i Association may determine I for each EFY 12,740,000 Such percentage of Eligible Expenditures as the Association may determine for eachEFY 5. Unallocated 2,130,000 I Total 149,600,000 1 137,050,000 29 SCHEDULE C FEDERALDEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCING FORTHE PROTECTIONOF BASICSERVICES PROCUREMENTARRANGEMENTS (in US$million equivalent) 1. General Procurement associated with project activities supported through the additional financing would be carriedout inaccordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004 revised October, 2006 and "Guidelines: Selection and Employment of Consultants by WorldBank Borrowers " dated M a y 2004 and revisedOctober, 2006. Inthe public sector in Ethiopia, procurement at Federal level is governed by proclamation no. 430/2005, `Determination procedures o f public procurement and establishing its supervisory agency proclamation o f the Federal Democratic Republic Government o f Ethiopia' dated January 12,2005 and the Federal Public Procurement Directive o f July 2005. These procedures have been reviewed by the World Bank during procurement reform follow-up missions and were found to be generally satisfactory. Following the federal structure o f the government procurement at regional and woreda level i s governed by codes enacted by the respective regional governments based on the model law prepared by the Public Procurement Agency and issued to the respective regions. At the time of the preparation o f this note new procurement codeshave been enacted at the four major regions (Amhara, SNNPR, Oromiya and Tigray), one smaller region (Benishangul-Gumuz), and one City Administration (Addis Ababa). The main outstanding critical issue inpublic procurement, especially at the local level, i s the lack o f capacity. While capacity i s being built at country level a temporary strategy to address the issues on procurement management needs to be developed. The main areas o f concern include: (i) Building procurement capacity including having trained and qualified procurement officers in place and an appropriate institutional and decision making structure, (ii) Insuringthat awareness i s created on the applicable procedures and rules at each woreda including availability o f standard procurement documents, and (iii) Monitoring and Evaluation o f procurement activities including procurement reviews. PSCAP resources can be used to address a significant part o f these issues as part o f the support to the ongoing procurement reform program. 11. Summaryof ProcurementPerformanceunderthe OriginalProject Procurement performance o f the existing project activities has been satisfactory, and has contributed significantly to the achievement o f many o fthe key results o f this project. 30 SCHEDULEC For Component 2, the procurement o f ITNs and insecticides, and subsequent distribution in the malarious areas to vulnerable households, has contributed significantly to the reduction o f morbidity and mortality associated with malaria. The procurement o f contraceptives and subsequent distribution to targeted population has contributed to an increase in the contraceptive prevalence rate. The procurement o f cold-chain equipment (refrigerators, vaccine carriers, etc.) has enabled health centers and health posts to carry and store vaccines that were not available earlier. With the exception o f cold-chain equipment and insecticides, the bulk o f the procurement has been done from UN agencies, chiefly UNICEF and UNFPA, and given the urgent nature o f this procurement, it i s proposed to continue with this arrangement until the capacity within the MOH procurement office i s sufficiently strengthened. An assessment carried out as part o f the semi- annual JBAR review shows that a large percentage o f items procured through UN agencies has been delivered or i s inthe warehouse awaiting delivery. The assessment underscores the need for UNagencies through whom these items are being procured to expedite delivery, and this issue has been taken up at the appropriate levels inthese agencies. For Component 3, the Government has procured several consultancies as well as goods utilizing the agreed procurement methods as definedinthe procurement plan for the ongoingProject. 111. DescriptionofProcurementArrangementsfor the AdditionalFinancing The general description o f various procurement activities under the different expenditure categories for the Additional Financing i s provided hereafter. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank project team during Negotiations and are described in the Procurement Plan (attached). The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurementfor Component 1 Subcomponent 1(a) - Promoting the Delivery o f Basic Services by Sub-national governments (Subprogram A) - The bulk o f this component would entail payments o f salaries and other recurrent expenditures, following the local government's procurement procedures and rules acceptable to the Bank as i s the current practice under the ongoing PBS Project. Subcomponent 1(b): Pilot Local Investment Grant (LIG) (Subprogram D) would support the introduction o f a Federal Specific Purpose Grant to be used exclusively for capital investment implemented by local governments. It would include investments in health, education, agriculture, water, and roads. The grants would be used primarily for works and associated goods and equipment. Individual contracts are expected to be small and scattered, with an estimated cost below $50,000. Procurement o f these contracts will follow the local government's procurement procedures and rules acceptable to the Bank. 31 SCHEDULEC Procurementfor Component2: Promotingthe HealthMillenniumDevelopmentGoals (Subprogram B): Procurement of Goods: The Procurements under the Component would include ITNs, drugs, rapid test diagnostic kits to primary health centers, vaccines and medical equipment. The procurement would be carried out usingthe same procurement arrangements as with the ongoing project, either from UNAgencies such as UNICEFand UNFPA or through a procurement agent. The applicable method o f procurements have been agreed and defined inthe project procurement plan. Selection of Consultants: Consultants services shall include Studies, training, workshops. The procurement procedures to be used for the additional financing are described in the attached Procurement Plan. Procurementfor Component 3: Strengthening Governance Systems on Financial Transparency and Accountability (Subprogram C): The procurement shall include consultant services (studies, assessments, reviews) and procurement o f goods (see procurement plan) and shall be conducted byusingthe procurement procedures inthe attachedProcurement Plan.. IV. Assessment of the Agency's Capacityto ImplementProcurement The overall risk assessment for procurement i s considered to be high. Key mitigating measures that have been discussed and agreed with Government are described in the Risk Assessment Matrix in Section XI1 o f the Project Paper. In addition, a set o f procurement capacity building initiatives that have been started as part o f the ongoing project and updated based on the assessments conducted during supervision missions. The assessment and the ongoing and agreed actions are summarized below: For Subcomponent l(b), Pilot LIG- 0 Only Regions that have implemented the national accounting and procurement reforms under the Government's Expenditure Management and Control Program are eligible to receive funding from the Pilot LIG. As part o fpreparation o fthe Pilot LIG Subcomponent, an initial capacity assessmentwas carried out o f a sample o f woredas. Once the pilot woredas have been identified, a Capacity Survey would be carried out in all pilot woredas, which would include a detailed assessment as to the extent to which the woreda i s able to follow national procurement procedures. The assessment would include availability o f staff with adequate knowledge in procurement, appropriate institutional setup and existence o f tender committee. The agreed national procedures would apply to all capital investments inthe Pilot LIGrecipientjurisdictions. Any significant capacity gaps identified by the Capacity Survey would be addressed before the start o f the Pilot LIG implementation, and modalities for the oversight by MOFED would be agreed. 32 SCHEDULE C A procurement manual, including related procurement capacity building requirements and national .bidding documents acceptable to the Bank, are in an advanced state o f development and will be developed in conjunction with the preparation o f a detailed Operational Manual for the LIG Subcomponent. The satisfactory completion o f the LIG Operational manual inits entirety i s a condition o f disbursement for the Pilot LIG. A post procurement review, including a review ofthe adequacy o f agreed procedures will be conducted on a sample basis by using consultants engaged by the Project and if significant deviations from agreed procedures are found, suitable remedies would be applied. For Component 2, Health MDGs Performance Facility - A procurement consultant has already been appointed in the Ministry o f Health and has been working closely with the Ministryofficials since the beginning o f 2007. Two officials from Ministry o f Health have received training in Bank procurement rules inaregionalworkshop organizedbythe Bankfor thispurpose. A procurement unit has been set up within the Ministry o f Health, but full-time procurement staff has not yet been identified. The process for identifying a Procurement Agent i s completed and it i s expected that the Procurement agent will be in place by December 2007. The Procurement Agent i s expected to provide additional capacity buildingwithin the Ministry o f Health and assist inthe establishment ofa functioningprocurement unit. For Component 3, Financial Transparency - A full-time procurement consultant was recruitedto support the consultancies conducted under this component o f the original project. This arrangement i s expected to continue throughout the life o f the Additional Financing. V. ProcurementPlan The Borrower has developed a Procurement Plan for Components 2 and 3 for the Additional Financing, which provides the basis for the procurement methods. This plan has been discussed with the Bank and agreed upon duringnegotiations. The procurement plan i s available inthe PBS Unit Office of MOFED, in the Ministry of Health, the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 33 SCHEDULE C A consolidatedprocurement plan would not be required for the small value works activities to be carried out at woreda level under the Pilot LIG as the contracts are small value and planned and executed ina widely dispersed manner inaccordance with the local governments' work plan. Once Pilot woredas receiving LIG resources have decided what capital investment activities will be undertaken, they will be expected to have local procurement plans and related documents available for the post-procurement audit. 34 SCHEDULEC Protectionof BasicServices Project-AdditionalFinancing ProcurementPlan November14,2007 I. GENERAL 1.1 Projectinformation: Country: FederalDemocraticRepublicof Ethiopia Project Name: Protectionof Basic Services Loadcredit No: H224-1-ET Project Implementing Agency (PIA): 1. Component 1:Ministryof FinanceandEconomicDevelopment,assistedby its Macro economic PolicyandManagementDept., MPMD) 2. Component 2: Ministryof Health(MOH) 3. Component 3: Ministryof FinanceandEconomicDevelopment,assisted MPMD 1.2 Bank's approval date of the procurement Plan: November 12,2007 1.3 Date of General Procurement Notice: January 2008 1.4 Period covered by this procurement plan: January2008 - June 2009 II. ProcurementPlan 2.1 GOODS SIN Descriptionof goods Estimated Procurement Responsible Domestic Review by Expected bid cost method entity preference Bank opening date Component 2 - Promotingthe Health MillenniumDevelopmentGoals, SubprogramB (in US%) 1 ITN 8,000,000 DCLJNICEF MOH No Prior N/A 2 DiagnosticiLaboratory 1,200,000 ICB MOH Yes Prior January 2008 Equipment 3 Vaccine 1,490,000 DCAJNICEF MOH No Prior NIA 4 Medical Equipment 8,210,000 ICB MOH Yes Prior January 2008 for HPs 1HCs 5. IRS 2,090,000 ICB MOH Yes Prior July 2008 6.IMalaria IEC/BCC 900,000 NCB MOH Yes Prior May 2008 Toolkits 35 2.2 CONSULTANT SERVICES I I I I I I I I Subtotal I$2,370,000 II Component 3 -StrengtheningG vernance Systf Accounta ility Design, Fielding & Analysisof $350,000 Prior 30-May-2009 Follow-up Financial& AccountabilityPerceptionSurvey (FTAPS) Reviews for Local Investment Grant: MPMD Various Priori 31-May-2009 Post (0 Technical output assessment (i) $270,000 (ii) Investment ProcessReview (ii) $230,000 (iii) Ex-post Procurement (iii)$60,000 Subtotal $910,000 36 c 2.3 CAPACITY BUILDING Estimated Review Expected Descriptionof Assignment Responsible Selection by Bank Proposals cost entity Method (Prior / Post) Submission Date *LIG Coordinator for 1year $25,000 MPMD IC **PBS Unit Office Assistant (1 yr) $20,000 MPMD IC * PBS SOC Unit ProcurementSpec (1 yr) $30,000 MPMD IC PBS Accountability Spec (lyr) $25,000 MPMD IC Training of BOFED & WOFED staff on $57,350 MPMD COS Prior financialaccountability& transparency& utilization of Laypersons' Budget & Expend.Guides and Templates 7 Training of BOFEDs & WOFEDs on $45,400 MPMD CQS Post Physical and FinancialReportingSystems Trainingon WB Procurementand Contract $48,000 MPMD CQS Post Over the period Management FY08 and Training on FinancialAccountability, $30,000 MPMD CQS Prior 30 July 2008 Transparencyand demand-sidegovernance I Subtotal: $280,750 37 SCHEDULE D FEDERALDEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCINGFOR THE PROTECTIONOF BASIC SERVICES PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS Milestone Available Date Time taken to prepare 6 months Preparedby Government with assistance o f IDA and DFIDStaff Appraisal August 31,2007 Negotiations November 19-21,2007 Estimated Board date December 20,2007 Planned Date o f Effectiveness January 7,2008 Closing Date June 30,2009 The Additional Financingwill be processed following streamlined procedures. Project Team: The preparation team includes: Messrs./Mmes. T i n a Haque, Lead Economist and Team Leader, Mukesh Chawla, Lead Economist; William Wiseman, Economist; Andrew Sunil Rajkumar, Economist; Gebreselassie Okubagzhi, Sr. Health Specialist; Sybille Schmidt, Consultant; Larissa Pelham, Consultant; Southsavy Nakhavanit, Program Assistant, Ken Green, Environmental Specialist Consultant, Ian Campbell, Environmental Specialist Consultamt (AFTH3); Marilou Bradley, Sr. Operations Officer (AFTH1); Jemal Omer, Sr. Economist (AFTP2); Lawrence Hannah, Lead Economist (FEU); Carolyn Winter, Sr. Social Development Specialist (AFTCS); Berhanu Legesse, Sr. Public Sector Management Specialist (AFTPR); Abebaw Alemayehu, Sr. Urban Development Specialist (AFTU1); Jonathan Pavluk, Sr. Counsel (LEGAF); Suprotik Basu, Health Specialist (AFTHD); Marie Khoury, Consultant, Luis Schwarz, Sr. Finance Officer (LOAFC); T.K. Balakrishnan, Lead Financial Management Specialist, Jean Charles Amon Kra, Sr. Financial Management Specialist, Mulat Negash Tegegn, Financial Management Consultant (AFTFM); Samuel Haileselassie, Sr. Procurement Specialist (AFTPC). Ms.LauraFrigentiis the Sector Manager. 38 0 m - 2 vi 0 vi T mf. z r. ri 3 c* d 0 E:0E d a 2z Nxs 4 0s x s E d m B n El 8 n Elri ds m m E 3? 00 Em 2 E 1:M 01 ? mE? z 2 E 3 3 3 z -0cI--, E! E Y i SCHEDULEF FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCINGFOR THE PROTECTIONOF BASICSERVICES FINANCIAL MANAGEMENT AND DISBURSEMENTARRANGEMENTS Introduction This financial management (FM) assessment was conducted in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board on November 3, 2005. Inaddition, OP/BP 13.20, Additional Financing, was also taken into consideration while conducting the assessment. This assessment was done inthe months o f July and August 2007. Substantial amount o f the total additional financing (US$194 million) i s required to address the Jinancing gap in completing core activities under Subcomponent 1(a) and Component 2 supported through the ongoing Protection o f Basic Services (PBS) Project. Thus, an additional FMassessment is not carried out for these components, as the FMarrangements will be the same as for the ongoing project. However, since the additional financing incorporates new activities under the Pilot Local Investment Grant window (Subcomponent l(b), US$20 million), a full FM assessment has been carried out to determine whether the implementing entities have acceptable financial management arrangements, which will ensure (1) the funds for the LIG are used only for the intended purpose in an efficient and economical way, (2) the preparation o f accurate, reliable and timely periodic financial reports for LIG financial transactions, and (3) safeguard the entities' assets. This FMassessment draws extensively on the assessment o f the FM system o f the ongoing PBS, the Fiduciary Assessment (FA), assessment o f the Joint Budget and Aid Review (JBAR) and the assessment o f government FMsysteminother projects. Summary ProjectDescription The additional financing supports activities under three main categories: Subcomponent 1(a) (US$165 million) - Basic Services, Subprogram A- finances the delivery o f basic services provided by regional and local governments; Subcomponent 1(b) - the Pilot Local Investment Grant, LIG, Subprogram D (US$20 million) - supports the introduction o f a multi-sector specific purpose grant; Component 2 (US$29 million) - Promoting the Health Millennium Development Goals, Subprogram B - finances those critical inputs for primary health service delivery that cannot be efficiently funded at woreda level through the block-grant; Component 3 (US$1 million) - Strengthening Governance Systems on Financial Transparency and Accountability, Subprogram C- finances the scaling up o f local initiatives to advance issues o f financial transparency and accountability around public finance management at the sub-national levels o f government. The Pilot LIG Subcomponent l(b) o f the PBS Project would support the scaling-up o f the existing Program's impact on basic service delivery. This new subcomponent would support the introductiono f a multi-sector specific purpose grant (SPG) from the Federal Government with the purpose o f increasing the quality and quantity o f capital spending by local governments. The 45 proposed additional financing o f US$20 million for the Pilot LIG would provide funds to up to fifty local governments (woredas) over an initial period o f one fiscal year. Country Issues The recently completed Joint budget and Aid review (JBAR)and the Fiduciary Assessment (FA) show that Ethiopia has made significant progress in strengthening public financial management in recent years. The JBAR, which was conducted by the Bank in collaboration with other donors, reviewed the Public Financial Management (PFM) system using the Public Expenditure and Financial Accountability (PEFA) framework. Out o f the sixteen indicators covered under this review, fourteen were on government's systems for public expenditure planning, budgeting and reporting. The remaining two indicators are means to assess donor performance. Ethiopia scored high on seven o f the fourteen indictors, i.e. macroeconomic management, including aggregate fiscal discipline and minimizing fiscal risks. The JBAR observes satisfactory progress in budgeting and accounting reform but notes that the adequacy and quality o f budget reporting leaves room for improvement andremain a key concern. The FA, which was completed in early 2005, notes that considerable progress has been made in implementing PFM reforms in both federal and regional levels. The areas o f improvements include budget processes, internal controls and cash management. Also, some steps have been taken inreforming internal and external audits. However, there are some weak areas that require attention - delays in financial reporting (both in-year and annual), inadequate capacity o f the auditors-general to discharge their responsibilities, and weakness in legislative scrutiny o f audited financial reports. The status o f P F M reform and performance varies between regions. Southern Nation and Nationalities Peoples (SNNP) and Tigray regions have been the beneficiaries o f investment and local initiatives to support PFM reform. They both show improvement in the overall public finance function and a consequential reduction in fiduciary risk. Other Regions are at an earlier stage o f investment in P F M or have not yet commenced their plans and therefore demonstrated less progress inPFMimprovement. However, there continues to be capacity and staffing issues in areas such as audit in all the regions. An additional concern i s that while there have been improvements in the financial discipline associated with government funds, the increasing use o f other funding mechanisms such as in the Food Security Program has the potential to increase fiduciary risk. This i s because the use o f alternative funding mechanisms creates additional workload in areas where capacity i s already stretched. It must be noted that there i s a shortage o f qualified accountants and auditors inthe country. Ethiopia's public financial management reforms have been carried out through the Expenditure Management and Control sub-program (EMCP) o f the government's civil service reformprogram (CSRP). EMCP has developed a revised strategic plan to implement the nine components o f the sub-program. Mobilization behindthe EMCP (interms o f financial and humanresources) i s a key component of the Public Sector Capacity Building Program (PSCAP) and has now been considered a priority in order to achieve further improvement in all aspects of financial management. Overview of the PEFA assessmentreport An evaluation o f Public Financial Management (PFM) performance in Ethiopia has been conducted in early 2007 based on an international reference framework - the PEFA or Public Expenditure and Financial Accountability framework. The assessment was done at the federal 46 and regional levels and two separate reports were issued. Seven regions were included in the assessment. The assessment report issued in April 2007, which i s still in its draft form, observed significant improvement inthe area o f financial management at regions, including budgetary transparency 'in recent years, robust budget preparation, regular internal audit scrutiny and follow up o f internal audit recommendations, timeliness of in-year and annual financial reports, and mutual supportiveness o f the federal and regional Auditor Generals. Nonetheless, the report noted that the quality andnature o finternal audit is uneven throughout the regions. It also reported untimely clearance o f suspense accounts and that some regions are still experiencing significant delays in producing timely in-year and end o f year information. The report further identified capacity limitations inreviewing annual budgets. The report for the assessment conducted at the federal level shows that the classification o f the budget meets international standards and the information included inthe budget documentation is o f good quality. The fiscal relations between the federal government and the regions are transparent. The report also noted that the budget process i s well ordered with the existence o f a budget calendar generally adhered to, and a budget circular issued to budgetary institutions. Payroll and procurement controls are identified as being satisfactory while control for non-salary expenditure shows some weaknesses. Internal audits are also improved over recent years although the department does not share its work with the Federal Auditor General. The report indicated that the quality o f in-year budget reports and annual financial statements i s satisfactory and delays insubmitting financial statements to OFAGhave been significantly reduced. However, the report also noted that the cash flow management i s not fully established and the public has limited access to key fiscal information. The Federal government report also shows that the OFAG adheres to INTOSAI auditing standards and focuses on significant issues. OFAG forwards audited accounts on time and these are reviewed by the parliamentary Public Accounts Committee (PCA). However, the review by the PCA i s not systemic due to limited capacity and time constraints and the executive does not act upon the recommendations. The report also looked at the status o f the government reform processes. It i s highlighted that the first phase o f the reform (transaction platform) has taken place through budgeting, planning, accounting, and information systems. The second phase o f the reform, policy platform, i s continuing at the sub-national level with reforms to the block grant mechanisms and a move towards more performance basedbudgeting. The government leadership and ownership regarding ongoing P F M reform efforts are both high.The report however observed challenges in carrying out these reforms: difficulty in accessing the PSCAP funds into which the Expenditure Control and Management Program (ECMP) i s tied to, qualified professional staff are thin at the sub- national level, particularly at the woreda level, and lack o f some basic office infrastructure. RiskAssessmentandMitigation The FM risk assessment, and the corresponding mitigation measures, for the Pilot LIG Subcomponent are given below: 47 Risk Risk RiskMitigating Conditions Remarks Rating Measures Incorporated for into Project Design Effectiveness (Y/N)? Inherent Risk 1 Country S N Risk arises because o f weak Level capacity, including shortage o f qualified accountants and auditors. It i s being addressed by the ongoing Civil Service ReformProgram supportedby PSCAP. 1 EntityLevel S N As above 1 ProjectLevel S MOFED, BOFED and N As above. The problem mainly zones recruited manifested inworedas. additional accountants for PBS. Control Risk 1 Budgeting L N LIGbudgeting follows the existing government budget processes 1 Accounting M N LIG transactions will be recorded using the government accounting system 1 Internal M The LIG financial N Control activities will be subject to continuous audit by the OFAG. 1 Fundsflow M N Regular established government funds flow mechanisms will be used. 1 Financial S Mechanisms for N The reporting system involves Reporting information flows and gathering information from consolidation have been significant number o f woredas agreed. Report based and their consolidation. disbursement shall be used for LIG which provides incentives for prompt reporting. Contents o f the IFRs and annual financial statements have been agreed. 1 Auditing S The LIG financial Y Delays insubmission o f audit activities will be subject reports has been a significant to continuous audit. The problem inthe IDA-financed scope o f the audit and portfolio. The dispersion o f audit arrangements have funds across various woredas been agreed. Detailed poses challenges. terms o freference for the audit are being finalized. H=Hig S=Subs ntial; M=Moderate; L= 48 The overall financial managementriskrating for the LIGis assessedas substantial. Strengths andWeaknesses As noted in various reports the country's discipline in executing budget and compliance with the existing government regulations are the major strengths in implementing Pilot LIG Subcomponent. The proposed FM arrangement will avoid setting up parallel system for the flow o f funds, recording financial transactions, reporting and auditing. The government's existing arrangements are already being used in a number o f projects, including PBS which i s currently under implementation. The main weaknesses for the FM arrangements o f the Pilot LIG Subcomponent, as it i s part o f the overall PBS program, include shortage o f qualified accountants and auditors (mainly at woredas), delay in reporting, limited focus o f internal audit, and understaffing o f the audit function. The long process involved inproducing reports from woredas to regions, and from regions to Ministry o f Finance and Economic Development (MOFED), may delay the timely submission o f financial reports to the DPs. Obtaining timely audit reports and timely and relevant financial reports was noted as a problem in most o f the diagnostic works conducted for Ethiopia. Overdue external audit reports for two projects and one IDF Grant implemented by MOFED and M O H (the Productive Safety Nets Project (PSNP), the Health Sector Development Project (HSDP), and an IDFGrant) havebeencompleted and submitted to the Bank. Significant Weaknesses Action Responsible Completion Date Person The programis . strengthen the monitoring .MOFED .ongoing implementedby various .. capacity at federal and agencies, including regions regional level and woredas . regular supervision by DPs IDA and other ongoing DPs Auditing may take long time Strengthen the capacity o f OFAG, Ongoing to complete OFAG MOFED Regular financial reports Establishment and operations MOFED, Ongoing may not be received on time o f a smooth information flow BOFEDs, from woredas and reeions and consolidation system WOFEDs ImplementingEntities The implementationarrangements under the additional financing would be largely the same as for the ongoing PBS project. MOFED will be the overall implementing agency responsible for Components 1 and 3, including the Pilot LIG. It will have the overall responsibility for the oversight, coordination, monitoring and evaluation o f project activities across these two components. At the regional level, Bureaus o f Finance and Economic Development (BOFEDs) will continue to be responsible for coordinating project implementation. At local level the Woreda Finance and Economic Development Offices (WOFEDs) and Urban Administration Offices o f Finance would be responsible for managing and coordinating day-to-day implementation o f activities executed. The Office o f DLDP o f the Ministry o f Capacity Building at federal level and its line bureaus at regional and local levels will continue to closely collaborate with MOFED and its Bureaus in the overall coordination and implementation o f Component 3. Component 2 will continue to be managed by the Federal Ministryo f Health (MOH). 49 The wide scope o f the Pilot LIG requires a fairly complex implementation arrangement. Pilot activities are spread over in selected regions and woredas. Budgeting The Ethiopian budget system i s complex, reflecting the fiscal decentralization structure. The budget is processed at federal, regional, zonal (in some regions), and woreda and municipality levels. The federal budgeting process usually starts by issuingthe budget preparation note to the Budgetary Institutions (BIs). Based on the budget manual, the BIs prepare their budgets in line with the budget ceilings and submit these to MOFED within six weeks following the budget call. The budgets are reviewed at first by MOFED and then by the Council o f Ministers. The final recommended draft federal budget i s sent to parliament inearly June and i s expected to be cleared at the latest by the end o f the Ethiopian Fiscal Year (EFY). The JBAR notes the need for the budget process to be more transparent and systematic in the areas o f administration o f federal transfers and inter-sectoral allocation, and budget reviews. The LIG will be an annual program synchronized with the Ethiopian fiscal year. Inpreparingthe Federal budget, an allocation for the LIG would be proposed for each region. Regions will determine appropriate woreda allocations. Based on these indicative figures, recipient woredas will include LIG resources on the revenue side o f their budget. Incorporation o f the LIG within woreda budgets i s important for promoting integrated planning and capital budgeting at the woreda level. This system will follow the existing time-line for determining the allocations o f the block grant as part o f the budget cycle inthe inter-governmental fiscal system. Accounting The Government's accounting policies and procedures will be used for LIG. Starting from July 2002, the Ethiopian government has introduced a double entry modifiedcash basis o f accounting. The new reform has been implemented at the federal level and in many regions. The main elements o f the accounting reform are the adoption o f (i) a revised and comprehensive chart of accounts consistent with the new budget classification, (ii)system o f ledgers accommodating all a types o f accounts (including transfers, assets, liabilities and fund balance in addition to revenues and expenditures), (iii)double entry book-keeping (thus, self balancing set o f accounts), (iv) a system o f control o f budgetary commitments (recording commitments as well as actual payments), (v) modified cash basis transaction accounting, and (vi) revised monthly report formats to accommodate double-entry book-keeping and commitment control and permit better cash control. The computerized Integrated Budget and Expenditure (IBEX) accounting system i s now operational at the federal level (MOFED and in 100 o f the 163 federal reporting entities) and most regions. Installation o f this system i s being carried out in Afar and Gambella regions. It i s expected that all regions, except Somali, shall use IBEX system starting from the EFY 2000 (FY 2007/08). The rolling out o f IBEX system to zones has continued and three regions (Oromia, SNNPR and Amhara) have already introduced the system in selected zones. The IBEXrolling out exercise i s expected to continue and will cover all federal reporting entities and all zones in all regions. The staffing level in the implementing agencies varies in number and quality. It i s reported that 168 contractual staff have been recruited for PBS, including 103 accountants and 65 IT specialists. These accountants will be responsible for handling LIG's accounting operation at their respective offices. The overall staffing level at woredas i s weak because o f understaffing, 50 which i s partly due to low salary scale to attract and retain qualified staff. This i s beingaddressed by the ongoing civil service reform supported by the Public Sector Capacity Building Project (PSCAP). InternalControlandInternalAuditing MOFEDand BOFEDs each have an inspection department performing post audit activities on all the financial transactions o f the entity, involving an assessment o f whether the budget utilization i s in line with the intended purposes. The staff o f the inspection departments varies from region to region. Each WOFED has an internal audit unitresponsible for the audit o fpublic funds. The CFAA report for Ethiopia recommended that the government should consolidate the organizational structure, redefine the work and duties o f the internal auditors to better address the need o f the government. This has been implemented and the Inspection Department in MOFED now acts as an internal audit regulatory body while the internal auditors in sector ministries conduct the audit activities. The Inspection Department in MOFED, in collaboration with the Office o f the Auditor General (OFAG), prepared user manual and provided training to internal auditors on the manual. The internal audit units in most offices are however understaffed and largely ineffective. The FA notes the need to enhance the independence o f the internal auditors. Also, there i s a need to carry out similar reforms in the Regions and Woredas. The EMCP o f the Civil Services ReformProgram, amongst other things, focuses on further improving the internalaudit function. For LIG and other components of the PBS, the internal audit section in each o f the regions and woredas will perform internal audit activities on the financial transactions. FundsFlow andDisbursementArrangements The funds flow for Subcomponent l(a) and Components 2 and 3 will follow the same mechanism for the ongoing PBS project. The funding flow mechanismfor Subcomponent l(b), the Pilot LIG, will be through regular fiscal channels managed by MOFED and will be monitored through existing systems established to report on public spending. The reporting already required for PBS will be augmented, largely in terms o f level o f aggregation, in order to track capital spending at the local level. Subcomponent l a - Promoting the Delivery of Basic Services by Sub-national governments, and Component 3 - Strengthening Governance Systems on Financial Transparency and Accountability: The Government of Ethiopia (GOE) and Development Partners (DPs) will agree on the annual budgets and work plans which will comprise the subprograms A and C for implementation in the year in question. Also, the proportion o f financing between GOE and the DPs will be established each year, and revised as needed. After the initial advance for the remaining period for the current year, the Government will in each six months submit a Withdrawal Application and Interim (Unaudited) Financial Reports (IFRs) for each Component, which will report actual expenditure at the MOFED and Regional levels for Component 3 and at the woredas and Regions for Subcomponent l(a) to the World Bank and other DPs. For Subcomponent 1(a) (Subprogram A), moreover, the DPs would simultaneously conduct a joint semi-annual review, including additionality, fairness and fiduciary reviews. Upon the satisfactory conclusion o f each six months review and analysis, the Bank Task Team Leader (TTL) will advise the Bank's loan department o f the share o f financing to be disbursed by 51 the Bank for Subcomponent l(a) and Component 3, respectively. The Bank in its own capacity and on behalf o f other DPs for Bank-administered Multi-donor Trust Funds (MDTFs) will then deposit their share o f financing to a Designated Pooled foreign exchange Account that GOE has designated for that purpose inthe National Bank o f Ethiopia. GOE will then draw resources from this account to its consolidated funds account, as required. For Subcomponent l(a) and Component 3 the existing Treasury channels o f GOE will be used to transfer the funds from MOFED to BOFEDs and from BOFEDS to WOFEDs. The following chart illustrates the funds flow system for Subcomponent l(a) and Component 3. I I I I IDA Other Participating DPs DesignatedPooledAccount A Based on request for funds from MoFED(Request for advance/FMRs) I I I +I At the discretionofMOFED I I Government Consolidated FundAccount inBirr Through GoE Treasury System, including government resources. BOFEDs ThroughGoE Treasury System, incl. regional government resources WOFEDS Component 2 - Promoting the Health Millennium Development Goals: As in the case o f the Subcomponent l(a) and Component 3 described above, a Designated PooledAccount (DPA) will be located in the National Bank of Ethiopia to which the DPs would contribute on the same basis as explained above. The funds would then be drawn by the Federal Ministry o f Health (FMOH) reports (s) received from MOH - which will report expenditure incurred on the project. Upon the to finance project expenditure. The DPA will be replenished on the basis o f interim financial conclusion o f each six month review, the Bank TTL will advise LOA o f the share o f financing to be disbursed by the Bank. The Bank team and other DPs will jointly review the share o f expenditures to be financed by IDA and the MDTFfrom time to time. The Bank will then deposit their share of financing to the DPA in its own capacity and on behalf o f the other DPs for the Bank-administered MDTFs.The following chart illustrates the funds flow system for Component 2. 52 DesignatedPooledAccount B Based on request for funds from MoFED(Request for advance/FMRs) I I At the discretionofMoH activities under Component 2 Subcomponent I@),Pilot LIG (Subprogram D): The purpose o f funds flow and reporting arrangement for LIG i s to specifically track expenditures incurred for LIG activities in a manner that will facilitate periodic reporting to and disbursement by the Bank. Accordingly, the following fundflow andreportingprocess is envisaged. The Federal Government will create a LIG Special Purpose Grant as a proclamation in the Federal budget, under MOFED;which will include allocations by region o f LIGresources. Funds flow will institutionally follow the treasury system: from MOFED to BOFED, and from BOFED to WOFED. Regions will be allocated a portion o f the annual financing for LIG, which will be deposited by MOFED into their treasury accounts. The allocation formula will follow the existing Block Grant formula. BOFEDs will determine individual woreda allocations for LIG (as per MOFEDguidelines) andwill informeach WOFED ofthese LIGallocations. A Designated Account will be opened at the National Bank of Ethiopia into which the Bank, the sole financing source for the program, shall transfer the required funds for the operation o f the LIG. This DA shall be managed by MOFED. An initial advance to the extent o f cash flow forecast for the first six months shall be made to the DA and subsequent replenishment shall be made on the basis o f six months financial report received from MOFEDindicating the utilization o f the fund. MOFED draws money from the DA and transfers it to regions based on the monthly cash flow forecast received from the regions for the LIG capital investment. For the Pilot LIG, disbursement to woredas will follow existing rules for disbursements from regional to woreda level for the capital stream o f the Block Grant. BOFEDs will transfer resources to woredas, based on the monthly LIG cash flow forecasts, to the Woreda treasury account. N o separate LIG bank account will be opened at Woreda level, and LIG financing will be pooled with other woreda revenues. LIG financing will be spent and accounted for following the same rules andprocedures as for the regular woreda budget. MOFED will prepare a guideline on the transfer, utilization, accounting and reporting o f LIG funds at federal, regional and woreda level. 53 The fund flow arrangement for Pilot LIG i s illustratedinthe chart below: I LIGDesignated Account I I Cash transfer based on monthly cash flow forecast through government Treasury system A .I I Cash transfer Fundflow through government Treasury system Report flow - -- Conditionsof Disbursements Conditions o f disbursements for Subcomponent 1(a) on Promotingthe Delivery o f Basic Services by Sub-national governments (Subprogram A), and Component 3 on Strengthening Governance Systems on Financial Transparency and Accountability (Subprogram C) are: 0 Submission o f annual sub-national budget for basic services comprising Subprogram A, satisfactory to the Association 0 Successful completion o f semi-annual Joint Budget and Aid Review (JBAR);and 0 Submission o f quarterly IFRs for the relevant project quarter. Conditions for disbursement for Subcomponent l(b) on the Pilot LIG (Subprogram D) are: 0 Finalization and Adoption o f the Operational Manual for the Pilot LIG Subcomponent, satisfactory to the Association; and 0 Submission o f quarterly IFRsfor the relevant project quarter. Condition for disbursement for Component 2 on Promoting the Health Millennium Development Goals (Subprogram B) are: 0 the submission o f an annual work plan satisfactory to the Association; and submission o f quarterly IFRs for the relevant project quarter.. 54 Retroactive Financing Government has requestedretroactive financing for up to 20% o f the total amount o f Additional Financing for all eligible expenditures that has been incurred after January 7, 2007 and up to the date o f the grant signing. Retroactive financing i s required to fill the financing gap under Subcomponent l(a) in EFY 1999. This gap was caused by the delay in some o f the expected donor financing in EFY 1999, which resulted in a much higher contribution to the Federal block grant by the Government than initially expected. Upon effectiveness, the Public Finance State Minister's Office o f MOFED i s expected to submit actual expenditure reports for reimbursement. Amount of Additional % of Expenditureto be Financed Categoryof Expenditure FinancinginUS$ million SubprogramA (Subcomponent 165 Suchpercentageo f Eligible 1(a)) Expendituresas the Associationmay determinefor eachEFY SubprogramB (Component2) 29 Suchpercentageof Eligible Expendituresas the Associationmay determinefor eachEFY SubprogramC(Component3) 1 Such percentageo f Eligible Expendituresas the Associationmay determinefor each EFY SubprogramD (Subcomponent 20 Suchpercentageof Eligible 1(b)) Expendituresas the Associationmay determinefor each EFY Total 215 Financial Reporting The computerized IBEX system enables public bodies to produce financial reports much more easily. MOFED i s accelerating the rollout o f the IBEX system to regions where computerization has not been introduced. As it stands now, the new chart of accounts i s capable o f recording the financial transactions o f the LIG activities and then producing the required financial reports. Financial regulations of regions require that Woredas should submit monthly financial statements to regions 15 days after the end o f each month. Inpractice, there are delays insubmittingmonthly financial reports to regions. The main cause o f delay i s the lack o f finance staff in most o f the woredas. As a result o f this, regions are not able to close their annual accounts on a timely basis. Currently, regions submit annual financial statements to MOFED for consolidation. For LIG, regions are expected to provide quarterly financial reports to MOFEDfor replenishment purposes and also for program monitoring. MOFED shall produce consolidated quarterly financial reports to be submitted to DPs. Submission o f quarterly reports by BOFEDs and consolidation o f financial reports at MOFED levels are additional activities as a result o f the LIG activities. BOFEDsand MOFEDare expectedto handle this with the existing staffing arrangement for PBS. Quarterly IFRs will be prepared and submitted quarterly to the Bank and other DPs within three months o f the end of the quarter. The IFRs will report on actual eligible expenditure incurred at regional and woreda levels for Components l(a) and l(b), at MOH for Component 2, and at the federal and regional levels for Component 3. The IFR will consist o f government expenditure reports (i.e. a report o f actual eligible expenditure incurred at regional and Woreda levels) for Component 1, and reports on actual expenditures incurred for Components 2 and 3. The format o f 55 the government expenditure reports and IFRs have been agreed with government and will be produced from the existing government accounting system. The annual financial statements will adopt the same format as the quarterly reports and will therefore be a consolidation o f the quarterly reports for each year. The audited project financial statements would include: (a) a summary statement o f funds received from all sources o f financing; (b) a summary o f expenditures incurred on the project appropriately classified - including actual expenditure incurred at the woredas and regions on Components l(a) and l(b), incurred by MOH on Component 2, and incurred at federal and regional levels on Component 3; and (c) a statement on the project's Designated Account including opening and closing balances and the movements (inflows and outflows). WOFEDs will produce consolidated expenditure reports, as they do now, and will send to BOFEDs.No separatereporting will be requiredat woreda level. BOFEDshave the responsibility to report to MOFED (i) on disbursement data from BOFED to WOFED for all woreda capital expenditure, with a line for each pilot woreda, and (ii) on expenditure data, by pilot woreda and eligible sector, for all woreda capital expenditure. MOFED will consolidate the regional LIG expenditure reports and submit them as part o f the IFR used for PBS. The financial guideline for LIG shall include a guideline on the transfer and utilization o f LIG funds at the regional and woreda level. Auditing According to the Ethiopian Constitution, the Office o f the Federal Auditor General (OFAG) i s responsible for auditing all the financial transactions o f the federal government as well as subsidies to the regions. OFAG has five regional offices. These regional offices audit revenues (including resources from higher tiers o f government) utilized by the regions and Woredas. The Woredas are audited using a revolving plan based on risk classifications. Each o f the regions has regional auditor general, which i s responsible for the audit o f government financial transactions in the region. The FA notes the Auditors-Generals were not able to perform the audits as per planned schedule due to understaffing. An important principle that is being applied is to strengthen the existing government external audit arrangements through the LIGprogram while at the same time ensuring that Bank fiduciary requirements will be met. Annual federal government audited financial statements will be submitted to the Bank and other DPs within nine (9) months o f the end o f the fiscal year. The audit will be carried out by OFAG. OFAG may enter into agreements with the Offices o f Regional Auditor Generals (ORAGs) and other independent auditors to execute the Annual Audit should it deem this to be necessary. The auditor would express an opinion on the project financial statements; and as part o f the audit also examine and report on the FMRs/IFRs used as the basis for disbursements, and the activities o f the Designated Account. The final TOR for the Annual Audit of Project Financial Statements shall be agreed prior to the effectiveness o f the PBS Additional Financing Grant. The first audit report for the Additional Financing Project would cover the period from start o f the project until July 7, 2008 (including expenditures covered by retroactive financing). This report would be due no later than April 7,2009, and would be combinedwith the second audit report for the Original Project. Additionally, the Auditor General, through its regional offices, will cany out audit o f the woredas and regions throughout the year on a quarterly basis and submit to DPs quarterly reports indicating summary o f audit findings, within 3 months o f the end o f the quarter. The terms o f 56 reference for these continuous in-year audits have been revised and agreed with OFAG by the Bank and other DPs. The first four continuous audit reports (for the 4thquarter o f EFY 1998 and lSt, 3rdquartersofEFY1999)weresubmittedandMOFEDhasproducedanactionplan 2nd, and to address issues indicated in the reports. The most prevalent finding was weaknesses around stores and fixed asset management. Other issues observed in the report include lack o f monthly bank reconciliations, irregular payments and delay o f submittingquarterly reports to regions. The ongoing reform undertaken by MOFED to enhance property and cash management will adequately address these issues. OFAG expressed qualified opinion on the EFY 1997 and 1998 federal accounts because o f recognition o f budgeted subsidies to regions as expenditures. This does not raise any substantive accountability issue in the project. Based on the legislative review o f the audit report, the Public Accounts Committee o f the parliament, in conjunction with MOFED and OFAG, i s charged with studying the experience o f sample countries in treating subsidy transfers to regional states and forward recommendation to the parliament to address the accounting treatment o f subsidies inthe country. The recommendation shall be implementedstarting from the EFY2002. As o f November 15, 2007, there are no outstanding audit reports for projects implemented by MOFEDand MOH. Financial Covenants IFRswill be prepared on a quarterly basis, and will be submitted to the Bank and other DPs within three months after the end o f each quarter. The IFRs will report on actual eligible expenditure incurred at regional and woreda levels for Component 1 (a) and l(b), at MOH for Component 2, and at the federal and regional levels for Component 3 , Annual audited financial statements to be submitted to the Bank and other DPs within nine months after the end o f the government fiscal year OFAG shall audit, on a continuous basis, samples o f regions and woredas that have received funds under the program, including LIG. The government shall cause OFAG to audit these regions and woredas on a quarterly basis and provide the Bank with quarterly summaries, o f audit findings within three months o f the end o f each quarter. SupervisionPlan The program in the Additional Financing i s implemented by all the regions and Woredas (LIG i s implemented by selected regions and woredas). There will be a six monthly joint review and supervision by the Bank, government and other DPs. The FM supervisions will align with such timeframe and focuses on randomly selected regions/woredas. The focus o f the supervision will be to determine: (i) funds are used for the intended purposes; (ii) lapses in operation o f the if any FM arrangements; (iii)further capacity strengthening measures; and (iv) implementation o f financial covenants. 57 SCHEDULE G FEDERAL,DEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCINGFORTHE PROTECTIONOF BASICSERVICES ENVIRONMENTAL AND SOCIAL SAFEGUARDS MANAGEMENT ARRANGEMENTS The project will be implemented throughout the country by local government authorities in collaborationwith respective sector specialists operating at the local and regional levels. The environmental classification o fthe ongoingprojectremains a Category B. I. MainSafeguardChallenges For Component 2: Health MDG Performance Facility. Project implementation will involve medical waste and use o f insecticides which raise safeguard issues. The physical design o f health centers and health posts have provisions for proper disposal o f liquid and solid waste in addition to small incinerators for burning contaminated materials used by health centers. Insecticides are used indoor and the potential for contaminating the outside environment i s limited in scope. The malaria control program has developed four guidelines namely: a) Guideline for Malaria Vector Control in Ethiopia; b) Guidelines for Indoor Residual Insecticide Spraying; c) Storage and Responsible Handling o f insecticides for malaria vector control; and d) IRS training manual. These vector management guidelines have been distributed and are in use since 2002-2006 and the malaria control supervisors ineach spray site has the responsibilityto ensure adherence to the guidelines and supervisors from regional malaria control offices regularly check on the proper implementation o f the guidelines. The guidelines are being updated to capture the recent developments. No significant negative impact i s anticipated as long as agreed safeguard measures are implemented. The updated Guidelines for Malaria Vector Control and the Guidelines for Indoor Residual Insecticide Spraying address the requirements o f Safeguard Policy OP4.09. The updated Guidelines have been disclosed The new LIG Subcomponent would support construction of small-scale civil works through the multi-sector specific purpose grant (SPG) from the Federal Government. These works would be identified and managed by woreda and are expected to be similar in scale and scope to those implemented in a number o f other Bank projects in Ethiopia. A PHRD funded consultancy identified possible environmental and social safeguard requirements for these civil works. An Environmental and Social Management Framework (ESMF) in conjunction with a Resettlement Policy Framework (RPF) has been completed. The safeguard procedures will be inputs to the Project Implementation Plan and will include a set o f innovative Technical Planning Guidelines for about twenty types o f investments. These Guidelines will serve as a common practical tool at the local government level to improve technical implementation o f the eligible public works inclusive o f environmental and social considerations. The Ministry o f Health has a standard health center and health post designs with the essential structure and facilities to allow proper handling o f wastes and avoid environmental contamination. 58 The ESMF and RPF described above are new. The parent project didnot have an ESMF/EA or an RPF.The Project only had a healthcare waste managementplan which was disclosed inthe Info Shop as the EA. The project did not have any involuntary resettlement issues. The new LIG activity, however, does trigger the safeguard policy on involuntary resettlement, and for which an RPFhas beencompleted. 11. Potentialindirect and/or longtermimpacts No long-term impacts are anticipated as long as the provisions for minimizing impacts are implementedas designed and the provisions o f the guidelines are fully adhered to. The focus on local decentralized service delivery has been recognized with subsequent challenges in improving capacity for planning, construction and supervision at this local level. Through synergy with several other Bank projects, the team has identifiednational level capacity building needs for woreda and local planning through appropriate institutions and these will be soridified over the next year. Regular supervision to ensure adherence to the safeguard guidelines help minimize the possible adverse impacts. 111. GovernmentMeasuresto Address SafeguardIssues For Component 2. Measures adopted as part o f the PBS operation will continue to be implemented. The original Amharic version o f the Government's Guidelines on the Handling and Disposal o f Waste inHealth Facilities (September 1997) has been distributed widely to health facilities providing such services, while an Englishtranslation has been disclosed in the World Bank's Infoshop (February 2006). The Government has also prepared and adopted the following guidelines: (i) Injection Safety Guidelines to reduce infections through contaminated needles; (ii) Vector Management Plan, inresponse to the significant scaling up o f IRS activities addressed in the ongoing PBS project as well as a prerequisite to insecticide procurement; and (iii) Guidelines for Malaria Vector Control, IRS and Storage o f insecticides have been introducedand inuse since 2002-2006. Regular training on IRS i s provided to ensure proper implementation o f the guidelines to staff and supervisors. Inaddition as part o f their mandates the Drug Administration and Control Authority and the Environmental Protection Agency supervise the management o f chemicals and environmental contaminations, respectively The Health facility construction designs include provisions for proper handling o f liquidand solid wastes generated by health units and small burning facilities are installed for tahng care o f contaminated and hazardous materials. Health facilities are provided with autoclaves to sterilize medical instruments and other materials. An environmental sanitation expert located in health centers takes the responsibility for supervising the implementation o f safety policy by health facilities. For the new LIGSubcomponent: Main environmental and social impacts of the LIG. The main environmental and social impacts associated with the project will result form the construction and/or rehabilitation o f small scale investments inthe transport, waste, health and irrigation sectors. Impact and mitigation checklists are provided inthe ESMF as a reference guide for identifying and managingthese impacts. Works preparation, screening, review and appraisal process. The LIG Operational Manual o f which the ESMF i s a part outlines the screening procedures, reporting systems, and responsibilities to be adopted by the MOFED during LIG implementation. The tools and 59 mechanisms provided include: (i)steps to be taken for screening subprojects; (ii) of terms reference for an annual environmental and social audit o f the LIG; (iii) Technical Planning Guidelines on the environmental and social impact o f potential sub-projects; (iv) compliance mechanisms; (v) training for staff o f Pilot LIG woredas who have adopted new procurement codes based on the model law preparedby the Federal Government, inapplication o f this law and associated standard bidding documents; and (v) descriptions o f roles, accompanied by terms o f reference. Mitigation plans. As part o f the assessmentprocess, the Technical Planning Guidelines have been prepared for over two dozen subproject types. These will assist local planners, officials and contractors implement appropriate mitigation measures for specific subprojects. If identified as a requirement o f the sub-project through the screening process, a Resettlement Action Plan, will also be prepared. Legislative framework. The key environmental policies exist which provide the overarching framework for environmental management include: the Constitution of Ethiopia, the Environmental Policy o f Ethiopia, and the National Conservation Strategy. A number o f proclamations and supporting regulations are also applicable:: ProclamationNo.295/2002 for the establishment o f EnvironmentalProtection Organs; ProclamationNo.299/2002 for Environmental Impact Assessment; Proclamation No.300/2002 for Environmental Pollution Control; and ProclamationNo. 455/2005 on expropriation and compensation. IV. Key Stakeholders Local governments and communities are the major stakeholders. The civil works funded under the LIG Subcomponent are vetted through the local government planning process that engages in direct community participation for identifying potential projects. Local woreda authorities, through sector specialists scope the potential projects and include them in annual workplan requests. Disclosure o f the ESMF and RPF will be in country, via notices inthe media regarding the availability o f these documents at the country Infoshop. As o f August 20, 2007, the Government has releasedthese documents to the Bank for general disclosure. 60 SCHEDULEH FEDERALDEMOCRATIC REPUBLIC OF ETHIOPIA ADDITIONAL FINANCINGFORTHE PROTECTIONOF BASIC SERVICES MONITORING &EVALUATIONFRAMEWORK PILOTLIG FOR The ultimate objective of the Government is to introduce a performance-based grant for capital expenditure at the local level. In order to better understand the constraints to improving and increasing capital investment at that level and to effectively calibrate the criteria to be used for evaluating performance, a pilot phase o f LIG would first be introduced. The main objectives o f the pilot phase are therefore about learning. The pilot aims to (i) better understand constraints to undertaking scaled-up capital investment at the local level, and (ii)roll-out and test recently developed national standards for planning and budgeting, procurement, and environmental screening. Inorder to achieve these objectives therefore it is important that there is a clear framework for monitoring and evaluating the results o f the pilot. The responsibility o f this task will be housed in the unit that will be overseeing overall PBS implementation, the Macroeconomic Department o f MOFED, which will have staff to focus on monitoring implementation o f this particular component. Monitoring o f implementationwill take two forms: Semi-annual data on capital disbursements and capital expenditure by LIG pilot woredas and by sector will be generated by the Government's reporting system and will give a basic overview regarding progress in implementation. This data will be presented woreda by woreda as part o f the Pilot. The expenditure reports will be prepared on a quarterly basis for those pilot woredas that will be visited for implementationreviews (see below) inthe relevant quarter. Quarterly implementation reviews will visit a selection o f pilot woredas to monitor progress and to identify bottlenecks inimplementation, ifany. These missions will comprise staff from MOFED and BOFEDs and where appropriate from the relevant zonal offices. If problems have been identified an action plan to address these issues will be developed assigning responsibilityto the relevant office. Beyond this, the aim o f the M&E system i s to gain detailed informationregarding the investment process and the quality o f the outputs achieved within each pilot woreda. Additionally the M&E system will aim to provide information as to how initial conditions in terms o f capacity and structural factors affect these. The following studies will therefore be implemented, to be financed out o f the ongoing PHRD grant and Component 3 o fthe PBS: (i)Capacity survey: Woredas will have been chosen to participate in the pilot through a stratified random sampling process in order to ensure that woredas with a diversity o f structural factors are included. The aim o f the capacity survey i s to develop a detailed understanding o f the initial capacity conditions within each woredas before the implementation o f the LIG pilot starts. The ultimate purpose will be to see how important different initial conditions and capacities are in successful implementation o f capital investments. It will focus on six areas including (i) human resources, (ii)management systems (iii)planning, (iv) financial management, (v) material capacity, and (vi) information and communication. Quantitative as well as qualitative indicators 61 will be used in each area to allow comparison and ranlung o f woredas across categories. This survey will be financed through the PHRD Grant (ii)InvestmentProcessReview:Thereviewwill assesswhether nationalsystems were applied and the impact this had on the overall process. It will focus on (i) planning and budgeting, (ii) procurement, and (iii) environmental screening. The key criteria will be (i) whether mechanisms for citizen participation led to credible inputs from the citizenry, and (ii) how long various systems took to use and whether they were understood and practical. This review will also assess whether the manuals and the training provided under the pilot were effective in adding to the capacity o f the woreda inthis area. (iii)Technical OutputAssessment:Thiswillfocus onanassessmentofthetechnicalqualityof infrastructure built in the woreda, both during the Pilot and preceding it. The key focus i s to determine whether in a given sector the infrastructure built meets the required standards, and if not, what was the cause o f sub-standard outputs (i.e. design, procurement, construction, materials used etc.). The exact division of tasks across the Investment Process Review and the Technical Output Assessment has not yet been determined. The focus will be to ensure that the results can be usefully integrated across all studies to gain a rich picture o f the entire investment process within a woreda and determine which key elements affect outcomes. (iv) Ex-post Procurement Review: Rather than oversee the tendering o f individual investments, an ex-post procurement review will assess procurement from a fiduciary perspective. It would be conducted on a sample basis and would identify areas, if any, where significant deviations from national procurement standards had emerged and suggest suitable remedial actions. Additional to the above, the Financial Accountability and Transparency Perception Survey (FTAPS) being implemented under Component 3 o f the PBS, will also provide a longer-term mechanism to assess how effectively accountability i s working in terms o f the responsiveness o f local-planning processes to citizen's priorities and citizen's perceptions o f whether or not they are adequately consulted by their local authorities. 62 SCHEDULEI FEDERALDEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCINGFORTHE PROTECTIONOFBASICSERVICES ECONOMIC AND FISCALANALYSIS FORTHE PILOTLOCALINVESTMENT GRANT (LIG) 1. PoliticalandEconomicBackground 1. Political decentralization in Ethiopia is now well advanced and fiscal decentralization is following quickly. Figure 1 illustrates the sharp increase in Federal block grant transfers to regions from 5.5 billion Birr in EFY 1997 up to 13.6 billion Birr budgeted for EFY 2000. Furthermore, the Government's Medium Term Expenditure and Finance Framework indicates that an additional4 billion Birr will be budgeted for the Block Grant per year untilEFY2002. 2. As part o f the process o f political and fiscal decentralization, the mandates o f regions and woredas (districts) have increased significantly. Woredas are now responsible for a large proportion of basic service delivery. In the education sector, woredas have the mandate to establish and manage kindergartens and primary schools. In some regions, construction and management of first cycle secondary schools also falls under the jurisdiction o f woredas. With regard to the health sector, woredas have the mandate to establish and manage health posts, clinics and health centers. Furthermore, all woredas have the mandate to construct, maintain and manage rural roads (community/RRlO roads). Inthe water sector, woredas in almost all regions have the mandate to develop and operate springs, hand-pump wells, water supply lines, water and soil conservation schemes, ponds, water harvesting schemes and small-scale irrigation schemes. Inrelation to agriculture,all woredas have the mandate to operate environmental rehabilitation programs, operate and manage veterinary clinics and farmers' training centers, multiplyimproved seeds and species of animals and carry out small-scale irrigation schemes by diverting rivers, floods and usingthe waters from ponds, springs and hand-pump wells. 3. In spite o f the significant increase in the mandates o f woredas to undertake capital investment, Figure 2 indicates that capital expenditure at the woreda level i s still greatly constrained. The share o f capital spending has remained roughly constant over the past two years at the Regional Bureau level. But, capital expenditure in woredas decreased in relative and absolute terms since EFY 1997 due to the pressure o frecurrent costs, inparticular salaries. 63 Figure 1: Federal Block Grant Transfers to Regions Figure 2: Expenditure Shares at Regional Level (Note: There are no transfers to Addis Ababa) (all regions excluding Addis Ababa) 5,000 390 4,000 f 15,000 1- L $ 3,000 465 - p C - 2,000 1,000 0 Regional Woredas RegionalIWoredas Bureau Bureau 1 EFY 1997 EFY 1998 EFY 1999 EFY2000 EFYZ001 EFYZOOZ Actuai Actual Budget Budget Pian Plan EFY97 EFY98 EFY99 CITotal Federal Block Grant to Regions HSalary 0 Operational Expenses Capital B. Analysis ofWoreda CapitalBudget Shares andExecutionRates" 4. In EFY97, rural woredas" in Oromiya and SNNPR planned to spend 0% to 36% o f their treasury budget (capital and recurrent) on capital investment (see Figure 3). In both regions combined, the median for rural woredas was 9%. Overall, 87% o f the rural woredas in SNNPR and Oromiya budgeted less than 20% of their treasury budget on capital. Figure 3: Oromiyaand SNNPR Capital Budget (Treasury Only) as Share of Total Expenditurein RuralWoredas, EFY97 -- - ~~ ____ Share of Capital Budget in % 5. Apart from large differences across woredas, there are also significant differences across regions with regard to woredas' capital budget shares in EFY97. Figures 4 and 5 illustrate the larger variance across woredas - though with a higher median - in SNNPR as compared to Oromiya. I'T h i s section analyses variations across woredas interms of budget shares and executionrates for the capital budget for the two regions for which detailed information, by woreda, is available. The sample size is 299 rural woredas in Orormya (94) and SNNF'R (105) for EFY97. 64 Figure 4: Oromiya Capital Budget (TreasuryOnly) - Figure 5: SNNPR - Capital Budget (TreasuryOnly) as Share of Total Expenditurein RuralWoredas, EFY97 as Share of Total Expenditure in Rural Woredas, EFY97 ... ..... ..... . ...... I I#edlanl Shareof Capital Budget In K Share of Capital Budget In % 6. In terms o f execution rates for capital budgets from treasury sources across rural woredas in Oromiya for EFY97, more than half o f all rural woredas performed well with capital budget execution rates o f close to or equal to 100%. The median execution rate i s 98%. Moreover, 80% o f all rural woredas were able to materialize 90% to 100% o f their capital budget from treasury sources. The main factor driving these high levels o f expenditure, however, are the extremely small amounts o f capital expenditure. Those woredas that show execution rates o f 100% have a median capital expenditure o f 460,998 Birr,which equaled approximatelyUS$ 53,00013. 2. Rationalefor LIGPilotandLIGNationalProgram 7. The analysis above shows that woreda capital budgets are very small and have decreased over time due to pressure from salary expenditure. Even though the Federal block grant to regions i s expected to increase by 4 billion Birr per year untilEFY 2002, interviews with the regions during the PBS Midterm Review and the PBS Additional Financing Mission suggest that the recurrent needs are still much larger than the proposed increase in block grants. Furthermore, it was noted by regional representatives that the quality o f capital investments, both in terms o f the processes by which projects are identified, selected and implementedas well as the outcomes, varies across woredas and sectors and benefits are often not sustained due to the lack o f sufficient budgeting o f operational and maintenance expenses (O&M). 8. In light o f these findings, the National LIG program intends (i) increase the quality and to quantity o f capital investment at the woreda level; (ii) to strengthen government systems and application o f national standards; (iii)to create an incentive mechanism through performance based conditions o f access for LIG funds; and hence (iv) to improve basic service delivery at the local level. 9. Before starting such a national performance based program, it i s necessary to understand the current constraints that woredas face, be they related to initial conditions, capacity, or other factors, in order to set access thresholds accordingly. The LIG Pilot (Subcomponent l(b) under the PBS Additional Financing) aims (i) test recently developed national standards (planning to and budgeting, procurement, technical guidelines, etc); (ii) to better understand constraints o f capital investment at the local level; and (iii) to learn from experience in Pilot woredas to help design the National LIG. l3The exchange rate inEFY97 was US$1= ETB 8.65 65 3. Simulations ofthe Size of the LIGPilot 10. Government has decided that those regions are eligible to participate in the pilot program that have implementedthe national accounting and procurement reforms under the Government's Expenditure Management and Control Program. These reforms are deemed important for effective fiduciary control o f the program at local and regional level. The five regions that have implementedboth o f these reforms to date are Amhara, Benishangul-Gumuz, Oromiya, S M R , and Tigray. For the pilot, rural woredas will be selected on a random basis in order to maximize the learning opportunities from the pilot program. In order to ensure an appropriate sample the selection process will ensure that key factors that might affect capital investment.are represented by woredas in the sample. These include population (large and small), remoteness (remote and non-remote), and capital investment experience (experience and limited experience). A random samplingprocedure will be employedusingthese criteria for stratification. 11. LIG grants to woredas will be based on the principle that the grants should be equal in relative terms (relative to the woreda treasury budget). Based on the low present levels o f capital spending from treasury funds and estimates o f the absorption rate o f additional funding it has been agreed that LIG grants equal to 30% o f the EFY 2000 treasury budget will be made to pilot woredas. Table 1 below presents the indicative size o f an annual LIG grant for woredas selected for the Pilot by simulating a transfer equivalent to this percentage for small, medium, and large woredas in the four main decentralizing regi~ns'~. It suggests that while the ratio o fthe LIGgrant to the budget would be constant, the variation in the absolute value o f the grant would vary significantly. For the two years o f the LIG pilot, the smallest allocation, for small woredas in SNNPR, would be around US$321,000, while the largest allocationwould be inlarge woredas in Tigray at aroundUS$ 863,000. 14No detailedbudget informationby woreda was available at the time of this analysis for Benishangul-Gumuz. 66 Table 1: SimulatedLIGGrantsinUS%, BasedonLIGGrants representing30% of EFY99Total Treasury Budgets EFYOO Budget 30% Grant (in US$) (in US$) Small" 1,583533 475,060 Amhara Medium" 2,028,475 608,542 ~ a r g e ~ ) 2,536,741 761,022 Small'' 759,140 227,742 Oromiya Medium" 1,086,918 326,075 ~ a r g e ~ ) 1,519,328 455,798 Small') 714,456 214,337 SNNPR Medium') 1,068,s 15 320,555 ~ a r g e ~ ) 1,704,064 511,219 Small') 1,375,508 412,652 Tigray Medium" 1,730762 519,229 ~ a r g e ~ ) 2,228,351 668,505 12. Table 2 indicates the estimated LIG allocation for each region by applying the block grant formula for the eligible regions to the total LIG Pilot budget o f US$20 million. By using the simulation inTable 1above, we then estimate the number o f woredas that could likely participate inthe pilot, by region. The total number of woredas is around 50. Actual allocations to woredas will be drivenby the stratified random samplingprocedure mentionedabove, which will therefore determine the final number o f woredas to participate inthe pilot, and their regional distribution. Table 2: PossibleNumber of LIGPilotWoredasinFive Regions inUS$ EstimatedLIG No Woredas Allocations MediumSize Tigray 1,496,233 2 Amhara 5.696.747 9 Oromiya 7,877,740 I 24 67 SCHEDULEJ FEDERALDEMOCRATIC REPUBLICOF ETHIOPIA ADDITIONAL FINANCING FORTHE PROTECTIONOF BASICSERVICES (committed Balance Additional Intervention PBS 2005-07 ProcuredKJnder Financing Commitments Procurement under PBS) 2008 Acceleratingand sustainingmalariacontrol(Commodities) ITNs 20,383,093 7,922,778 12,460,315 8,000,000 ACT 4,057,836 2,589,367 1,468,469 Insecticides(IRS) 500,000 0 500,000 2,090,000- Spray Pumps 250,000 0 250,000 Diagnostics Laboratory Equipment 850,000 0 850,000 1,200,000 Sub-total 26,040,929 10,512,144 15,528,785 11,290,000 ReducingInfant Mortality throughvaccines Vaccines 5,000,000 2,901,582 2,098,4 18 1,490,000 Cold Chain Equipment 3,000,000 3,239,112 0 0 Sub-total 8,000,000 6,140,694 2,098,418 1,490,000 Primary healthservice delivery Essentialdrugs 8,500,000 0 8,500,000 0 Medical Equipment to HPs HCs 5,900,000 945,880 4,954,120 8,200,000 Revolving Drug Fund 0 0 0 Sub-total 14,400,000 945,880 13,454,120 8,200,000 FamilyPlanning * . Contraceptives 11,595,071 11,495,835 99,236 5,540,000 Sub-total 11,595,071 11,495,835 99,236 5,540,000 Audio visual equipment 964,000 0 964,000 0 Transport 1,500,000 0 1,500,000 0 Sub-total 2,464,000 0 2,464,000 0 Monitoring & Evaluation 820,000 0 820,000 Training 615,000 0 615,000 CapacityBuilding 220,000 0 220,000 Sub-total 1,655,000 0 1,655,000 1,570,000 68 SCHEDULE K FEDERALDEMOCRATICREPUBLIC OF ETHIOPIA ADDITIONAL FINANCINGFOR THE PROTECTIONOF BASIC SERVICES ETHlOPIAAT A GLANCE I Sub- Key D e v e l o p m e n t I n d l c a t o r s Saharan LOW Ethiopia Africa income A i 0 diatrlbution, 2006 (2006) Male Female Population. mid-year (millions) 72.7 770 2,403 Surface area (thousand sq. km) 1,140 24,265 29,215 60.64 Population growth (%) 2.0 2.3 1.8 Urban population (% of total population) 50.54 15 36 30 40.44 GNI (Atlas method, US$ billions) 12.9 646 1,562 30.34 GNI per capita (Atlas method, US$) 180 842 650 20-24 GNi per capita (PPP, international $) 1,190 2,031 2,698 10.14 0.4 GDP growth (%) 9.0 5.6 6.0 20 10 0 10 20 GDP per capita growth (%) 6.9 3.2 6.1 DelCe"l (moot recent eotlmate, 2000-2006) I Poverty headcount ratio at $1 a day (PPP. %) 41 Poverty headcount ratio at $2 a day (PPP. %) 76 72 Under4 mortality rat8 (per 1,000) Life expectancy at birth (years) 43 47 59 Infant mortality (per 1,000 live births) 80 96 75 Child malnutrition (% of children under 5) 38 29 250 Adult literacy. male (% of ages 15 and older) 50 69 72 Adult literacy. female (% of ages 15 and older) 23 50 50 Gross primary enrollment, male (% of age group) 88 96 106 Gross primary enrollment, female (% of age group) 72 66 96 Access to an improved water source (% of population) 22 56 75 Access to improved sanitation facilities (% of population) 37 38 1000 1005 2000 2005 OElhiopia OSub-Saharan Africa N e t A i d Flows 1980 I990 2000 2006 lZO (US$ millions) Net ODA and official aid 211 1,009 666 1,937 Growth of GDP and GDP per capita (%) Top 3 donors (in 2005): United States 19 50 130 625 Italy 7 169 26 87 United Kingdom 4 35 11 75 Aid (% of GNi) 3.4 8.4 8.7 17.1 Aid per capita (US$) 6 20 11 27 L o n g - T e r m E c o n o m i c T r e n d s 03 00 Consumer prices (annual % change) 12 5 5.2 6.2 12 3 GDP implicit deflator (annual Oh change) 4.4 4 0 6.0 7 4 -GDP - GDP percapila Exchange rate (annual average, local per US$) 2 1 2 1 8.1 8.7 Terms of trade index (2000 = 100) 131 151 100 79 1910-90 1990-2000 2000-06 (average annual growth %J Population. mid-year (miliions) 37 7 51.2 64.3 72.7 3 1 2.3 2 1 GDP (US$ millions) 7,289 12.083 7,903 13,315 2.0 3 5 5 7 (% of GDPJ Agriculture 54.2 56.3 47.4 48.1 0.5 2.2 5.0 Industry 12.1 12.4 12.6 12.6 3.4 3.8 7.0 Manufacturing 5.7 4.7 3.1 3.8 4.4 Services 23.8 31.3 39.8 39.3 3.5 4.5 5.7 Household final consumption expenditure 80.0 77 2 74.7 93.7 1.0 3.1 6 3 General gov't final consumption expenditure 9.8 13.2 18.5 12.4 4.0 9.5 -0.5 Gross capital formation 14.5 12.9 19.2 19.8 4.0 2.3 4 3 Exports of goods and sewices 7.6 5.6 12.5 15.8 3.2 7.1 13.9 Imports of goods and services 119 8.8 24.8 41.7 3.2 5 8 13 0 Gross savings 10 8 11.9 14.9 9.3 Note Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available. a. Aid data are for 2005 Development Economics, Development Data Group (DECDG) 69 SCHEDULEK FEDERALDEMOCRATICREPUBLICOF ETHIOPIA ADDITIONAL FINANCINGFORTHE PROTECTION OF BASICSERVICES ETHIOPIA AT A GLANCE B a l a n c e o f P a y m e n t s a n d T r a d e 2000 2006 Governance indlcalorr, 2000 and 2006 (US$ millionsi Total merchandise exports (fob) 466 1,001 Total merchandise imports (ctf) 1,611 4,594 Voice and aoCOunlablllly Net trade in goods and servlces -976 .3,444 POItical Ilabil ty Current account balance -335 .1,367 as a % of GDP 4 2 .10.4 Regulatory quality Workers' remittances and Rula oftaw compensation of employees (receipts) 53 174 controi O f co11"pllo" Reserves, including gold 349 1.080 C e n t r a l G o v e r n m e n t F i n a n c e 0 2 0 0 6 Countryr p@rcenlllerank (0 100) 0 2 0 0 0 hCh., I*,".. b.11.rnlh~. imph (% ofGDP) Current revenue (including grants) 16.2 19.1 Tax revenue 9.9 12.2 Current expenditure 21 3 13.2 T e c h n o l o g y a n d I n f r a s t c u c t u r a 2000 2005 Overall surplusldeficit -9.7 -6.3 Paved roads (% oftolal) 12 0 19.1 Highest marginal tax rate (%) Fixed line and mobile phone Individual 35 subscribers (per 1,000 people) Corporate 30 High technologyexports (% of manufactured exports) 0 1 0.2 E x t e r n a l D e b t a n d R e s o u r c e F l o w s E n v i r o n m e n t (US$ rniilionsi Total debt outstanding and disbursed 5,463 6,176 Agricultural land (% of land area) 31 32 Total debt service 137 I 7 2 Forest area (% of land area) Debt relief (HIPC, MDRI) 2.264 1,363 Nationally protected areas (% of land area) Total debt (% of GDP) 69.4 54.3 Freshwater resources per capita (cu meters) 1 7 1 2 Total debt service (YOof exports) 13.1 6.3 Freshwater withdrawal (% of internal resources) 4 6 Foreign direct investment (net inflows) 135 265 CO2 emissions per capita (mt) 0 0 9 0 I 1 Portfolio equity (net Inflows) 0 0 GDP per unit of energy use equivalent) 2 6 2 8 lComporltion o f total external debt. 2005 (2000 PPP Iper kg of 0 1 1 Energy use per capita (kg of oil equivalent) 291 303 (US$ mrllionsJ iBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 interest payments 0 0 IDA Total debt Outstanding and disbursed 1,779 3,359 Disbursements 137 162 P r i v a t e S e c t o r D e v e l o p m e n t 2000 2006 Total debt service 34 72 Time required to start a business (days) 16 IFC (fiscal yearl Cost to start a business (% of GNI per capita) - 45.9 Total disbursed and outstanding portfolio 0 0 Time required lo register property (days) 43 of which IFC own account 0 0 Disbursements for IFC own account 0 0 Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for iFC own account 0 0 Tax rates 72.2 Tax administration 58.2 MlGA Gross exposure Stock market capitalization (% of GDP) New guarantees Bank capital to asset ratio (%) Note' Figures m italics are for years other than those specified 2006 data are preliminary. ..indicates data are not available. - 6il6107 indicates observation 1s not applicable. Development Economics, Development Data Group (DECDG) 70 32°E 36°E 40°E 42°E 44°E ERITREA ERITREA ETHIOPIA To To Keren Keren R e REP. REP d OFOF SELECTED CITIES AND TOWNS ETHIOPIA To To AdigratAdigrat S YEMENYEMEN REGION CAPITALS Gedaref Gedaref HumeraHumera 14°N Tekeze AxumAxum NATIONAL CAPITAL T I G R AY MekeleMekele RIVERS Ras Dashen Ras Dashen Terara (4620 m) erara (4620 m) MAIN ROADS Atbara D e n a k i l e 14°N a D RAILROADS Gonder Gonder A M H A R A REGION BOUNDARIES Lake A FA R Dinder INTERNATIONAL BOUNDARIES Tana 12°N DebraDebra 12°N Tabor abor Weldiya eldiya esert DJIBDJIB DJIBOUTI Bahir Dar Bahir Dar Blue AsayitaAsayita 46°E 48°E Aba Nile n Dese Dese e G u l f o f A d y SUDANSUDAN BENSHANGULBENSHANGUL AsosaAsosa Hanger Debre Debre Markos Markos Awash E t h i o p i a n 10°N 10°N Didesa P l a t e a u DIRE DAWA DIRE DA Dire Dawa Dire Dawa To To HarerHarer HargeysaHargeysa GimbiGimbi NekemteNekemte ADDIS ABABA ADDIS ABABA ADDISADDIS HARARIHARARI Jijiga Jijiga ABABAABABA Aw Awash SOMALIASOMALIA NazretNazret Baro Welkite elkite Ramis Aw Aware Degeh Bur Degeh Bur GambelaGambela GoreGore O R O M I YA 8°N G A M B E L A y DomoDomo 8°N Asela Asela e Akobo JimaJima HosainaHosaina l l Shebele BongaBonga a Wabe O g a d e n ShashemeneShashemene V S O M A L I SodoSodo Aw Awasa Goba Goba t DodolaDodola Warder arder Kebri Dehar Kebri Dehar SOUTHERN NATIONS, SOUTHERN NATIONS, Wendo endo f i ImiImi NATIONALITES NATIONALITES R 6°N AND PEOPLES AND PEOPLES Wabe Gestro t Wabe 6°N a Shebele 0 50 100 150 200 Kilometers r e Genale NegeleNegele 0 50 100 150 Miles G FerferTo To Yavello avello Dawa MogadishuMogadishu DoloDolo OdoOdo IBRD This map was produced by the Map Design Unit of The World Bank. Lake The boundaries, colors, denominations and any other information 4°N MegaMega shown on this map do not imply, on the part of The World Bank 4°N 33405 JUNE Turkana Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. INDIAN 2007 UGANDAUGANDA KENYAKENY MoyaleMoyale To To OCEAN To To 32°E 34°E 36°E 38°E To To Wa Wajir R1 MarsabitMarsabit 40°E 42°E MogadishuMogadishu 44°E 46°E 48°E