Documentof The World Bank FOR OFFICIALUSEONLY Report No. 32412-NG WORLD BANK GROUP AND DEPARTMENT FOR INTERNATIONALDEVELOPMENT (UK) COUNTRY PARTNERSHIP STRATEGY FOR THE FEDERALREPUBLIC OFNIGERIA (2005 -2009) June 2,2005 Country Department 12 Africa Region The InternationalFinance Corporation Sub-SaharanAfrica Department Multilateral Investment Guarantee Agency UKDepartmentfor International Development This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contentsmay not otherwise be disclosedwithout World Bank authorization. Country Partnership Strategy -ii- Nigeria CURRENCY EQUIVALENTS(May 20,2004) Currency Unit = Nigerian Naira (N) US$l - - 137N s 1Naira - 0.0073 US$ FISCALYEAR January 1-- December31 ABBREVIATIONSAND ACRONYMS AAA AnalyticalandAdvisory Activities ADB AfricanDevelopmentBank AML/CTF Anti-MoneyLaunderingandCountry Terrorist Financing AU AfricanUnion CAP Country AssistancePlan CPS Country PartnershipStrategy CDD Community-DrivenDevelopment CENA CapacityEnhancementNeedsAssessment CFAA Country Financial Accountability Assessment CIDA CanadianInternationalDevelopmentAgency CPAR Country ProcurementAssessment Review CPPRs Country PortfolioPerformanceReviews CSP Country StrategyPaper DFID Departmentfor InternationalDevelopment(UK) DOC Drivers of Change EC EuropeanCommission ECOWAS Economic Community of West African States EFA "Education for All" EFCC Economic & Financial CrimesCommission EITI ExtractiveIndustriesTransparencyInitiative FATF Financial ActionTask Force FCT FederalCapitalTerritory FGN FederalGovernmentof Nigeria I T A FreeTrade Association IAS InternationalAccountingStandards IASC InternationalAccountingStandards Committee ICPC InternationalCentrefor the Preventionof Crime IDA InternationalDevelopmentAssociation IDG InternationalDevelopmentGoals IMF InternationalMonetary Fund JICA JapanInternationalCooperationAgency JIS Joint InterimStrategy LGA LocalGovernmentAuthority M&E MonitoringandEvaluation MDGs MillenniumDevelopmentGoals MSME Micro, SmallandMediumEnterprises MTEF MediumTermExpenditureFramework NAPEP NationalPovertyEradicationProgram NFIU NigerianFinancialIntelligenceUnit NEEDS NationalEconomicEmpowermentandDevelopmentStrategy NEPA NigerianElectricPower Authority NEPAD New Partnershipfor Africa's Development NCP National CouncilonPrivatization NITEL NigerianTelephoneCompany NNPC NigeriaNationalPetroleumCompany Country Partnership Strategy -iii- Nigeria NPC NationalPlanningCommission NPV NetPresent Value ODA OfficialDevelopmentAssistance OED OperationsEvaluationDepartment PEMFA Public ExpenditureManagement andFinancialAccountability PER Public ExpenditureReview PRSP PovertyReductionStrategyPaper SAP StructuralAdjustment Program SEEDS StateEconomicEmpowermentandDevelopmentStrategy SFAA StateFinancialAccountability Assessment SIL Specific InvestmentLoan SME Small andMediumEnterprises SPAR StateProcurementAssessment Review tbc to beconfirmed TI TransparencyInternational UBE UniversalBasicEducation UN UnitedNations UNDP UnitedNationsDevelopmentProgram UNICEF UnitedNationsChildren's Fund UNPF UnitedNationsPopulationFund USAID UnitedStates Agency for InternationalDevelopment The WorldBank The InternationalFinancial MultilateralInvestment Departmentfor Corporation Guarantee Agency IntemationalDevelopment (UK) Vice President GobindNankani AssaadJabre Yukiko Omura Country Hafez Ghanem William Kingsmill Director Core Team Galina Sotirova(TeamLeader), Andrew Kidd(TeamLeader,DFID), PaulCollier(Advisor), Luis Alvaro Sanchez (Consultant),Victoria Kwakwa, SubramaniamV. Iyer, PeterMousley,Alex McPhail,John Elder, FolusoOkunmadewa, LarisaLeshchenko,ChinedumNwoko, MichaelMoms, SamuelWaribokoEremie (WB); Andrew Alli, Charles McPherson,Hillmare Schulze(IFC), Guy Darlan,Kofi Anani (WBI), Liz Gaere (DFID), Peter Hawkins(DFID), Mavis Owusu-Gyamfi (DFID), JamesZasha(DFID), Matthew Moms (DFID), MavisOwusu-Gyamfi(DFID),John Leigh (DFID), GrahamGass (DFID), Jeri Larson, Gloria Kwembe,PatriciaClaggion Country Partnership Strategy -iv- Nigeria THE FEDERALREPUBLICOFNIGERIA COUNTRYPARTNERSHIPSTRATEGY Table of Contents AbbreviationsandAcronyms .. 11 List of Tables, Figures, Text Boxes andAnnexes V NIGERIA AT A TURNINGPOINT EXECUTIVESUMMARY - vi I.ANOPPORTUNITYFORSUSTAINABLEPROGRESS 1 PoliticalandEconomic ReformsinNigeria 1 InternationalSupport, IDA ClassificationandDebt Reduction 3 11. DEVELOPMENTCHALLENGESAND PROSPECTS 6 PoliticalEconomy and SocialContext 6 Poverty inNigeria 8 An Agenda to Achieve Non-oilGrowth 10 MediumTermEconomicProspects 13 111. COUNTRYDEVELOPMENTAGENDA: NEEDSAND SEEDS 17 A New Frameworkfor Reform, GrowthandPovertyReduction 17 TangibleProgresson Implementingthe NEEDS and ImprovingGovernance 19 IV. PARTNERSHIPSTRATEGY A NEW WAY OFDOINGBUSINESS - 21 Lessons fromJoint InterimStrategy andDFID CSP 22 A Results BasedStrategy 23 Supporting HumanDevelopment 27 Supporting Growth 28 Supporting GoodGovernance 30 World Bank Group Lending, DFIDGrants, andNon-lendingServices 31 V. IMPLEMENTATIONISSUES 37 PortfolioManagement 37 IDA CountryFinancingParameters 39 BoostingAid Effectiveness: StrengtheningDonorHarmonization 40 Outcome-basedMonitoring 41 CommunicationsStrategy 42 Risks 43 Country Partnership Strategy -V- Nigeria Tables Table 1 The MDGChallenge inNigeria Table 2 Medium-TermMacro-Economic Framework, 2005-08 Table 3 Summary CPS Results-Based Framework Table 4 Indicative 2-year IDA LendingProgram(US$ millions) Table 5 DFDNigeria Resources (2 million) Table 6 Four-year Core Non-lending Program Figures Figure 1:Incomepoverty levels by region Figure 2: Infant mortality according to region Figure 3: Selectivity of CPS inrelation to NEEDS priorities Text Boxes Box 1: Poor Growth inResource-Rich Economies: Nigeria i s not unusual Box 2: The Poor inNigeria Box 3: The poorest Nigerians dependheavily on naturalresources Box 4: Impact of IV/AIDS on livelihoods Box 5: Progresson implementationof NEEDS Box 6: Tackling Corruption - A growing consensus and agenda Box 7: Partnership for Impact -WB/DFID Box 8: Development of the CPS -A participatory approach Box 9: Hastening Impact, BuildingDemandfor Change Box 10: SEEDS Benchmarking Box 11: Mainstreamingcross-cutting issues ininterventions Box 12: New World Bank Group and Donor Coordination: the Case of Micro, S M E Development in Nigeria Box 13: Paris Declarationon Aid Effectiveness Box 14: Outcome-Based Management Annexes Annex 1.Results Framework Annex 2. InterimStrategy Completion Report Annex 3. Working with Lead States Annex 4. Nigeria's Opportunity of a Generation: Meeting the MDGs, Reducing Indebtedness Annex 5. Analytical, Advisory and Capacity BuildingServices Annex 6. Country FinancingParameters Annex 7. Donor Activities & Aid Effectiveness Annex 8. Nigeria CPS -participation and consultationprocess Annex 9. World Bank Group CAS Annexes Country Partnership Strategy -vi- Nigeria NIGERIA AT A TURNINGPOINT EXECUTIVE SUMMARY A National ComprehensiveFrameworkfor Reform, Growth and Poverty Reduction. InMay 2004, Nigeria launched its strategy for growth and poverty reduction, the National Economic Empowerment and Development Strategy (NEEDS) and the state-level State Economic Empowerment and Development Strategy (SEEDS). The NEEDS is based on three pillars: (i) empowering people and improving social service delivery, (ii)growing the private sector and focusing on non-oil growth, and (iii)changing the way government works andimproving governance. Over the past two years, Nigeria has made good progress implementing key reforms, particularly in macroeconomic managementand the fight against corruption. A development challenge of global significance. Despite the reform efforts, Nigeria still faces significant challenges in accelerating growth, reducing poverty and meeting the Millennium Development Goals (MDGs). Nigeria i s Africa's most populous country, but 70 million of its population lives in poverty. Only China and India have more poor people. Lagos State, just one of Nigeria's 36 states, i s larger than each of 32 African countries. Africa's attainment of the MDGs depends on Nigeria's success. Nigeria's reform efforts and development challenges need strong international support. Even with recent high oil prices, Nigeria's shortfall in development financing remains large. Nigeria receives only US$2 per capita in Official Development Assistance (ODA) compared to an African average of US$28 and faces negative net transfers of US$1.3 billion annually, given current levels of debt servicing. Yet, significant public financing is needed to ease the economy's enormous infrastructure needs and make progress in human development. Nigeria will require a marked increase in external aid inflows - through increased IDA and DFID assistance, and debt relief - to be able to unleash growth and meet key MDGs. World Bank Group /DFZD Partnership. The World Bank Group and DFIDrecognizethat Nigeria is at a turning point, one that requires a significant, consistent response from the international community. Responding to the Paris Declaration of 2005, the two organizations aim to continue to build a successful partnership in support of a country-led approach to growth and poverty reduction. The World Bank Group and DFID aim to broaden this partnership - including with the UN, other multilaterals and bilaterals -to increasedonor harmonizationand enhance aid effectiveness. The Strategy. The CPS proposes to step up financial and technical assistance to signal strong support for the Government's reform efforts and help finance investment necessary to remove obstacles to growth and development. The CPS proposes specific activities to support the Federal Government and selected well-performing states (lead states), and targeted MDG-related action elsewhere. Work with the Federal Government will be in four areas: (i) financing investments in infrastructure (especially power, gas infrastructure and transport); (ii)financial and technical support to improve accountability and transparency and to fight corruption; (iii)technical assistance and advisory services on investment climate and policies to stimulate private sector led growth; and (iv) support to national initiatives for human development, particularly those aimed at fighting HIV/AIDS, strengthening the health system and supporting the knowledge economy. Inlead states,financial and technical assistance will seek to leverage state effort and resources to boost economic activity and improve social service delivery. State interventions will be designed to support state development strategies and will help create a model of growth and development that can be scaled up. Initially, the World Bank and DFID propose to work in up to six lead states, chosen on Country Partnership Strategy -vii- Nigeria the basis of their governments' commitment to reforms -especially inthe area of budget and financial management, transparency and fightingcorruption. Inthe remaining states, the strategy is to impact more directly on the lives of poor people and their access to social and productive infrastructure, goods and services. Focusedprograms will work with a range of stakeholders - in close cooperation with UNagencies and others - on specific MDG-related issues, such as girls' education, maternal health, routine immunization or access to safe water. An important aspect of work in these states will be to strengthen voice and demand for change among service users and communities. A distinctive feature of the CPS strategy is the variety of aid instruments it will be able to offer at different levels of intervention. Interventions at the federal level will continue to be predominantly Specific Investment Loan (SIL) projects. Lead states will be able to access a "performance package", a more programmatic, cross-sectoral approach to both analytical work and financing, drawing in both IDA and DFID resources. It is foreseen that Sector-Wide Approach (SWAP)-type operations will emerge for the lead states. With increasedaccountability and efficiency of public expenditures across all levels of government, it i s expected that the basis for using budget support instruments in some lead states will be established prior to the end of this CPS period (although budget support is not anticipated duringthis CPS period). Inother states, support will target direct impact on the livelihoods of poor people through nationally designed Community Driven Development (CDD)-type projects in the social and productive sectors and MDG-related programming, particularly through the UN, civil society and the private sector. Both at the federal and state level, the CPS will help strengthen dialogue between Government and civil society and build coalitions on economic reforms, transparency and accountability. The CPS resonates with key elements of the Africa Commission report, including its support for private sector growth and its emphasis on new investments in infrastructure, agriculture and human development. The CPS's push for increased resource flows to Nigeria i s also in line with the Commission's report for increased resourceflows to Africa, including through debt relief. Risks. Nigeria's reformers have the necessary political will and a broadening consensus and constituency for sustaining change. However, given Nigeria's history, today's reformefforts are high r i s k hence the World Bank's and DFID's strong commitment to provide support to Nigeria in its efforts to sustain reforms while mitigating risks. A key risk i s that the political landscape and commitment to reform may shift, particularly after the 2007 elections. The CPS will support Government in completing the reforms it has initiated, and support Nigerian civil society in strengthening its capacity to demand change on accountability, transparency and service delivery. The international community can also help protect against the erosion of gains by providing greater moral and financial support to Nigeria. Given Nigeria's reliance on oil, it will not be free from the risk of strong negative external shocks. Nigeria is currently building up reserves to smooth its expenditure profile and sustain growth in the longer-term. The Government has built a strong relationship with the IMF on macroeconomic management that will help mitigate risks associated with external economic shocks. Country Partnership Strategy -1- Nigeria I.ANOPPORTUNITYFORSUSTAINABLEPROGRESS 1. Nigeria's current political and economic transformation provides an opportunity to assist Africa's most populous nation to turn its economy around to achieve sustained economic and social development. Nigeria is a regional giant; a growing and prosperous Nigeria moving towards achieving the MDGs would translate to gains in social and economic progress for the whole region. However, the challenges facing Nigeria's reformers are formidable and success i s not assured. To enhance the chances for success: (i) the implementationand support for reforms need to continue; this would be strengthened if reformers are able to show early results; and (ii) international community the needs to ensure that Nigeria's economic program i s adequately financed. This would require an increase innew commitments and a resolutionof Nigeria's debt problem. Politicaland EconomicReformsinNigeria 2. In April 2003, Nigeria successfully held its second consecutive national elections, further consolidating the transition from military to democratic civilian rule that began in 1999. Institutions and mechanisms for accountability and good governance are being strengthened; a vibrant press and civil society groups are emerging and gaining strength. Naturally, after more than three decades of military dictatorship, Nigeria's democracy remains fragile; and ethnic and religious tensions flare up from time to time. The next Presidential elections are scheduled for 2007 and President Obasanjo will not run. Much therefore depends on whether his successor will continue to implement the ongoing political and economic reforms. 3. Nigeria i s gaining respect and international standing as a leader inAfrica. President Obasanjo has become Chair of the African Union (AU). Nigeria has become a leading player in the Commonwealth, in the New Partnership for Africa's Development (NEPAD), in the Economic Community of West African States (ECOWAS) and plays an important role in peacekeeping throughout Africa. 4. Economic reforms are gaining momentum. The second Obasanjo administration has assembled a highly competent, professional group of reformers that i s implementing policies to: (i) strengthen governance and fight corruption, (ii) the private sector; and, (iii) grow empower people and improve social service delivery. The process i s slow and gradual, given the depth of institutional deterioration caused by years of mismanagement and rampant corruption. However, the Government i s showing strong resolve, and reform implementation is generally on track. 5. Policy implementation in 2004 signaled a clear break from past practices and, in particular, a break from a 30-year history of uncontrolled booms and busts cycles caused by oil price fluctuations. Macroeconomic policy implementation was commendable. For the first time, Nigeria successfully implemented a fiscal rule de-linking the budget from current oil prices. All three tiers of government prepared their budgets based on an oil price of US$25 a barrel, and in effect sterilized a significant portion (about US$6 billion) of the oil windfall. Prudent fiscal policy, complemented by tight monetary policy, allowed the Government to achieve the key objectives of its 2004 program, namely to restore macroeconomic stability, enhance predictability and transparency of policies and reduce the economy's vulnerability to oil price shocks. 6. Real GDP i s estimated to have grown about 6%, the consolidated government fiscal surplus rose to 10% of GDP on a cash basis, compared to balance in 2003, annual inflation decelerated sharply from 24% at end 2003 to about 10% at end 2004, notwithstanding increases in prices of fuel products following progress on deregulation and liberalization of the downstream petroleum sector. Country Partnership Strategy -2- Nigeria Parallel improvement in Nigeria's terms of trade strengthened Nigeria's external position: internationalreserves rose to US$17 billion, equivalent to 6.5 months of imports projectedfor 2005l. 7. Nigeria has also made good progress in improving governance and transparency and fighting corruption. First, the budget i s more transparent; allocations are widely published, so that citizens can better hold officials accountable. Second, a "Due Process" Unit in the Presidency ensures that public money cannot be disbursed for investment unless procurement procedures have been respected. Third, the Government has made an impressive start on implementing the Extractive Industries Transparency Initiative (EITI), setting an example across Africa. Among other things, full audits of oil sector accounts for the last three years would be available before end-2005. Fourth, the Economic and Financial Crimes Commission (EFCC) i s successfully pursuing corrupt officials. Indeed, the Government has begun 2005 with an intensified effort on the fight against corruption and two Federal Ministers have recently been removed. 8. The focus over the last 18 months has rightly been on macro-stabilization and better governance. However the Government i s now paying more attention to structural constraints to growth and social development. New initiatives in the social sectors in the Federal Government's 2005 budget include: (i)increased funding for the Universal Basic Education program; (ii)a nationwide feeding program in basic schools; (iii) a special program to encourage girl's primary education; and, (iv) a new program for accelerated achievement of Health MDGs. The President has also launched a renewed effort on safe water. Actions to encourage private sector growth include: (i) unbundlingof the power parastatal ahead of divestiture, passing a landmark Power Bill to underpin and accelerate transformation of the electricity sector; (ii) legislating to promote development of the domestic gas sector; (iii)liberalizing the downstream petroleum sector; (iv) re-starting the privatization of the telecommunications parastatal NITEL; and, (v) increasing funding to address key infrastructure constraints. 9. Legislation i s being put in place to make reforms more difficult to reverse. Key elements include: a Fiscal Responsibility Bill for all tiers of government that enshrines the oil-price based fiscal rule and best practice infiscal transparency, coordination and monitoring; a Procurement Bill to make public procurement competitive and more open; and an EITIbill to maintain transparency of oil revenues. 10. Nigeria's economic outlook in 2005 is, on balance, positive. On the macroeconomic front, if the current pace of reform i s maintained, real GDP i s projected to grow at about 7% on the basis of higher crude oil and gas production and non-oil GDP growth of about 5%. The external current account surplus i s expected to widen and gross intemational reserves to increase by about US$17 billion. There are nevertheless some short-term risks. Oil and gas output could be affected by social tensions and OPEC production quota cuts, while agricultural output remains vulnerable to climatic conditions. In addition, implementing financial sector reforms, and particularly enforcing banks' new minimumcapital requirement, will need careful management to avoid loss of confidence and undue pressure on the financial system. 11. Fiscal risks also need to be carefully monitored. Full implementation of the 2005 appropriations act will imply a significant increase inpublic spending in 2005 with a risk of a return to high inflation and macro-instability. Government recognizes those risks and intends to implement a fiscal policy in line with macroeconomic stability, the NEEDS objectives and the country's absorptive capacity. It intends to ensure that due process i s followed in capital spending, to continue the effective work of the cash management team in budget execution, and to ensure that the oil 'Elevenmonthsof importsof goods in 2004. Country PartnershipStrategy -3- Nigeria windfall i s calculated on the basis of total oil production*. If these fiscal containment measures are successfully implemented, primary Federal Government spending will increase about 15% in real terms. The consolidated non-oil primary deficit would increase by about 6 percentage points to 41% of non-oil GDP above 2004. This execution would be inline with macroeconomic stability but would still place a burden on the central bank to implement a sufficiently tight monetary policy to contain liquidityexpansion and limit real exchange rate appreciation. International Support, IDA Classification andDebt Reduction 12. Nigeria's reform efforts need international support. In the past, the perception of oil wealth and of entrenched corruption has tended to drive donors away. Today, Nigeria receives only US$2 per capita in ODA compared to the average for Africa of US$28 per capita. It i s regarded as serious- underaided, an `aid ~rphan'~.As a result, net transfers with the rest of the world are negative and average minus US$1.3 billion annually. On the other hand, oil exports provide Nigeria with an important source of foreign exchange. Given that oil prices are currently higher than ever and expected to stay high for some time, Nigeria's oil revenues are projected to grow from an annual average of about US$15 billion between 2000-2003 to about US$36 billion annually between 2005 and 2008. 13. Nigeria needs international financial support in spite of rising oil revenues for three reasons. First, given the large population, pervasive poverty and the depth of social and economic decay resulting from years of mismanagement, Nigeria's needs for development financing still far outstrip its projected domestic financing potential. Additional foreign financing i s essential if the economy's enormous infrastructure needs are to be met and progress made in power, transport, education, health and safe water. The macroeconomic analysis presented in the following section show that in order to make adequate progress towards achieving the MDGs, Nigeria will require additional external financing averaging about US$6.4 billion annually between 2005 and 2008. Second, Nigeria's economy i s heavily dependant on oil, and it would be dangerous for Nigeria's policymakers to assume that oil prices will remain at their current levels indefinitely. They simply cannot spend all of the windfall oil revenue. They need to buildreserves to avoid a huge contraction when oil prices decline. Nigeria's large and increasing foreign reserves indicate good policy. The size of donor programs in infrastructure, health, education and rural development should be based on a medium-term vision of the country's needs and not by short-term variations in oil prices and the country's reserves. Naturally, this excludes the few donor programs that specifically aim at supporting stabilization, and therefore should vary to offset swings in international prices. Third, the size of donor financing provides a signal of support for reforms. Nigeria's economic performance has improved significantly over the last two years and merits strong support from the international community. 14. Increasing support and external financing flows to Nigeria require action on at least three interrelated fronts: (i) increasing new financing from Nigeria's external partners, including IDA and DFID; (ii) IDA country performance rating by sustaining the implementation of governance raising reforms; and (iii) reducing Nigeria's external debt burden. 15. As key external partners, IDA and DFID will expand their financial support to Nigeria under the CPS. The indicative two-year IDA lending program (FY06 and FY07) includes frontloading of the resource envelope and i s set at US$500million per year. Subsequent allocations will be defined based on further annual assessment of policy performance and the mid-term review of the CPS. Nigeria i s also expected to benefit from additional donor resources, which would provide a window * This includescrudeoil that is allocatedfor domestic use. V. LevinandD.Dollar(2004),The ForgottenStates: Aid Volumes andVolatility inDifficult Partnership Countries. Country Partnership Strategy -4- Nigeria for increased support to countries at an upward turn in policy performance and with potential for great impact on growth and development inAfrica. DFIDfinancing will grow from 235 million in 2004 to 2100 million in 2007. IDA will also continue to work hard with the Government to ensure that disbursements on existing commitments improve. The international community can help by supporting federal and state governments to improve public expenditure management. 16. Nigeria has been reclassified from a "blend" to an "IDA-only" country. Nigeria meets all three criteria for IDA-only status: low GNI per capita, lack of creditworthiness and a track record of good policy performance. It is currently the poorest country inthe world that i s not classified as IDA- only. Its per capita income i s only US$350, considerably below the IDA-only cut-off level of US$895. Nigeria i s not creditworthy since it does not have the ability to service new external debt at market interest rates over the long term. As a result, it cannot access private capital markets or IBRD and has not borrowed from IBRD for over a decade. 17. Nigeria has the potential to re-enter the group of middle-income countries (MICs) and regain access to international financial markets. In the long run, it will achieve this through sustained and strengthened policy performance and increased external support. However, for the medium-term, IDA-only status provides the appropriate framework to support Nigeria's progress towards achieving the MDGs. The Nigerian Government has requested this change in status for three reasons. First, it would provide a signal to donors and alert them of the need for increased financial support. Second, it sends a message within Nigeria that it is a very poor country - despite being oil wealthy. This will help them in communicating the need of reform and that Nigeria should avoid non-concessionary lending or repeatingthe boom-bust mistakes of the past. Third, it has the advantage of better terms of IDAcredit. 18. Nigeria's total public debt, estimated at about 72% of GDP at the end of 2004, will impede its progress in attaining the MDGs. Domestic debt (about 22% of the total) i s being addressed as part of the Government's reforms. A solution is needed for that owed to external creditors, mainly the Paris Club4. 19. Traditional Debt Sustainability Analysis (DSA) suggests that, at current oil prices, neither external nor fiscal sustainability is an issuefor Nigeria. However, this analysis is extremely sensitive to assumptions about future oil prices. If oil prices fall by some US$4 per barrel below current projections, Nigeria's debt becomes unsustainable. Moreover, Nigeria cannot maintain external and fiscal sustainability and make appreciable progress on the MDGs. Results of a DSA incorporating the additional government spending needed to reach key MDG goals show that even with outstanding future economic performance and sustained high oil prices, it will be virtually impossible for Nigeria to meet the MDGs and simultaneously lower its indebtedness to sustainable levels (defined as 60% of GDP). On the fiscal front, although high oil prices prevent the emergence of a fiscal gap before 2012, a significant gap with net present value of US$50 billion5develops over the IO-year MDG horizon, 2005-2015. Moreover, much larger fiscal gaps with net present value of US$90 billion, appear as early as 2008, when oil prices are lowered by one standard deviation of historical oil prices. This shows that a negative price-shock could quickly trigger a debt and macroeconomic crisis and deal a severe blow to reforms (see Annex 4). 20. Reducing debt may also help to reduce capital flight. There is evidence to suggest that Nigerians are holding significant amounts of money abroad. Attracting some of this capital back to Nigeria could have positive effects on investment, growth and employment creation. Empirical Includesarrears. At 5% discount rateusedin Bank-FundDSF. Country Partnership Strategy -5- Nigeria evidence also indicates that, as the debt to GDP ratio rises above 60%, capital flight is induced. This implies that an agreement to reduce Nigeria's debt would help to "crowd-in" repatriated capital, and so have a larger effect on growth. 21. save oil windfalls - as it i s doing right now - but the issue of debt repayment can threaten this A large debt burden gives the wrong signals to policy makers. Nigeria needs periodically to practice. When oil prices are high, the debate about saving the windfall to cushion an eventual price decline becomes confused by the issueof debt repayment. There i s a strong incentive to policymakers to spend rather than save windfalls, thus perpetuating the boom-bust cycles that have characterized economic management in Nigeria for many years. Cleaning the slate would remove this source of macro-policy weakness. 22. President Obasanjo has made debt reduction a key objective of his administration. A positive decision on debt relief would provide a strong signal of support for the reforms. It would enhance the reformers' credibility and improve prospects for sustaining of the reforms beyond the general elections of 2007. The Nigerian Government has made clear that it will use any resources released through debt relief to finance MDG-related expenditures. 23. Two important issues are delaying a resolutionof Nigeria's debt problem. First, Nigeria does not have a formal program with the IMF, which i s usually required by the Paris Club. Since early 2004, the Fund has monitored on a quarterly basis the Nigerian economic reform program. The enhanced surveillance program has helped the Government to achieve commendable results in terms of monetary and fiscal stability. The Nigerian authorities have indicatedtheir willingness to move to a non-financial arrangement approved by the Fund when such an arrangement becomes available. Second, there i s concern that debt relief to Nigeria will create a problem of "moral hazard". Nigeria should aspire to becoming creditworthy because foreign savings will be required to lift Nigeria to middle-income status over the medium-term. Creditors worry that providing debt relief to Nigeria today could influence future behavior, and promote a culture of lack of respect for honoring contracts. In recognition of this, Nigeria is fully servicing its debt to the London Club as well as its multilateral debt. 24. Nigeria and its bilateral creditors and donors are discussing issues pertaining to debt relief and increasedassistance. There are good prospects for increased support for Nigeria, especially since the UK has made Africa a priority area for attention by the G8 and EUduringits period of leadership of both in 2005. The UK is looking to work with other governments in focusing attention on Africa, responding to recommendations of the Commissionfor Africa and various new and creative initiatives to help address key development challenges in Africa. Nigeria i s poised to benefit from these initiatives. Country Partnership Strategy -6- Nigeria 11.DEVELOPMENTCHALLENGESAND PROSPECTS 25. Africa will fail to meet the MDGs if Nigeria fails, given that one in five Africans i s a Nigerian. Achieving the poverty MDG will require rapid and sustained growth of the non-oil economy, creating employment and opportunities for small businesses and improved livelihoods. Achieving the health, HIV, water and education MDGs will require resources to be reallocated to the social sectors and demandcreated for quality services, which will improve institutional capacity. This i s no easy task. Nigeria's history of poor performance is rooted in a complex and challenging political and social context where traditional values have been damaged under the influence of a "resource curse". Economic analysis indicates that Nigeria's success will depend upon continued reforms to improve the investment climate and strengthen governance; as well as upon increased investments in economic and social infrastructure. Political Economy and Social Context 26. The "oil curse" led to many years of political and economic destabilization, including decades of military rule. This became the most significant factor underpinning Nigeria's political, social and economic development after independence. Both the NEEDS and the analysis of Nigeria's political economy undertaken through the Drivers of Change (DOC) initiative6 have identified three fundamental and inter-related constraints that Nigeria must overcome if it is to meet the MDGs: 0 First, successivegovernments have institutionalized mismanagement of public revenue, particularly from oil. This has seriously damagedthe capacity to manage public expenditure and develop it further; 0 Secondly, years of military rule, institutionalized corruption and weakformal accountability have weakened the relationshipbetween poor Nigerians and their government; and, 0 Thirdly, a combination of `Dutch Disease' and institutionalized rent-seeking behavior has underminedactivity innon-oil areas of the economy (particularly agriculture and manufacturing), reducing non-oil sector economic growth, fuelling unemployment and exacerbating poverty and conflict. 27. Successive Nigerian Governments - federal, state, local - have systematically mismanaged revenues from oil. This fuelled corruption, undermined trust and ultimately held development back. Corruption worsened in a climate of weak transparency and accountability at all levels of government, and was reinforced by the values and behavior of those outside government. There has been little incentive for budgetary allocations to be aligned with development priorities. Financial management systems became weak, often conveniently so, and there was inadequate information for proper resources management. Corruption related to weak governance and patronage-based politics fuelled unproductive public investment, while an unsustainable increase in external debt left the economy vulnerable to falling oil prices. B y 1998, 6 C. HeymensandC. Pycroft, 2004. Summary Reportof Driversof Change, DFID,unpublishedreport. Country Partnership Strategy -7- Nigeria approximately 70% of private wealth had been taken out of Nigeria'. Conditions are now emerging in Nigeria under which this wealth can beginto return. 28. Mismanagement of the country's oil resources also resulted in significant environmental degradation and contributed to persisting social conflict. Oil spills, leakage through old and corrosive pipelines, dumping of oil into the waterways, burning of excess gases have all been extensive, often poisoning drinking water, polluting the air, destroying vegetation, fisheries, land quality and undermining the livelihoods of people. Weak enforcement of environmental laws, which draws support from past political leadership, has exacerbated the problems. Activities relating to oil exploration and drilling inthe context of weak property rightsregimes have also displaced indigenous communities from their homelands and fueled social protest and disruption. 29. Nigeria is large, diverse and complex. Nigeria's constitutionally powerful executive is constrained by the complexity of Nigeria's political system and the importance of ensuring national unity in a country with around 200 ethnic groups, 500 indigenous languages and two major religions (Islam and Christianity). 30. These potential cleavages in Nigerian society can be used for political ends. While there are indications that communal conflicts have subsided somewhat in the last two years, Nigeria remains vulnerable to resurgences of conflict. The extraction of oil in the Niger Delta provides a particular focus but there is the potential for violence to flare almost anywhere in the country in response to specific political, economic and social triggers. Violence deters economic activity, reduces opportunities for non-oil sector growth, worsens unemployment and poverty and creates a stream of disaffected youth prone to manipulation into violence for political ends. The causes of violent conflict identified in the national Conflict Assessment in 2002-03 largely remain, and the run-up to the 2007 elections will provide many potential flashpoints. Despite this particular manifestation of the `resource curse', the Nigerian federation is unusual in managing to avoid major civil unrest for more than 25 years. 31. The federal system has contributed to the survival of Nigeria as a cohesive nation. The 36 states and their 774 local governments exercise considerable political and fiscal autonomy. They control about 50% of government resourcesand are responsible for primary education and healthcare. The incentives for states - particularly the political leaders - to engage with a reform agenda have been weak. Serious capacity constraints in several states and local governments also hamper their ability to deliver on their mandate. Achieving reform at state level and introducing greater fiscal discipline remain significant challenges. Nevertheless some states are making impressive progress in fighting corruption, improving their public expenditure management and strengthening their capacity to deliver services. Though conflicts can mar the federal-state relationship, the Federal Government and some states are placing more attention on building consensus and coordination between the different tiers. The Federal Government is currently designing a system of incentives and rewards intended to challenge more states to improve performance. The fiscal responsibility legislation and the SEEDS benchmarking process - a Govemment-led initiative to track state performance - are key elements inbuildingenhancedcoordination. 32. The relationship between the legislature and the executive, particularly at the federal level and on matters relating to the budget and key pieces of legislation, i s often difficult. Unlike other countries in the region, Nigeria's National Assembly has significant powers to remake budgets. This has contributed to a conflictive relationship between the executive and the legislature on budget preparation. As a result, budgeting has become lengthy and unpredictable, often with significant 'Estimatesof PaulCollier. Country Partnership Strategy -8- Nigeria disagreements over fiscal policy and, more recently, on the benchmark price of oil to underpin revenue forecasts. This conflictive relationship on a key policy instrument jeopardizes important elements of the reformagenda. 33. Building voice and demand for change is critical. Support for the Government's implementation of the NEEDS and SEEDS is important, but i s not sufficient to ensure the achievement of the MDGs. Strengthening the connection between Nigerians and their government i s also important. Politics has been dominated by geopolitics and conflicts over the control of resources. Politicians have exploited ethnic and religious divisions to create powerful patron-client relationships that undermine issues-based politics. The National Assembly has begun to play a more constructive role in this area. Although the media, policy think-tanks, academic institutions, faith-based organizations and trade unions all function, they have yet to play a critical role inreform. Poverty inNigeria 34. Nigeria has the third highest number of poor people in the world, after China and India. With annual per capita income falling significantly to about US$350 between 1980 and 2003 (below the Sub-Saharan average of US$450), approximately 70 million of Nigeria's 130 million people are living on less than one dollar a day. An LSMS- based analysis which is currently under way indicates that low educational attainment and employment in farming are among the most powerful correlates of poverty. Also, female-headed households tend to be poorer than those headed by males. Millennium Development Goal Current Status inNigeria Halve the number of people living inextreme 55% of Nigerians live on less than US$1per day. poverty between 1990and 2015 Halvethe proportionof people suffering from I 29% of children are underweight. hunger Ensureall children complete primary educationof Less than 60% of primary aged children attend school. adequatequality 7 millionprimary-aged children are not in school. Eliminate gender disparity inprimary and The number of girls enrolled inprimary education is secondary educationby 2005 92% the number of boys. Insome states it is less than 40%, particularly inthe north of Nigeria. Reducechild mortality by two thirds among One infive Nigerianchildren die before their fifth children under five birthday. Main causes are malaria (33%), VPD (22%), diarrhea (19%) and acute respiratory infections (16%). Reducedeaths of mothersdue to childbearingby - - IIOne birthin a hundredresults inthe deathof the 75% between 1990and 2015 mother. Women innorthern Nigeria have a one in fifteen chanceof dying through a pregnancyrelated cause. Halt the spreadof AIDS 5% of Nigerians are infected with HIV -over 10% in some states. Over 1millionchildren havealready been orphanedby AIDS. Halvethe proportion of people without safe Less than 50% of the rural populationhas access to a drinking water by 2015 safe water source. Country Partnership Strategy -9- Nigeria 35. Poverty in Nigeria has significant geographicaldisparities.Income poverty is higher inrural areas (64%), where the majority of the population lives, than in urban areas (35%). Most Nigerians quickly and Lagos is so large as to account for Box 3: The poorest Nigerians depend heavily on one in 25 of Nigeria's poor. There are naturalrwourcw. Over 80% of the rural populationare employed in agriculture, significant linkages among rural and urban forestry, fisheries and H&ll-scale mining. Nigeria has under- areas*Many dependOn migration as utilized cultivable land, land resources suited to cultivating a wide variety of crops, a large coast and major lakes andriversto Dart of their livelihood strategies. In addition. sustain fisheries as well as livestock. Aericuiturai I poverty rates in the northem regions are performance directly affects poor &ph's livelihood;. Current substantially higher than those in southem growthin agriculture will not be sustainable without a switch to regions (Figure 1). I Droductivihr poor of iesources inckases the vulnerabiky of the poor and further reducesthe incentivesfor investment. >65 - 5(3-65 <50 Fig. 1: Income poverty levelsby region, % of population (NLSS, 2004). 36. Nigeria has poor human development indicators, with significant regional variations. In 2003, about 7.3 million school-age children did not attend primary schools and net primary school attendance was only 60% (64% for boys versus 57% for girls). In the North-West Region the figures are starker; only 34% of girls attend school. For those children who do have access, the quality of education is insufficient to provide them with basic life skills and knowledge. School infrastructure is poor; over 50% of classrooms need extensive rehabilitation, according to a 1999 survey. Literacy is low; only 45% of urban and 19% of rural primary school age children are able to readpart of a simple sentence. The quality of schooling i s reduced by large class size, limited pupil-teacher contact, high pupilheacher ratios, lack of teaching materials and equipment and widespread use of unqualified teachers. Of those students who do complete secondary education, only 11% are admitted into tertiary education. 37. Nigeria's infant mortality rate i s among the highest in Africa - 10%of live births (cf. Ghana 6%, Burkina Faso 8%, Benin 9%), with markedregional disparities (see Figure 2). The relatively less poor Niger Delta has among the highest levels of infant mortality. Around one million Nigerian children under the age of five died in 2004. Malaria i s the biggest killer of under-fives in Nigeria. Only 6% of under-fives sleep under a mosquito net and less than one-third of under-fives with fever are treated with anti-malarials. Mortality rates among infants and children in the poorest 20% of households are more than 2.5 times as high as the rates in the richest 20%. Health outcomes are worse than in similarly poor countries, and poor access to basic health services i s a significant factor. The referral systemi s fragmented and uncoordinated (primary, secondary, and tertiary services are the Country Partnership Strategy -10- Nigeria responsibilities of local, state and federal governments respectively), with insufficient public funding for most basic services. Immunization coverage has fallen from around 30% in the early 1990s to 13% in 2003 - and is as low as 4% in the North-West. Only one-third of deliveries are assisted by a skilled professional, and access to emergency obstetric care is poor. 110+ 90-109 70-89 <70 Fig. 2: Infantmortality according to region (DHS,2003). 38. Poor access to infrastructure also affects a largepercentage of the population. Less than half of all Nigerian households (42%) have access to safe drinking water. Estimates suggest that some 35,000 children under five die each year due to lack of good water and sanitation. Access to all- weather roads i s also limited. Only about one in three households in rural areas has electricity compared to eight out of ten urban households. However, even when electricity i s available, it i s often unreliable. Despite the recent growth in cellular subscribers, Nigeria's teledensity remains low, especially inrural areas. 39. High HZV prevalence will devastate the social and economic landscapes. Nigeria has the Box4: Impactof HIWAIDS on livelihoods. third largest number of people living with HIV/Aids Livelihood opportunities and security are at risk from HIV/AIDS in Nigeria. A recent study in Benue State highlights ahighpercentof chronic illness, much clearly million people are living with HIV - 10% of the after South Africa and India. An estimated 3.5 AIDS-related, with severe household impacts world's total - and the national prevalence i s around particularly affecting women andchildren. The study found that 87% of householdheads were 5%. Young people are the most vulnerable to farmers who were often dependent on remittances from infection. The poorest are most vulnerable and are illordeceasedfamilymembers.Socialcapitalwasby far the most important asset for households coping with the worst hit when the disease strikes. Addressing the impact of AIDS. However, 50% of households had HIV/Aids is critical and must challenge denial, gone into debt, mostly to informal credit associations, cultural practices, stigmatization, limited access to following a death in the family. There is a dearth of formal care and support options with a need to treatment and condoms and resistance, possibly due strengthenlocalsupport networks. to lack of compliance with drugregimes. H W A I D S lmnact Assessment. Benue State (2004) An Agenda to Achieve Non-OilGrowth 40. Lasting poverty reduction and achievement of the MDGs requires sustained and rapid growth in the non-oil sectors. Nigeria's growth rate over the last two decades has beenjust 3.4%; while populationgrowth has been about 2.5%. Clearly, this GDP growth rate i s not enough to achieve a rapid and significant reduction in poverty. To cut poverty by half by 2015, growth needs to rise to Country Partnership Strategy -11- Nigeria 7-8% and stay at that level. Key non-oil sectors have performed significantly below their potential. This is particularly true of agriculture, and sub-sectors such as cocoa, cotton and oil. Most non-oil sectors have not succeeded in moving to higher value added activities. Furthermore, growth has historically been too volatile. With low growth and inadequate diversification, it i s not surprisingthat unemployment remains high, estimated conservatively at about 10.8%' but believed to be more accurately inthe range of 40-50% inkey urban centers and amongst new graduates. 41. Competitivenessof Nigeria's economy has declinedsteadily and, while Nigeria is the second largest economy in Sub Saharan Africa, it is one of the least competitive, ranking 93 out of 104 countries on the global competitiveness indexg. This reflects four main constraints. 42. First is the real exchange rate appreciation over time", or the "Dutch disease" phenomenon, which has weakened the non-oil sectors. The mismanagement of oil revenues, and specifically the adverse effects of large foreign exchange inflows during oil price booms, has produced a historically highly unstable and unpredictable macroeconomic environment. 43. Second, Nigeria has a huge infrastructure deficit. Poor infrastructure has hindered non-oil growth in many cases and significantly increasedthe costs of doing business in Nigeria. Inthe power sector, where this deficit i s perhaps the most bindingon economic activity, per capita consumption i s about 8lkWh compared to 288kWh in Ghana and 355kWh in India. Businesses commonly report output losses due to power deficiencies of up to 30%. Similarly, poor road infrastructure i s estimated to exact an annual cost of about 3% of GDP. Improving infrastructure i s critical for rapid growth of Nigeria's economy, and therefore for achieving the income poverty MDG. It i s also essential for health and education services to be provided and accessed by poor Nigerians and therefore for achieving health and education MDGs. Reductionof child mortality, for example, depends directly on improvements in water supply and sanitation. Improvements in energy services also contribute directly to reducing smoke-induced respiratory infections and to the time, effort and interest that children can give to education. Over one-third of rural educational and health establishments in Nigeria do not have electrical connections. 44. Third is policy instability which, coupled with a burdensome and inadequately coordinated regulatory and legal framework, has created a hostile business environment. The Government has attempted unsuccessfully to compensate business operators for the lack of competitiveness through the use of high tariff and non-tariff barriers to protect domestic industry. Weak governance further compounds the effect of these constraints on the economy's competitiveness and secures opportunities for rent-seeking behavior. Concerted action i s required on several fronts and through all tiers of government. 45, A fourth constraint is inadequate access to medium- and long-term finance. Money and securities markets are underdeveloped, and the policy environment does not provide adequate incentives for a strong intermediary function. More than 95% of credit provided to the private sector by financial institutions in Nigeria i s short-term, usually only suitable for quick turn-around trading activities. Business operators and particularly small scale enterprises are starved of funding for mediumand longer termproductive investments. * FOS StatisticalFact Sheet on Econ & Social Devt Sept 04. WEFCompetitivenessreport2004-05. loparticularlyduringoil pricebooms. CountryPartnership Strategy -12- Nigeria 46. The Government's reform program i s beginning to tackle these underlying constraints to competitiveness and building a foundation for sustainable growth and poverty reduction. In particular, the Government is: Continuingfiscal prudence and buildinga cushion of reserves duringperiods of highoil prices. This is essential for maintaining a competitive and stable real exchange rate; Accelerating its program of investment in infrastructure, especially power, natural gas and transport. This will reduce the cost of doing businessand ensure that ruralproducers are linkedto markets. Inparallel, Government i s puttinginplace policies and institutions to ensure adequate maintenance of infrastructure; Strengthening govemance andfighting corruption, extending this to areas that directly affect the country's competitiveness -e.g. port concessioning and customs reforms; Improvingthe business environment by reducingpolicy-related costs and risks such as corruption, red-tape and administrative barriers, a weak legal system, inadequate protection of property rights, inadequate enforcement of tariffs and policy and other uncertainties associatedwith exchangerate and other prices; and, Reforming thefinancial sector such that it is more stable and efficient. Simultaneously, the Government is piloting specific programs on: access to credit for small-scale, environmentally sustainable infrastructure investments by Fadama farmers; community financing for small-scale miningactivities inthe solid minerals sector; and commercially sustainable financial services to micro-, small- and medium-enterprises. 47. Shared growth in Nigeria -a rolefor agriculture. Unlocking the potential of sectors (such as agriculture) on which the poor depend i s crucial to achieving `shared growth' in Nigeria. Agriculture i s the mainstay of the rural economy and, since most of Nigeria's poor live and work in rural areas, the health of the sector i s fundamental to poverty reduction. As a large economic sector (some 30% of GDP), agriculture affects growth of output and the expenditure side of the economy through consumption (65%-70% of GDP), providing part of the incomes of an estimated 75% of the population - particularly among the poor. Trading and processing produce also supports a significant proportion of the urban poor. 48. Inthe past, Nigerian agriculture has performed poorly as a result of "resource curse'' effects of oil and inappropriate policies and institutions. Since democracy returned, agriculture has performed better. In the five years to 2003, the sector grew by 4.6% p.a. With limited technical change, in an attempt to produce more and maintain living standards (as crop prices have not kept pace with inflation) farmers have increased the cropped area. In the short- to medium-term, the current growth in agriculture will continue. But in the longer-term, declining land fertility due to shorter fallow periods, low use of productivity enhancing technology, labor shortages with rising labor costs and ageing farmers will present formidable barriers to growth of output. Unsustainable water use has also cost agriculture dearly; there were 26,000 sq. kmof degraded lands in 1993-95 - a near nine-fold increasein20 years. 49. For bringing benefits to the poor and the broader economy, a turn-around in agricultural productivity will be necessary in Nigeria. Greater productivity can generate higher incomes for the rural poor, reduce the cost of consumption for the urban poor, stimulate industrialization through reducing the cost of raw materials andor increasing export led growth". ~~ "Foracross-countyanalysisofthecorrelationbetweenagriculturalproductivityandpro-poorgrowth,seeReachingtheMillenniumDevelopment Goals:How doesagriculhldproductivityreducepoverty?NomaanMajid, LO, 2004. Country PartnershipStrategy -13- Nigeria 50. Government has developed a three-pronged program to support increases in agricultural productivity, as follows: Technical change.Increasing investment to strengthenagricultural research organizations, improving the quantity and quality of private sector-led, demand-driven technology transfer services, and improving the policy environment. This should also encourage the private sector to increase the supply of agriculture inputs that are key for improved productivity: fertilizers, seeds, agro-chemicals, farm tools and processing equipment; 0 Improving connectivity.Increasing investments ininfrastructure (especially ruralroads) so as to significantly improve the linksbetween rural producers and urban consumers. Improvementsinmarket access resulting from a strengthenedrural transport network will strengthen demand for raw and processedagricultural commodities, improve the profitability of farming and post-harvest processing activities, increase incentives to adopt improved productiontechnologies, raise the incomes of rural producers, and lower prices paidby urban consumers for food and other commodities; and, 0 Better water management.Working to unlock the potential productivity growth offered by more complete, rational, and effective management and use of Nigeria's water resources, especially for irrigation. Inaddition to the small-scale irrigation activities that are currently under way, more emphasis will be put on developing medium- and large-scale irrigation systems that can help mitigate the weather risk associatedwith rain-fed agriculture. 51. The regional contextfor growth. Nigeria can and should also play an important catalytic role inthe economic development of the West African sub-region. It i s a potential large market for its much smaller neighbors, as well as a potential supplier of goods and services for the sub-region. The Government i s now focusing more on playing its natural lead role in economic integration of the sub- region. It is aligning its trade regime to regional agreements and international commitments through the planned implementation of the ECOWAS CET by mid-2005, and the phasing out of all import prohibitions by January 2007. It i s also actively participating in the preparations of a common regional currency. Its efforts at ports and customs modernization will be beneficial not only to the domestic but also to the sub-regional economy. 52. Nigeria is currently engaged in various regional infrastructure initiatives. The ongoing West Africa Gas Pipeline project will transport the country's huge gas reserves to neighboring countries. This project will be an important source of national growth inNigeria's Niger Delta region and inthe beneficiary countries. The West Africa Power Pool will provide a common legal and regulatory framework favorable to private investment and therefore promote increased private sector participation in the country's power sector and availability of affordable power supply both for Nigeria and the sub-region if the ECOWAS Energy Protocol i s fully implemented. Nigeria i s also working on several regional road initiatives. Beyond these regional investment initiatives, Nigeria could play a stronger lead role in promoting harmonization and convergence of economic and sectoral policies across the sub-region. Medium Term Economic Prospects 53. Nigeria's medium-term economic outlook i s positive. With recent reforms and projected oil windfall, the economy has the potential to move to a much higher, more diversified, and stable growth path. It has a considerable resource base across almost all of its non-oil sectors: agriculture, solid minerals, manufacturing, and in services such as transport, communications, banking, ports, etc.. Each of these is a potential contributor to economic growth. The dynamism and the entrepreneurial spirit of Nigerians are widely acknowledged, yet presently underutilized. Country Partnership Strategy -14- Nigeria 54. Agriculture i s critical to any sustained improvements in Nigeria's growth performance. Specific sources include revitalization and higher productivity in traditional areas such as cocoa, oil palm, cassava, ground nuts; as well as progress in newer areas such as high-value fruits and vegetables, rice and agro-processing (including aqua-culture such as catfish and shrimp). In industry, light manufacturing, leather products, food and beverages are areas for growth - i.e. many with agriculture sector linkages to further increase demand. In addition, there is good potential to develop private provision of infrastructure and other services at urban, rural and community level, using innovative "output-based aid" (OBA) methodologies. In the short- to medium-term, the principal markets to be tapped for growth and employment opportunities will be domestic and regional, except for selectedproducts where Nigeria has establishedglobal competitiveness (e.g. shrimps, leather). 55. This strategy, and the implied need for higher levels of support, is developed around a scenario in which Nigeria deepens and extends ongoing reforms. Nigeria can begin to harness more of its considerable resources to put the economy on the path towards attainment of the MDGs. Improvements in trade and exchange rate policy in particular, will stimulate growth. Nigeria could also become a growth pole for the West Africa sub-region and indeed for Sub-Saharan Africa. Under this scenario, public investment would need to rise significantly in order to reduce Nigeria's severe economic infrastructure deficit, particularly in the power and roads sectors, and provide basis for increased access to basic social services. Public investments would also catalyze private investments including in infrastructure. Public investment would average about 11% of GDP and private investment about 14.5% of GDP annually over the period from 9.3% and 13.0% respectively in 2004. At the same time, gross national savings would decline to about 20.9% of GDP annually compared to 27.1% in 2004, inorder to accommodate risingper capita consumption. 56. With public expenditures rising to make progress on the MDGs and more aid resource flows, some degree of real exchange rate appreciation can be expected. Continued prudent fiscal management-in particular, adherence to the oil-price based fiscal rule, tight monetary policy, and improved efficiency and quality of spending-will be critical for keeping this trend in check. Experience from other large economies suggests that with vigorous reforms and progress on removing constraints to non-oil growth, growth gains are still possible even with limited improvements in external competitiveness. Inparticular, improvements in (input and output) marketing arrangements can deliver a substantial agriculture growth dividend. 57. Annual GDP growth would rise to an average of 7.7% in the medium-term driven by stronger non-oil growth averaging about 7.0% annually. This would come from recovery in agricultural productivity, from manufacturing activities such as cement, food processing, sugar-based industries and leather products initially meeting the needs of the large domestic market. Growth in construction would continue to be strong. Services would benefit from growth in both agriculture and industry. Macroeconomic stability would be maintained and inflation would be contained at about 10% annually with continued prudent fiscal management. The non-oil primary deficit would rise to about 47% of GDP in 2005 and decline gradually to about 41.5% by 2008 given the increased outlays requiredfor meeting the MDGs, which i s still consistent with maintaining macro-economic stability. 58. Projected high oil prices would significantly boost oil revenues to about US$36 billion annually over the period. At the same time, with high non-oil investment requirements including import requirements, rising private per capita consumptionand the need to build up reservesto reduce the economy's vulnerability to external shocks, considerable additional external inflows are neededto realize this scenario. An external financing gap emerges in 2005, and grows rapidly, averaging about US$6.4 billionannually (Table 2). Country Partnership Strategy -15- Nigeria 59. The argument for increased international support would be weaker if Nigeria does not accelerate structural reforms and the pace of investment in economic infrastructure and social sectors. Ifthepuce of reform is notacceleratedsignifwuntly, growth wouldpickupto about 6.5% over 2005- 2008 due to double-digit growth in the oil sector in 2005-2006, and marginal improvement in non-oil sector growth to about 5% over the period (Table 2). Fiscal policy would continue to be prudent and consistent with a non-oil primary deficit of about 40% of non-oil GDP. This deficit i s compatible with a fiscal rule fixing the non-oil primary deficit at a reference oil price of US$25 per barrel in 2002 prices. As oil prices are projected to remain higher than the reference price over the medium term, such a policy would permit the accumulation of substantial fiscal savings. The primary surplus could strengthen to about 14.5% of GDP in 2005, from 3.3% in 2003, stabilizing at around 10% of GDP by 2008. The external current account balance would swing to a surplus of about 7.4% of GDP by 2008, a significant improvement from a deficit of nearly 11%of GDP in 2002. While better than historical trends, given the enormity of the country's growth and development challenge, this level of performance would not be sufficient to achieve the MDG targets by 2015. Growth in per capita consumptionand reduction inincome poverty would be limited. 60. If the reform effort is weakened or stulled, there would be no justification for increased assistance. Under such a scenario economic growth would average 5.3% annually over 2005-08, largely reflecting the strength of the oil sector. However, growth in the non-oil sectors of the economy would probably drop to about 2.8 % p.a., from 4.4% in 2003, hampered by the delayed structural reforms and other growth-oriented policies. The drop in the growth rate of the non-oil economy would translate in stagnant if not increasing income poverty, given Nigeria's population growth rate of 2.5 percent and the fact that the majority of the population earns their living inthe non- oil sectors. Public investment rates would stagnate, while private investment could decline to around 11%of GDP. Inflation would remain high, averaging nearly 14% annually as fiscal reforms are delayed in the face of highpublic expenditures. Overall fiscal surplus would average about 7.0 % of GDP compared to 1~0.1%of GDP inthe basecase scenario. 61. Nigeria's positive medium-term economic prospects can be realized provided the government i s able to sustain macroeconomic stability, including through strict implementation of the oil-price based fiscal rule and improved public expenditure management; and make further progress in key structural areas, such as trade and exchange rate management. However, the Government's reform efforts while necessary will not be sufficient, unless accompanied by significantly increased external financial support through a combination of debt reliefand higher ODA and FDIflows. Country Partnership Strategy -16- Nigeria Table 2 :Medium-TermMacro-EconomicFramework, 2005-08. 2004 2005 2006 2007 2008 Sustained and Deepened Reform Scenario GDP Growth (a,at 1990factor costs) 6.1 7.0 9.1 6.5 8.1 Oil 3.5 11.2 13.1 4.0 8.3 Non-oil 7.4 4.9 7.0 8.0 8.1 Gross Investment(% GDP) 22.3 22.0 24.8 27.0 28.0 Public 9.3 10.0 10.5 11.0 12.5 Private 13.0 12.0 14.3 16.0 15.5 Gross NationalSavings (% GDP) 27.1 25.9 25.0 23.8 20.9 Total RevenueandGrants (% GDP) 43.1 46.3 46.1 43.0 40.0 Total Expenditureand Net Lending(% GDP) 35.7 38.8 39.9 40.7 40.8 Non-oilPrimary Balance (% Non-oil GDP) -37.0 -47.1 -46.0 -42.2 -41.5 ExternalFinancingGap (US$billion) 0.0 3.7 5.4 5.2 11.2 Gross internationalreserves(US$billion) 17.0 28.6 37.9 43.3 48.9 (months of imports) 6.4 9.5 10.6 11.2 10.8 Good Policy Scenario GDP Growth (%, at 1990factor costs) 6.1 7.0 7.8 4.8 6.5 Oil 3.5 11.2 13.1 4.0 8.3 Non-oil 7.4 4.9 5.0 5.3 5.5 Gross Investment(% GDP) 22.3 20.8 23.0 24.0 24.0 Public 9.3 9.0 9.3 9.9 9.9 Private 13.0 11.8 13.7 14.2 14.1 GrossNationalSavings (% GDP) 27.1 30.1 33.4 31.5 31.5 Total RevenueandGrants (% GDP) 43.1 45.8 45.5 43.2 43.1 Total ExpenditureandNet Lending(% GDP) 35.7 34.5 33.2 34.7 34.7 Non-oil Primary Balance(% Non-oil GDP) -37.0 -40.8 -39.9 -40.0 -40.0 ExternalFinancingGap (US$billion) 0.0 2.2 1.6 1.3 0.6 Grossinternationalreserves (US$billion) 17.0 31.0 44.9 55.9 67.0 (months of imports) 6.4 12.0 16.6 19.5 22.2 Non-Reform Scenario GDP Growth (%, at 1990factor costs) 6.1 5.9 6.4 3.9 5.1 Oil 3.5 11.2 13.1 4.0 8.3 Non-oil 7.4 2.8 2.8 2.8 2.8 Gross Investment (% GDP) 22.3 19.9 18.9 19.2 20.0 Public 9.3 9.0 9.0 9.0 9.0 Private 13.0 10.9 9.9 10.2 11.0 GrossNationalSavings (% GDP) 27.1 29.1 26.6 22.7 22.3 Total RevenueandGrants (% GDP) 43.1 45.0 44.6 41.4 40.5 Total ExpenditureandNet Lending(% GDP) 35.7 35.4 35.3 36.4 36.2 Non-oil PrimaryBalance(% Non-oilGDP) -37.0 -43.6 -44.1 -44.1 -43.7 ExternalFinancingGap (US$billion) 0.0 1.3 2.1 2.5 2.8 Gross internationalreserves (US$billion) 17.0 31.0 43.6 52.7 60.3 (monthsof imports) 6.4 12.0 15.1 16.8 17.6 Source: World BanWIMF. Country Partnership Strategy -17- Nigeria 111.COUNTRYDEVELOPMENTAGENDA: NEEDSAND SEEDS A New Frameworkfor Reform,GrowthandPovertyReduction 62. The NEEDS and state-level SEEDSform the nationalframework of Nigeria's home-grown poverty reduction strategy.The development of the NEEDS enjoyed strong ownership. It underscores the Government's commitment to an ambitious development agenda that aims to place Nigeria on a path of sustainable long-term growth and poverty reduction, through changing attitudes and behaviors as well as policies and legislation. In May 2004, President Obasanjo officially launched the NEEDS, prepared and are beginning to implement their SEEDS - though progress varies. The international although implementation of key elements began in mid 2003. Most of the 36 state governments have community recognizes that NEEDS and SEEDS present a significant shift inthe country's agenda and a coherent framework for future increased engagement. It also provides a rallying point for donor coordination and harmonization. 63. The NEEDS honestly and self-critically assesses poverty and the lack of growth in Nigeria, their causes, and the challenges confronting the nation. While highlighting Nigeria's potential, NEEDS points out that Nigeria i s currently one of the weakest economies in Africa (although the second largest in sub-Saharan Africa), and one of the poorest countries in the world. According to the NEEDS, achieving the MDGs i s a critical challenge for Nigeria. Therefore, NEEDS places growth of the economy firmly at the centre of its agenda. There i s a clear recognition that sustained poverty reduction will not be achieved without improved economic performance, particularly in the non-oil economy in which most of the poor participate. 64. NEEDS Vision. The NEEDS sets out a vision for wealth creation, employment generation, poverty reduction and value reorientation. NEEDS i s founded on three pillars: (i) empowering people and building a social contract; (ii)promoting private enterprise; and, (iii)changing the way government works. 65. Empowenngpeople and building a social contract. NEEDS seeks improved access to health, basic education, safe water, welfare, employment and security through empowerment and participation. It proposes a social charter which recognizes the right of Nigerians to government services and accountability. Ineducation, the policy thrust includes the provision of unhinderedaccess to Universal Basic Education (UBE) to all children of school-going age. It seeks the establishment and maintenance of quality standards through appropriate curricula and quality control. NEEDS calls for capacity buildingin post basic education and training for the knowledge economy. Inhealth, key elements include reducing the disease burden of malaria, TB, W / A I D S and reproductive health related illnesses. NEEDS calls for improved availability and management of health resources (financial, human etc). The Federal Government's health reform program will support the development of improved primary health care services at state level with a special emphasis on routine immunization. NEEDS anticipates the preparation of detailed sector strategies that will clearly delineate the roles and responsibilities of the three tiers of Government in service provision. This should eliminate waste and duplication of effort. Sector programs for these strategies are to be prioritized and costed and public spending for services increasingly based on performance benchmarks. This pillar recognizes that success in delivering the social charter will depend on close collaboration between all stakeholders: federal, state and local governments as well as the private sector, NGOs and the international community. The NEEDS also envisages the creation of a strong safety net programfor particularly vulnerable groups. Country Partnership Strategy -18- Nigeria 66. Promoting private enterprise tofoster growth of the non-oil sector. The NEEDS prioritizes improving performance in agriculture and SMEs in order to build a stronger connection between growth, employment and poverty reduction. Private sector led growth and a sound macroeconomic framework are considered key elements of Nigeria's economic transformation. Speeding up privatization, de-regulation and liberalization are important priorities. The NEEDS emphasizes the importance of a conducive business environment for formal and informal enterprises and outlines a program of institutional and administrative reforms to reduce the cost of doing business in Nigeria. These include: reform of business regulation and registration processes, taxes, key trade facilitation services including customs, ports administration, and related financial and service provisions. The structure of the tax system i s being simplified and appropriate incentives are being introduced to encourage business activity. Tax administration i s being overhauled and modernized. In parallel, Nigerian ports are being concessioned to increase their efficiency and reduce hidden costs to private operators. Customs reforms are addressing corruption, addressing staff training needs and modernizing operations. telecommunications - which are the major bottlenecks for private sector led growth. 67. The NEEDS stresses the importance of economic infrastructure - transport, power, and Private provision of infrastructure and public private partnerships will be encouraged. Laws to improve competition and protect consumer welfare in industries providing infrastructure services are to be enforced. Improvingrural infrastructure and programs of rural access and mobility are assigned high priority. The NEEDS stresses the importance of a strong financial system, with bigger asset volume, instrument diversity and an incentive structure in support of growth in the real sector. The government has raised the minimumcapital requirements for banks from N 2 billion to N25 billion in a major initiative to reduce risks posed to the system by unsound banks. The NEEDS commits the government to diversifying the economy away from oil, gradually liberalizing imports and strengthening Nigeria's participation in regional integration. 68. Changing the way that government works. As part of value reorientation, the NEEDS emphasizes the break from "business as usual". It spells out an ambitious agenda for fighting corruption and addressing the issues related to a large and under-performing public sector. The NEEDS states clearly that government must change to allow space for the private sector to function effectively and invest in people and in the delivery of services. Government institutions are to be restructured, right-sized and re-professionalized to improve their performance. Enhancing transparency and accountability inresource use and decision making are considered crucial in making government perform. Under the Procurement Bill submitted to the National Assembly in January 2005, a Public Procurement Bureau is to be established to oversee implementation of new procurement regulations that introduce open and competitive processes for public procurement. Reforms of justice administration and the police will strengthen the work of targeted anti-corruption agencies such as the International Centre for the Prevention of Crime (ICPC) and the Economic and Financial Crimes Commission (EFCC). Economic Coordination will be improved both across the Federal Government and between the different tiers of government. State governments are following suit and are addressing the issues of more effective government in their own SEEDS. Such improvements in coordination and functioning will call for stronger monitoring and evaluation systems servedby high-quality data that are generated, analyzed and disseminated through the tiers of government. Buildinggreater fiscal responsibility, initially through a pact with all states, and through a Bill to be passed in the National Assembly in 2005, will provide a strong basis for strengthening systems and coordination across tiers of government. 69. The Government has set up a Presidential Implementation Committee to take forward the issues raised in a recent Conflict Assessment. It has inviteddonors to contribute to working groups on political and socio-economic conflict. EFCC investigations into crude oil bunkering address a key Country PartnershipStrategy -19- Nigeria driver of violent conflict in the Delta, while the President's suspension of the Governor of Plateau State (albeit temporarily) sent a message that localized conflict should not be left unchecked or manipulated for political ends. TangibleProgresson Implementingthe NEEDSand ImprovingGovernance 70. NEEDS accurately diagnoses the key development constraints facing Nigeria and proposes a sound agenda to address them. Implementation nevertheless presents several challenges: weak capacity, Nigeria's history of poor policy and strategy implementation and the resistance to reform from vested interests. While reform implementationto date has been impressive, there have also been set-backs. Taking a long-term perspective, continuing the process of "value reorientation" and embedding key reforms that can carry beyond the 2007 elections are essential if the constraints to reform are to be overcome. 71. Good progress has been made on several fronts and especially inthe area of governance. Public financial Box 5: ProgressonimplementationofNEEDS management processes and systems are being reformed A global leaderonEITI DueprocessinFederalGovernment procurement, to reduce their susceptibility to corruption. For the first savingmillions time, the Nigerian public has easy access to details of oil Pilotingofpublic servicereform revenue flows to different tiers of government with Incrementalprogress on privatization Progress on liberalization,includinginthe regular publication of this information in the national downstreamoil sector andtelecoms newspapers. Public procurement is being made Fiscalresponsibilitypactandbill competitive and transparent. A mechanism to provide Improvedbudgetprocess, linkedto NEEDSpriorities Buildingnationalconsensusfor reformandSnvice greater oversight of compliance with procurement delive-rythroughthe SEEDSprocess regulations has been successfully implemented and df employees - formerly a major source of corruption and abuse - are being monetized. Operational saiings of hundreds of millions doliars have been realized. Non-monetary benefits of federal reviews have been carried out for selectedkey Federal Government spending activities and steps have been taken to address weaknesses and sources of corruption. Government fiscal accounts have been brought up to date and the Public Accounts Committee i s actively following up on cases of misuse of public funds. 72. Ghost workers, about 5000 to date, are being flushed from the public payroll through physical verification exercises and modernization of human resource management systems. Land transactions in the FCT, which were a major source of corruption and patronage, have been totally revamped. The cadastral and Land Registry has been computerized and a comprehensive Abuja Geographic Information System created. New certificates of occupancy with stronger security features are being issued. Legal backing is being provided for several of these policy, process, and systems changes through enactment of landmark legislation. In addition to process and systems improvements, targeted anti- corruption efforts have been stepped up with the creation of theEFCC. Country Partnership Strategy -20- Nigeria 73. There have been promising developments in the Anti-Money Laundering and Counter Terrorist Financing (AMLKTF) environment in Nigeria. Most notably the Money Laundering (Prohibition) Act was passed in 2004. This has empowered the EFCC to investigate, prosecute and penalize economic and financial crimes and to enforce the provisions of other laws and regulations relating to economic and financial crimes. The Nigerian Financial Intelligence Unit (NFIU) was established to monitor suspicious transactions in support of the EFCC's mandate. The EFCC is currently prosecuting several corruption cases, which include cases against high-ranking government officials, some of whom have been relieved of their duties and jailed. It has also seized US$670 million in assets from corruption cases. The Government i s working towards Nigeria qualifying for removal from the Financial Action Task Forces (FATF) list of "non-cooperative" countries. An implementation plan was submitted to the FATF Review Committee in October 2004. An on-site visit by the Review team i s planned, the results of which are expected to lead to de-listing of Nigeria from the FATFlist of non-cooperative countries by early 2006. 74. Inparallel with economic and institutional reforms, Government plans to implement political reforms to strengthen the process of democratization and address weaknesses in the current constitution. Political reforms will also help provide the enabling environment for economic reforms to take root. A National Political Reform Conference has been convened that i s discussing a wide range of issues. These include electoral reform, federalism and decentralization, security, the police, the public service and immunity from prosecution for some political office holders. Country Partnership Strategy -21- Nigeria IV. PARTNERSHIPSTRATEGY A NEW WAY OFDOINGBUSINESS - 75. The Country Partnership Strategy (CPS)for Nigeria FY06-09 is ajoint WB Group-DFID approachfor assistingNigeria to implement its program to boost growth and achieve the MDGs. It takes as its starting point the vision of wealth creation, value re-orientation and establishment of a social charter for human development and empowerment as outlined inNigeria's homegrown poverty reduction strategy - the NEEDS. 76. It is essential that every aspect of the CPS and each intervention internalize an understanding of the political economy and works to unblock the three underlying constraints highlighted earlier - mismanagement of oil revenues, weak formal accountability and transparency, and poor non-oil growth. The CPS will be implemented during the political uncertainty of general elections in 2007 in which President Obasanjo will not run. Hence, a key objective of the CPS i s to support reformefforts and ensure that they are sustainable over the medium term. The key objectives of the reforms - empowerment, growth and good governance - have broad support among the Nigerian population. However, powerful interest groups are losing economically and politically and are resistant to change. This resistance is likely to increaseduring the election process. In view of this, the Government, the World Bank Group and DFIDagreed on the following: The World Bank Group and DFIDshould use the occasion of this CPS to send a strong signal of support for Nigeria's reforms; The CPS should identify some early tangible results ("quick wins"), especially inthe area of infrastructure, in order to help demonstrate benefits from reforms; The strong partnership between Government, the World Bank and DFID should be extended to include other members of the international community'2, civil society and private sector groups. This will create space for voices supportive of moving Nigeria forward ina way that benefits all Nigerians; DFID-with other members of the internationalcommunity -will support the election process; The CPS should identify performing states -lead states - and work closely with them, thus helping spread the support for reforms beyond the Federal Government; Partnership with the legislature should be strengthened (e.g. through WBI and DFID programs); and, A communications strategy should be an integral part of the CPS. 77. The political risks are high(see risk section), but the potential gains for Nigeria and the whole region are also great. Therefore, the World Bank Group and DFID have agreed that the time i s right to increase support for Nigeria. A mid-term review of the CPS will be carried out after two years of implementation, some months following the elections. This review, and the CPS progress report, will provide an opportunity to assess results and adjust the strategy in response to lessons learnt as well as inresponseto economic andpolitical developments. ''Otherdevelopmentpartners-the UNandthe ADB amongothers-have given strongsupport inresponseto the CPS for movingtowards ajoint donor strategic framework in support of NEEDS andSEEDS andintensifying further onjoint programming(see Annex 7). Country Partnership Strategy -22- Nigeria Box7: Partnershipfor Impact WB / DFID- Effective support for Nigeria's development agenda will benefit from working towards collaborativeadvantage among development partners,based011 comparativestrengths. We recognizethe following, thoughnotnecessarilyexclusive, strengths: World BankGroup globalanalyticalcapacity,informedby worldwideexperienceandlessonsleamed,substantialfinancia - andstaffresources;ccuveningpowerof amultilateralinstitution;and, directengagement with organizedprimsector (E). DFID specialistcountryanalyticalcapacity,includingworkonpoliticaleconomyissues; work onthedemand-sideofrightsand - governancewith directengagemeat withnon-govemmentstakeholders (parliamentarians,civil society, private sector); flexible useofgrantresources; rapidglobalaccess to expertise;readinessto test new ideasor ways of working; intanationalaccess 8s a CWEUgovernmentagency; sustainedfield-levelpresence;and,experienceofinter-sectoralanalysisand working. These strengthsare h i a y complementaryand will be effectively inter-wovento deliver greater impact. It is anticipated that enhanced development effectiveness will require continuedjoint analysis, maintaining a common understanding and prioritization in policy dialogue with governments. We anticipate that the CPS will benefit from a combmtion of separate and joint products or forms of support. In addition to enhanced impact at federal and state level, it is expected that this will reduce the transaction costs to governmentof engaging with its developmentparmers. The agencies will work together to build a stronger field presence for sustainedpolicy dialogue and developmenteffectiveness. based on DFlD'sexistingredona1presence. We will have a joint framework for engagement in up to six lead states over the CPS period. 'Ihe two agencies will implement thejoint strategy in support of the three commonoutcomes. This will involve agencies assuming leadership on particularly secton, recognizingand supporting the comparative strength of other development partners in the process, thoughthis mayinvolvejoint working. An indicativelistincludes: World BankGroup- Publicservicereform,procurementreform,infrastructure,investmentclimate. education,urbanwater, economicanalysis andpolicydialogue. DFLD Health,HIVIAids,ruralwatcr, security, makingmarketswork betterfor the poor,coalitionbuildingonkeygrowthand - governanceissuesacrossgovernmentandnon-governmentstakeholders,rapidresponseto TA requestsfrom Federal GoVCIUmUlt We will continue to pmue greater convergenceon seategy andjoint workingarrangementsover the CPS period, a key role forjoint Outcome coordinators.Bothagencies will seek to broaden the.parmership with other developmentpartners under a govenuaeot-led - strategy- building on the interested already shown by the UN, the ADB and others in response to consultation on the CPS. Furthermorr,interventionsacrcssmembersofthe WorldBankGroup IDA, IFC.WBI, MIGA-have aCDmplemeataryroletoplayin - deliveringthe strategy. Lessons from Joint Interim Strategy and DFID CSP 78. The CPS builds upon an assessment of implementationexperience of the World Bank Group and DFID since 1999. A detailed account of this assessment i s contained in the Interim Strategy CompletionReport (see Annex 2). The main lessons are summarized below: In 1999there was an overestimationof the scopefor progress and a concomitant underestimationof thepolitical economy challenges in Nigeria. The political economy of Nigeria was not a central partof the strategic analysis at the beginning of the period of civilian rule. In particular, the ways in which established interests and relations of power - revolving mainly around the oil economy but extending into the political sphere -have historically impeded change and maintainedand entrenched inequality were largely overlooked. The degree of institutionaldeterioration, the entrenchment of corrupt practices, the lack of accountability and transparency were greater than initially imagined. The World Bank's absenceaffected its knowledge base and the portfolio contracted before 1999 providing very limitedexperience on how to engage on reform. Strong ownership,a clear govemment agenda and commitment are prerequisites to effective interventionsand support. Supportingthe Federal Government inareas where there i s high level of commitment bringsresults (e.g. the areas of transparency, civil service reform). Experience at state level also strongly suggests that state government commitment and capacity i s critical for successful projects and effective support. The quality of policy dialogue and project preparation and implementation strongly depends on the quality and scope of analytical work (AAA). Continued analytical work i s needed to upgrade the quality of the dialogue with the federal and state governments, especially regarding the use of the oil resources(fiscal management and linkages with domestic Country PartnershipStrategy -23- Nigeria industry) and non-oil growth. AAA will be particularly important inworking directly with states and in improving the relationship between the Federal Government and the states. The large number of states (36), unclear division of responsibilities and poor relationships across govemment tiers have afSected the quality and efectiveness of assistance.Attempts to guarantee national coverage dilutedthe resources available for each state. This reduced impact and leverage to seek significant institutional improvements. Fixedcommitments per state, per project, introduced rigidities andjeopardized implementation progress and lowered disbursement ratios. Assistance for the delivery of basic services was particularly affected. The Govemment and the World Bank lacked the tools to manage the risks of theprogram. Past experience shows that projects tend to stall, leaving substantial resources stranded. Flexibility should allow the country team and Government to reallocate resources to performing non-performing projects/states. Few tangible results in the short-term limited the scopefor reform. Focus on tangible results has to drive the reform program, including results that can buildmomentum for a change in political behaviors. This requires not to be hindered by the lack of "modern" legislation. Progress inprocurement and energy has been possible even when modem legal frameworks are lacking. Also, donor coordinationis requiredearly on indiagnosis and design. 79. In addition, the preparation of the CPS built on the lessons Box8: Developmentof the CPS A participatory approacb - learned from World Bank assistance The CPS supports the Government's development agenda, as artidat& in the NEEDSandSEEDS, which enjoy the strong supportof the intanatioaalcommunity. to other large federal countries, such The CPSbuilds on lessonsh e dinthe Joint IntgimStrategy andDFID'sCountry as Brazil, India (also drawing on Assistance Plan,which is basedon an inte.nsiveanalysisof the politicaleconomy of Nigeriathat involveda wide-range of Nigerianandinternatid mperis. DFID's experiences), Mexico, The development of the CPS was a close collaborationamongfederalandstate Russia. Main lessons include: (i) to governments with development parmers, particularly the World Bank and DmD. operate effectively in federal The CPS was gradually defined over a series of intensive retreats and meetings. It was further articulated by a CPS Core Team that included members from structures requires clear Government, the World Bank Group and DFID. Thc team also benefited from differentiation of interventions and lessonlearningfromglobalexperienceof otherWorld BankCASs. Strategic propositions were tested with a range "of stakeholdas from expected outcome at Federal and govcmment, parliament, civil society, academia and private sector, at aational, state levels; and (ii) impact at the fedem1 and state levels. 'Ihc consultations helped to validate the overall strategic state level requires clear focus of the CPS and helpedthe team to reflect on a number of key issues. Close consultationon tbe development of the CPS was kept with FedaalMinistersand a commitment, ownership and numberof stategovernors. capacity. A Results Based Strategy 80. Drawing from the above lessons, the proposed strategy i s based on four principles: (i)realism about opportunities and scope for change; (ii)responsiveness and Government ownership; (iii) selectivity for impact; and (iv) balancing a longer-term transformational agenda with the need for more direct, shorter-term impacts. 81. Selectivity to create a visible and early impact is critical to the success of the strategy. The amount of assistance, even when the allocation i s increased, is still small relative to Nigeria's population and the challenges Nigeria faces in accelerating Country Partnership Strategy -24- Nigeria economic growth and meeting the MDGs. The CPS applies selectivity in four different ways: (i) it focuses on a sub-set of issues inthe three priority areas identified by the NEEDS (see Figure 3), (ii) it defines outcomes and allocates assistance according to the level of commitment, need and capacity at national and state level, (iii) inaddressingMDGs, it focuses on a few key issues - for example, child and maternal mortality, girls' education, IV/AIDS, safe water - in areas where human development indicators are at their worst; and (iv) it strengthens incentives for states to demonstrate their commitment to accountability, transparency and service delivery. Thus, the strategy sees its impact in helping to develop - and rewarding - a number of `models' of development and growth in the lead states, while addressing progress on the MDGs and public good issues nationwide. Furthermore, a key element of the strategy is to lever improvements in the effectiveness and efficiency of public expenditure to broadenand sustain impact. Fig. 3: Selectivity of CPS inrelation to NEEDS Priorities NEEDS Priorities 82. Work with lead states. The CPS has defined the `lead state approach' as a core principle for work at the state level as a means to lever resources to increase impact, strengthen demand and commitment for reform. This approach i s aligned and supports the NEEDS medium-term transformational agenda of value orientation and the Federal Government's effort foster consensus with state governments on moving Nigeria forward (see Annex 3). 83. Two criteria will influence the selection of lead states: demand and performance. The selection process will be based on the government-led benchmarking of state performance (SEEDS Benchmarking which will identify states that perform better and are interested in cooperating to further improve performance in areas such as transparency, accountability, sound public resource management and pursuit of the MDGs). The SEEDS benchmarking exercise will foster a competitive approach that will help to shift incentives towards reform. Where a group emerges in which all states perform similarly, up to six states will be selected according to their levels of poverty and size of population. This is intended to maximize impact on shared growth and poverty reduction in the CPS period. Progress on partnerships with lead states i s likely to be influenced by their history of political stability and of positive cooperation with development partners. Unlike past partnerships which were Country PartnershipStrategy -25- Nigeria forged to address project specific issues, these will be long-term relationships based on a shared strategic vision for growth and development and formed inalignment with the state SEEDS. Work in lead states will be coordinated with other development partners in order to develop a joint donor approach to state-level work. 84. Delivering on three outcomes, in support of NEEDS and SEEDS. The CPS is a structured program of assistance that i s geared to achieving tangible results within its specific time frame of implementation. The CPS i s founded on three pillars of the NEEDS (see paragraph 69) and is designed to impact the achievement of three outcomes: (i) improved service delivery for human development; (ii)improved environment and services for non-oil growth; and (iii)enhanced transparency and accountability for better governance. Embedding reforms in Nigeria relies on achieving early, tangible results. In support of this, the World Bank-financed project portfolio in Nigeria i s being restructured to align with the CPS to ensure quick gains (increased immunization coverage, for instance). Furthermore, special focus is placed on strengthening analytical work and policy dialogue as key instruments for assisting the Government in formulating policies, communicating and implementing reforms. 85. The Table below shows a summary of outcomes and indicators to track progress towards the NEEDS and the CPS' three outcomes. Annex 1 describes in more detail the results.framework together with intermediate outcomes and milestones and World Bank-DFID interventions to support the results. In addition, cross-cutting issues will be mainstreamed across the outcomes and partner interventions (see Box 11). Country Partnership Strategy -26- Nigeria Box 11:Mainstreamingcross-cuttingissuesininterventions EnvironmentalSustanubility: We will seek strategic opportunities to promote the wise use of naturalresources and the delivery of environmental services at federal and state level to support poverty reduction and promote sustainable economic growth. Environmental degradation and impact will be monitored and tackled at the project level. In addition, Niger Delta analytical and advisory work will help to addressissuesof socialdevelopmentand conflictand the environmental implicationsof oil explorations. It will build a strong partnership with Government, oil companies, communities and donors for good environmental policies and practices. Conflict: Continued violent conflict will retard human development anddeter investment andjob creation.We will promotea multi- stakeholder approach to understandingand the causes of conflict. In the short-term we may engage in alternativedispute resolution, community policingandprovidefurther support for the ExtractiveIndustriesTransparency Initiative(Em. H N a dAIDS: ActiononHIVandAIDS willbebuiltintoallsectorsandresults. Gender: We will work to ensurethat effectiveapproachesto promotinggenderequity are builtintotheCPS. CommuniratMn: Strategic communication throughout the CPS can help to promote the reform agenda and help structure the government's communication function. We will assist the Government and other stakeholders to identify communication needs and suggest a suitable institutional arrangement and build capacity in this area. The CPS communication program would include communication activities, channels and tools to raise awareness, build public consensus and identify ways of communicating more effectively with stakeholders. CapaCitr Building:We will provide assistance to buildthe capacity of the Government at the federal, state andlocallevelsto develop and implement policies, identify priorities and align them with necessary budget financing, prepare and implement projects and improve public procurement and financial management. We will assist civil society organizations to establish dialogue with the Governmentas a-meansof increasingandmaintaid;ngtransparency andaccountability of federal, state and localgovernme&. Country Partnership Strategy -27- Nigeria Table 3: Summary CPS Results-BasedFramework Longer Term Goals MDGsandNEEDS Shorter-term projected outcomesfor the CPS period(2009)" I.IMPROVEDSERVICED1 JVERYFORHUMANDEVELOPMENT Empowering People Secure Improvements in access and quality of basic servicesinhealth care, HIV/AIDS, education, water and sanitation. Reducedmatemaland child -Health servicesimproved: mortality rates Fullimmunizationcoverageof childrenincreasedinleadstates. Increaseduse of formal healthsystemby pregnantmothers. Combat HIV/AIDS, Malaria and -HIV/AIDS: other diseases Increasedaccess to prevention,VCT, care and support services. Family Life andHIV/AIDS cumculum implemented. Improvededucationaloutcomes -Educationservicesimproved: Increasedgirls' primary andsecondaryenrolment. Improvedaccess to safe drinking Post-Basic EducationReformStrategypiloted. water -Water and sanitation services improved: Increasedaccess to reliablepipedwater inurbancommunities. Increasedaccess to safe water inruralcommunities 11.IMPROVEDENVIRONM NTAND SERVICESFORNON-OILGROWTH Promoting Private Enterprise Support non-oil growth through improvedproductive infrastructure (power, roadsand telecom), improvedregulatory businessenvironment and Reductioninincomepoverty increasedproductivityinagriculturalsector. through shared sustainable -Increased access to reliable, affordable energy: economic growth of average 8% Actual power generationincreased, with reducedpower outages. innon-oil sector -Increased access to improved transport system: Federalhighwaysincreasinglyunder performance-basedmanagement, increasing share rehabilitated,maintained. -Increased competitiveness, improvedlegaland regulatory environment: Reducedindex of cost of doingbusiness. Increasedaccessto financial services. -Improved investmentclimate and productivity inleadstates: (illustrative) Improvedruralaccess, businessenvironment Access to improvedagriculturaltechnology andfarm inputs III.ENHANCEDTRANSPARE1 :YANDACCOUNTABILITYFORBETTERGOVERNANCE Changing the Way Government Advance transparency, accountability and efficiencyof government at all Works levels, and create environment conducive for economic growthand social cohesion. Government working effectively -Strengthened, transparent public expenditure management: andinpartnershipwith civil Annualbudgetsalignedwith NEEDS, with amediumterm horizon. society and the privatesector Oil RevenueAccounts (regularly)auditedanddisseminated. -Strengthened, efficient public administration & service delivery systems: Public servicereformprogramimplemented. -Improved accountability and oversight: Improvedprofessionalismin legislativeoversight. -Demand for change strengthened: Nigeriancoalitions formed aroundkey development policy issues. Strengthenedcapacityof mediaon economic & social issues. l3Detailedoutcomes, indicatorsandinterventionsinAnnex 1. Country Partnership Strategy -28- Nigeria Supporting HumanDevelopment 86. Inthe area of Human Development, the World Bank and DFID propose to work at three levels to strengthen progress on key MDGs and create a basis for sustainable development as follows: 0 At thefederal level: (i)analytical work to support developing national strategies and policies for human development, with specific reference to healthand basic education; (ii) financing of a national HN/AIDS programto work with a range of government and non-government stakeholders; and (iii)financing federal and lead state programs ineducation, including capacity buildinginscience and technology to promote the development of a knowledge economy. 0 projects. A broad-basedengagement- including on governance and growth - will also lever Inlead states the CPS will finance state-specific education, healthand water programs and more efficient public expenditure on social service delivery. 0 Where human development indicators are at their worst: The World Bank and DFIDwill help states to address weak progress on many MDGs in ways that result indirect, shorter-term impact. Outside lead states, programs will work with a range of stakeholders -cooperating with UNagencies and others -on specific MDG-related issues such as girls' education, maternalhealth, routine immunization or access to safe water. This will entail a CDD approach to financing social infrastructure and engaging community participation intackling the MDGs. Under this CPS urban and rural CDD projects will support local communities and help to provide basic social services. 87. In addition, support for federal and state level infrastructure (especially rural roads and power) are expected to improve access to healthand education services and thus contribute to moving towards MDGtargets. 88. Ineducation, the CPS will: (i) closely with other development partners to support the work implementation of state-specific EFA programs; (ii) implement the restructured Universal Basic Education (UBE) project; (iii) provide institutional capacity strengthening at federal level and in lead states to improve management planning and monitoring capacity of quality and effectiveness in education; (iv) increase access to distance learning opportunities; (v) work with UNICEF and others to improve girls' access to quality education in northern Nigeria, where the indicators are worst; and (vi) provide support to the Government in promoting the knowledge economy through secondary and tertiary education to further Nigeria's role inAfrican science and technological progress for economic growth. 89. In health, analytical work and policy dialogue will continue at the national level to focus on the Government's Health Sector Reform Program. This will consider a Country Status Report and work on health insurance. One CPS focus will be on routine immunization and its operational capacity at state level. The World Bank has already followed up a successful intervention to fight polio by extending support to the whole country. In the lead states, the CPS will focus on improving the availability, quality, demand, and utilization of basic health services. It will work simultaneously to remove structural bottlenecks relating to financing, management and integration of the health health SWAps in lead states - levering additional resources and improving the efficiency of public system. Where appropriate, the CPS will collaborate with Government and other partners to develop expenditure. Under the CPS, the World Bank and DFID will support a range of health sector programs at national, state and local levels, working with public and private sectors and with civil society on meeting the MDGs (addressing child and maternal mortality and malaria). Country Partnership Strategy -29- Nigeria 90. The CPS will take advantage of the malariabooster programfor Africa, to help tackle malaria at the state level and help strengthen national-level efforts in cooperation with other donors. For HIV/AIDS the CPS will support a multisectoral AIDS strategy in which the "three ones" are implemented: (i) one agreed AIDS action framework that coordinates the efforts of all partners, (ii) one national AIDS coordinating authority with a broad-based, multisectoral mandate, and (iii) one agreedmonitoring and evaluation systemthat operatesat country level. The CPS will: 0 strengthen prevention strategiesby raising awareness, particularly among women, youth and groups most at risk; 0 provide medical care and support, including treatment of opportunistic infections such as TB, for people living with HIV; 0 enhance blood safety; 0 implement measuresto mitigate the impact of AIDS, including orphan support; and 0 support through collaboration with government ministries, civil society groups and the private sector a national social marketing network to distribute condoms. 91. The experience gained during the past years of engagement serves as the basis for a greater effort indelivering potable water. The primary instrument of assistance will be the World Bank's First National Water Project. This will be complemented by the Second National Water project, presented to the Board with this strategy. These will concentrate on rehabilitating basic infrastructure, establishing financial sustainability of service delivery and perfecting public/private partnerships. The program i s intended to serve as a model to improve water management in other cities, with or without World Bank support. DFID will continue support for improving water delivery in rural areas, through UNICEF.Further support for water services in small communities will be provided through the CDD operations. On sanitation, the World Bank will initiate work on urban slum rehabilitation in Lagos. Concerning solid waste and waste water, the World Bank will respond to requests to work with lead states to improve drainage and, inother states, do the same under CDD-type operations. Supporting Growth 92. IFC, MIGA -and DFIDdevelop ajoint framework on economic growth with a range of stakeholders, In order to support shared growth, the strategy proposes that the World Bank Group - IDA, includingother donors (UN,USAID, ADB, CIDA). This will identify opportunities for triggering and sustaining growth, shaping existing initiatives and guiding new investments and analysis at three levels, as follows: 0 At thefederul level, the CPS focus is on improving the business environment and removing major infrastructurebottlenecks. This i s likely to entail large infrastructure programs inthe energy sector (electricity and gas), transport, and improvements inports and customs services. Analytical and advisory services will assist the Government in identifying flaws inthe business climate, particularly concerning agriculture. Advisory work will help to define policies that encourageprivate sector development help monitor changes inthe investment climate annually. Support will continue to ongoing initiatives for regional economic integration such as the West Africa Gas Pipeline Project. The World Bank and DFIDare also supporting capacity buildinginECOWAS to enhance its ability to articulate and implement the regional integration agenda; 0 Work inthe leadstates will initially focus on rural transport since access to markets i s a major constraint to producers, but would expand to include state-specific growth platforms basedon a deeper state-specific analysis. The platform will encompass a mix of advisory Country Partnership Strategy -30- Nigeria facilities and investments to boost non-oil growth, particularly inthe agriculture sector and rural economy with due attention to sustainablemanagementof natural resources; At the sub-national level and outsidelead states, there will be two main initiatives: one on investmentsinagriculture through a CDD project (Fadama) and the other on demand for change inthe businessenvironment. 93. The World Bank Group (IDA, IFC) and DFID will work at the federal and national levels, when appropriate, by developing private-public partnerships, to improve the business environment and the energy and transportation environment. IDA, IFC and DFID will continue to coordinate activities in the area of privatization, building the capacity of the Bureau of Public Enterprises. A significant increase in power generating capacity i s expected by the end of the CPS. A better functioning transmission and distribution systems should further contribute to significantly reduced power outages. The recently approved power bill facilitates the restructuring of NEPA and the engagement of the private sector. The strategy will assist the government in reforming the power sector, particularly in developing a framework for off-grid projects (in both urban and rural areas). The IFC will support developing off-grid electricity projects to supply power to industrial users and areas of concentrated demand. The development of the gas industry is recognized as important in boosting the domestic non-oil economy and improving poorer households' access to cheaper, cleaner energy. In telecommunications, the World Bank and IFC will continue to provide TA to the sector regulation and private operators. 94. Under the CPS, IDA will support the rehabilitation of important federal roads and help to develop a sustainable system for road maintenance. Improved transport, especially rural roads, will bringadditional benefits of increasing people's access to basic health and education services and thus contribute to achieving the MDGs. Significant advances in private sector participation in ports and rails and the Abuja airport are foreseen and are supported by IFC. MIGA will also be interested in supporting private-public partnerships in infrastructure projects through the provision of political risk guarantees to foreign investors. 95. National efforts to fill the infrastructure gaps are being complemented by participation in regional initiatives. In the energy sector, the active participation of Nigeria in the West Africa Power Pool implies a common legal and regulatory framework that i s favorable to private investment, increasing availability and security of affordable power supply bothfor Nigeria and the sub-region. In the telecoms sector, the World Bank will support Nigeria's participation in regional efforts to create a regional market under the ECOWAS framework by harmonizing the policy, legal and regulatory frameworks, cross-border interconnectivity and regional roaming. In the transport sector, regional initiatives seek to improve road infrastructure along the Abidjan-Lagos corridor, particularly between Lagos and Cotonou. 96. Past experience shows that pro-growth interventions often fail to generate synergy due to a high level of geographical dispersion. Therefore, the CPS will focus state-level interventions in lead states to remove obstacles to sustainable growth in rural and urban environments. Lead state growth platforms will provide a critical mass of investment required to make major infrastructure improvements - including through improving rural access. Such investments, coupled with improvements in the business environment at the federal and state level, will invigorate private sector activity and ultimately increase employment, generate higher state revenues and help the state to address public services and human development needs. Development of lead state interventions will be preceded by an intensive policy dialogue and analytical work to help the states develop their growth strategies and define the areas for investment. At the same time, the intensive work for improvement of businessenvironment and financing of infrastructure would provide opportunities for other states to benefit, gradually turningthe lead state `growth poles' into growthcorridors. Country Partnership Strategy -31- Nigeria 97. The World Bank Group and DFID will support the vision of NEEDS and many SEEDS for private sector led growth in agriculture. This will demonstrate how agricultural commodity and related markets can better serve the poor. The CPS will focus on raising agricultural and agri-related productivity. Selected value chains - with work co-financed by CIDA and coordinated with USAID- will offer the potential to bridge the competitiveness gap and make a difference to the livelihoods of the poor, especially women, and would serve as a powerful demonstration. Investments in infrastructure will benefit growth in the agriculture sector. This could include investments in rural access and mobility, irrigation and community level infrastructure, and work on the business environment, particularly inlead states where such work can be concentrated. 98. Maintaining a policy dialogue at federal and state levels will be critical for addressing underlying public investment and institutional constraints on growth in agriculture - including in public goods such as research. The CPS will draw lessons from various interventions and its support to Government for an Agriculture Policy Support Facility - ledby CIDA, co-financed by USAID and coordinated with other donors. This Facility will assist the Government in making agriculture the basis of rapid pro-poor growth through private sector development in agro-industry, building on recent agriculture sector reviews and policy dialogue inputs. In developing this, understanding the linkages between growth and natural resources - including water resources management - will be an important area for analytical work and policy dialogue. 99. In the area of SME development, IDA and IFC will provide lending (MSME project), enhance policy dialogue at the federal and state level and (together with DFID)assist in establishing a baseline to assess the cost of doing business regularly. IFC will provide financing and TA in manufacturing and services in the corporate sector, strengthening those larger companies that are often the customers of SMEs. 100. Financial sector reforms will be supported in close cooperation with the IMF. An FSAP update will provide the vehicle for strengthening dialogue on financial sector reform, banking sector regulation, supervision and sustainability. Existing and planned work will also concentrate on establishing the legal and regulatory framework for robust financial markets that include provision of mortgage, insurance, pensions, SME- and microfinance. These efforts will seek to strengthen not only the access to financial services of typically urban enterprises and sectors such as manufacturing, construction, and services (including infrastructure), but will also increase access on the part of traditionally underserved rural sector activities including input distribution, commercial farming, and agricultural processing. Supporting Good Governance 101. Governance work at federal and state levels will strengthen systems of and demand for accountability and transparency, which will lead to improved public resource management and service delivery, as follows: 0 At thefederal levelthe CPS seeks to maintainthe focus on budgetpreparation and transparency, public financial management, procurement, and targeted efforts to fight corruption. This will be achieved partly through strengthening formal oversight institutions. Similarly, the CPS provides for continued support for reformof the public service. New activities will be started that seek to enhance the business climate by addressing weak governance and corruption inkey trade facilitation services, such as ports and customs; 0 The focus at the state levelwill be similar to the federal level, strengthening public expenditure management systems in lead states; and, Country Partnership Strategy -32- Nigeria 0 Both federal and state activities will place greater emphasis on building demundfor good govemunce, supporting formal accountability mechanisms (e.g. the legislature and elections) and supporting coordinationbetweenthe tiers of government. 102. The CPS will help achieve the objective of changing the way government works by supporting ongoing reform and modernization of budget and fiscal management; by helping civil service reform; b y strengthening formal accountability mechanisms; and by buildingcapacity of non- government actors to understand and demand improvements in public resources management at federal, state and local government levels. With the support of DFID and IFC, the role of the private sector in promoting transparency and accountability will also be strengthened, as will their relations with government. Sustainable growth and poverty reduction will also require improved service delivery for greater security of life and property. DFID and other UK departments will continue support for reforms in the security sector, especially a community policing initiative that aims to change the culture of the Nigerian police force. 103. Three main lending activities in the governance area are: the recently approved Economic Reform and Governance Project which will be implemented over the CPS period; the Customs and Ports Modernization Project at the federal level; and the States Governance Project. The state support platforms in lead states will also have a governance component tailored to the specific needs and circumstances of the state and which will be broadly focused on budget, financial management and procurement improvements and initiatives to builddemand for better governance. The state selection process itself will promote reform by rewarding those states that have demonstrated, through a transparent benchmarking process, that they are committed to reform and greater openness. DFID grants will link to the lending operations to provide advisory support for improvements in the functioning of government systems, coordination across tiers of government and building institutional readiness, in order to foster progress towards using budget support. Joint analytical and advisory activities include the Public Expenditure Management and Financial Accountability Review (PEMFAR) (Public Expenditure Review (PER)+Country Financial Accountability Assessment (CFAA)+ Country Procurement Assessment Report CPAR), the EITI Implementation Policy Dialogue, natural resources assessments, annual Governance and Corruption Risk Survey to monitor progress on these issues and a Niger Delta policy dialogue focused on issues of social development, participation and sustainable management of resources. 104. NEEDS seeks to encourage demand for change. The CPS, with Government and other stakeholders, will support this aim in a number of ways. Together with DFID, WBI will continue to strengthen the National Assembly's oversight functions. Furthermore, the CPS will back government efforts to inform the public on priority programs, expected outputs and the basic reasoning underlying policy initiatives, including the NEEDS. The CPS, in parallel, will support public-private and social dialogue and the growth of coalitions around key issues - such as the management of oil resources (including through EITIin Delta states), procurement, the business environment, market functioning, service delivery, etc - and improving the analytical capacity of the media. This will be an important area of DFID-WBI support, which will have important ramifications, including: helping to build momentum for greater external accountability and issues-basedpolitics; and forging a social contract which, together with a more transparent and robust electoral process can help sustain reforms beyond 2007. The CDD-type interventions in both lead and other states include activities which will enhance the voice of communities and their participation in making decisions on resource allocation and service planning at local level. Country Partnership Strategy -33- Nigeria WorldBank GroupLending,DFIDGrants,and Non-lendingServices 105. IDA allocations.IDA 14 country allocations for all countries are indicative and are made on the basis of country performance, the overall IDA14 envelope and lending terms. However, given the rapid changes occurring in Nigeria and expectations of continued improvements in performance, it i s difficult to set indicative IDA allocations for the entire four years of the CPS. Instead, we have developed an indicative two-year lending program, which also includes front-loading of the resource envelope and is set at US$500 million per year. IDA financing covers all three CPS outcomes, including state platforms in up to six lead states and federal-level investments in larger scale infrastructure, as well as interventions ineducation, health and community development (see Table 4). Indicative lending plans for the remaining two years of the CPS will be set at the time of mid-term review of the strategy in 2007. Inaddition, IDA 14 rules require annual reviews of performance, thus providing the flexibility to define specific IDA allocations annually. Inaddition, Nigeria i s expected to benefit from additional donor resources, which would provide a window for increased support to countries at an upward turn in policy performance and with potential for great impact on growth and development in Africa. 106. Access to a higher IDA envelope will be determined annually on the basis of the performance-based allocation (PBA) system, which takes into account individual country performance as well as the relative performance of all other IDA borrowers, the total available IDA envelope and country Iending terms. Key areas for improvement in policy performance include sustained macroeconomic stability, improved service delivery, equity of public resource use, trade policy, transparency and accountability and quality of public administration. An increased IDA envelope will cover increased financing under all three outcome packages and includes support to development and growth inup to 10lead states. 107. In case of major deterioration of policy performance, the IDA envelope will be reduced significantly and financing will be limited to only direct poverty/MDG impact assistance - basic services and productive CDD-type operations and public goods interventions (such as HN/AIDS, immunization) nationwide. 108. The indicative two-year IDA lendingprogram for the CPS i s shown in Table 4. Inthe first two years, support to communities through CDDs will be for some US$lOO million of which half is for rural development through the Fadama program. Financing for lead states i s expected to be about US$200 million. Support to the Federal Government will be for about US$700 million, with a focus on infrastructure (energy and roads). Country Partnership Strategy -34- Nigeria Table 4: Indicative two-year IDA lendingprogram(US$ millions) Project 109. A distinctive featur- of th CPS is the array of NationalEnergy Project 172 instruments used to suit different outcomes and levels of intervention. Interventions at the federal level will FederalI FederalRoads 250 National continue to be predominantly Specific Investment Loan Level Customs andport (SIL) projects. Support in lead states will be based on modemization 28 their SEEDS, investing in their own growth and poverty NationalUrbanWater 200 reduction agenda. Lead states will be able to access a Post Basic Education "performance package", a more programmatic, cross- andKnowledge 50 sectoral approach to both analytical work and financial Economv assistance, drawing on both IDA and DFIDresources. It Leadstates StatePlatform Envelopes 200 is foreseen that SWAP-type operations will emerge for Direct lead states. In other states, support will aim to impact poverty I CDD Social 50 directly on the lives of poor people through nationally MDG CDD Productive designed CDD projects in the social and productive impact (Fadama) 50 sectors and MDG-related programming, particularly Total innn through the UN,civil society and the private sector. 110. DFZD's annual allocationfor Nigeria will become three times that in thefirst Obasanjo administrdwn -amongthehighestincreasesintheE ' s globalassistanceportfolio. It is anticipated that DFID will contribute about E250 million in grant financing over the next three years. These allocations are shown in Table 5. The focus of the DFID support i s expected to vary according to performance in line with any shift in IDA allocation. For example, in a scenario where performance declines, a greater proportion of resources will flow to have direct impact on the MDGs through non- government agencies and buildingdemand for change external to government. Table 5: DFIDNigeria Resources(E million) 2005106 2006107 2007108 Program Resources 70 80 100 Anticipated allocation across the resultspackages: Result 1-ServiceDelivery for Human Development: 62% Result 2 -Non-oil Growth: 19% Result 3 -Better Governance: 19% 111. The ZFC's engagement in Nigeria is based on the IFC's strategy for Sub-Saharan Africa, (IFC/SECM2003-0049), which emphasizesfostering growth, particularly inthe non-oil sector. Within the CPS, the F C will seek to maximize participation in private-sector projects that have a positive development impact on the country and which are compatible with the IFC's established investment criteria. In particular, the IFC will seek investments that: (i) improve access to finance; (ii) in assist removing infrastructure constraints; (iii) in improving the competitiveness of Nigerian industry; assist (iv) assist in developing SMEs by providing integrated support to such enterprises; or (v) have a positive demonstration effect, particularly in the areas of structuring, corporate governance and good social and environmental practices. Country Partnership Strategy -35- Nigeria 112. The IFC will seek appropriate investments in all sectors of the economy, although it i s likely that investments will be concentrated in the financial, manufacturing and infrastructure sectors. The IFC will selectively consider investments in the oil and gas sector, particularly those which: (i) promote the wider economy and its development, including projects which will assist in the development of the internal or regional energy sector or which will help to strengthen domestic participation in this sector; (ii)encourage the reduction of gas flaring or increase gas utilization; and (iii)are deemed to be beneficial to the economy and require IFC support for the implementationof unique financing structures. Support for projects in this sector will be in accordance with the outcome of the World Bank Group's Extractive Industries Review. 113. The IFC will also integrate technical assistance activities more closely with its investment work, emphasizing improving the business environment. This will be achieved through the delivery of targeted technical assistance, investments with a positive demonstration effect and by working with development partners. The IFC recently established the Private Enterprise Partnership for Africa (PEP Africa) with the mandate to implement private sector development programs in collaboration with various stakeholders. PEP Africa is considering providing assistance to the Nigeria Bond Market Development Program, a School Financing and Technical Assistance Facility for private schools and the MSME project (see Box 12). In addition, IFC will continue to deploy its traditional technical assistance activities, including the provision of advice on privatization to the government and the use of trust funds to finance project-level technical assistance. 114. Nigeria i s currently the IFC's largest portfolio country in Sub-Saharan Africa. The IFC's total committed portfolio or Nigeria amounts to US$312 million, 20% of the IFC's total in Sub-Saharan Africa. FYO4 was the IFC's best year in Nigeria, with US$161 million of new commitments. Investments are concentrated in the telecommunications and financial sectors. US$140 million in new investments, including projects in the building materials, microfinance and related sectors are in the pipeline for FY05. 115. MZGA will contribute to the CPS in two distinct areas, technical assistance and guarantees. MIGA's online services can assist the Bureau of Public Enterprise (BPE) and line ministries to disseminate information on privatizations and other information related to investment opportunities to a wider network of potential investors and lenders. MIGA guarantees can alter the risk perception of investors and realize projects by making them more attractive, particularly since MIGA can cover both sovereign and sub-sovereign risk. 116. Since 2003, MIGA has witnessed an increase in demand from investors interested in investment opportunities in Nigeria. MIGA i s ready to respond to increasing demand from foreign investors seeking to contribute to Nigeria's development strategy by providing guarantees. MIGA currently i s one of the few political risk insurance providers that offer long-term coverage inNigeria; however, MIGA maintains a collaborative relationship with re-insurers that allow MIGA to undertake Country Partnership Strategy -36- Nigeria large transactions. Exposure in Nigeria has grown rapidly in the last two years. Currently, gross exposure in Nigeria i s US$101.8 million (1.87% of the portfolio), and its net exposure is US$80.3 million. There are eleven contracts which have been issued for investors in Nigeria: two in the services sector, four in the infrastructure sector (power and telecom), and five in the manufacturing sector. 117. Areas for potential further involvement include infrastructure, electricity, ports and gas. MIGA would also consider supporting investments in the agribusiness, manufacturing and services sectors, which tend to be dominated by SMEs and would contribute to non-oil private sector growth. MIGA will also be available to provide guarantees for foreign banks interested in entering intojoint ventures with Nigerian banks and/or establishing their own operations in Nigeria. Support for the financial sector would improve SMEs access to medium- and long-term finance and contribute towards raising the standards of corporate governance. MIGA will coordinate its involvement in Nigeria with the World Bank and IFC, particularly inthe infrastructure sector. 118. Analytical and Advisory Activities (AAA). Recent experience in Nigeria has shown the benefits of analytical and advisory assistance ininforming project design and helping the Government to make significant policy achievements. A client survey also showed that World Bank advisory services are very highly valued by Government counterparts. This also been a major and valued focus of support from DFID to Nigerian government, civil society and private sector stakeholders. Analytical work will focus on identifying and prioritizing the constraints to growth, combined with the analysis of the social and poverty impact of policy reforms and public actions designed to overcome them. These would embody a multi-sectoral approach to identify policies, public expenditures and investments needed to, for instance, achieve growth, strengthening the private sector, and managing natural resources revenues. Monitoring and evaluation instruments will also receive special attention within the program of AAA. Economic analysis and policy dialogue become even more important as the CPS intensifies involvement, develops strategic relationships with lead states and supports the creation of models of growth and development at state level. The CPS therefore includes a program of analytical and advisory work focused on the NEEDS pillars and the CPS's three outcomes. Table 6 presentsthe core program(see Annex 5 for details). 119. Analytical and advisory activities will underpin the work on each of the three outcome platforms. Poverty dialogue will be maintained on an ongoing basis and,will include a series of poverty assessments (FY06 and FY09), PSIA and poverty monitoring TA. This will help to strengthen Government capacity for poverty data collection and analysis, will identify poverty correlates and poverty dynamics and help policy makers define poverty reduction strategies and alleviation programs. Health and Education country status reports (FY06, FY08) and sector reform TA will identify system flaws and options for programresponse to deteriorating service access and quality and HDindicators. 120. Analytical work will be particularly robust in the area of non-oil growth. In addition to the core diagnostic (CEM FY06, FSAP update, FY06-07), formal and informal economic sector work and TA will enhance understanding of growth factors and patterns. The CPS will help the government to develop sectoral strategies as part of the NEEDS implementation process (e.g. National Infrastructureflransport Strategymural water strategy etc. in FY07-09). Regular assessment of the businesshvestment environment at the Federal level and lead state level, as well as Labor Market studies, will help identify key constraints to private sector development and monitor progress throughout the CPS implementation. Technical assistance activities in implementation of the EITI, trade policy analysis, privatization and debt management will be an important part of the support for strengthening government capacity incarrying out structural reforms. Country Partnership Strategy -37- Nigeria 121. To support the Government effort in improving transparency and accountability, the CPS envisages regular assessment of governance and corruption risks, including at state level. Inaddition, the Public Expenditure Management and Financial Assessment (FY06) will focus on fiscal decentralization to define options for efficient use of public resources. Emphasis on strengthening demand for good governance i s at the core of analytical and technical assistance activities engaging Government, Legislature, civil society, media etc. For example, DFID will continue its ongoing effort in strengthening parliamentary oversight and WBI will enhance its program with the media and the academia. 122. Work at the lead state level will require a state specific knowledge creation and policy dialogue effort. Therefore, the CPS includes a state analytical and advisory service facility which allows to define analytical areas and tools based on the specific needs and strategic priorities of the state as identified in their SEEDS. For example, depending on the state, this facility could be used to analyze poverty or rural development, financial sector weaknesses or efficiency and equity of public resource use. 123. Withinregional integration, the World Bank is supporting efforts to reverse trends inlandand water degradation and to improve management of Niger River Basin resources, of which Nigeria i s one of the nine riparian countries and the main downstream beneficiary of shared resources14.As part of this work, the World Bank i s providing assistanceto Niger Basin Authority (NBA) to modernize its structures (both at the country and regional levels), develop multi-purposes water infrastructures, strengthen its environmental planning and management capacity and further its efforts to reverse the land and water degradation. 124. Inorder to improvequality and ensurea stronger impact, nearly all AAA work will bedone in partnership with state and federal stakeholders building on existing institutional capacity. For example, the CEM which is to focus on sources of growth, trade policy issues and implications of the ECOWAS CET and planned trade liberalization on economic growth, will be prepared jointly with local think tanks; the Education Report will be prepared in partnership with a group of Vice Chancellors of Universities; and work on the Poverty Assessment i s being carried out in partnership with the Federal Office of Statistics. The CPS will aim to carry out analytical work jointly with other relevant development partners to arrive at a shared understanding and approach while reducing the transaction costs for government and other partners. In addition, as part of the NEEDS and the CPS results orientation, instruments - such as investmenthusiness climate assessments, poverty surveys, monitoring and others - will be used to help the Government and other stakeholders monitor developments and record improvements. l4 Infact, 69%of the total landof Nigeriaand51% ofits populationbelongto the Niger River Basin. Country Partnership Strategy -38- Nigeria Table 6: Four-year core non-lending program Results Package Non-lending activities I -= 11Poverty Assessment I - ',opment Healticountry Status Report EducationReformReport II liumanueve1 I State-suecific analvtical work Non-oil Growth Business Environment Assessments I Labor Market State-specificanalytical work I State-specificanalytical work Country Partnership Strategy -39- Nigeria V. IMPLEMENTATIONISSUES PortfolioManagement 125. IDA Portfolio Management and Performance. Early results of the strategy are likely to be achieved mostly through the existing portfolio and non-lending activities. These will be important in helping to embed the gains of key reforms made by Government. The current IDA portfolio for Nigeria has 16 projects and a commitment value of about US$1.48 billion. Of this amount, about US$258 million has been disbursed as of May 3, 2005. The disbursement ratio inFY04 increased to about 13% from about 3.5% in FY03 and i s estimated to be about 15% in FY05. Fiduciary compliance in FY04 was 100%. Although the portfolio is relatively young (average implementation period i s 2.6 years), implementation has not met expectations. Six projects have an unsatisfactoryDO or IP rating. Portfolio analysis has identified five systemic factors that hamper implementation: (i) complex project design, project management, and implementation procedures; (ii) downstream delays due to premature launch of projects and consequent underestimation of implementation capacity; (iii) inadequateAate counterpart funding; (iv) weak results management, often due to inadequate monitoring and evaluation systems and capacity; and (v) political interference, incentives issues, and rigidities in applying performance-based principles (including implications for less well performing states). Several projects have areas of overlap (e.g. in states, similar activities, CDD) and, thus, provide opportunities for harmonization, consolidation, more efficient implementation and lower transaction costs. 126. Rigorous analysis and monitoring have been carried out since 2003, through semi-annual joint CPPRs; the latest CPPR was inDecember 2004. These portfolio reviews have identified systemic and project-specific issues and set strategic priorities and time-bound actions for sustained portfolio performance improvement. Key among these actions are the portfolio restructuring, harmonization of the CDD projects, and resolution of systemic issues. Project-specific action plans have been devised and implemented and have brought encouraging signals of improved portfolio performance. To ensure the portfolio's continued improvement for future operations the systemic issues are being addressed through the following immediate steps: (i) new operations will strive for simplification, flexibility and implementation readiness (projects now use a readiness guide during preparation to ensure that the project i s ready for implementation and to reduce effectiveness delays); (ii) country financing parameters (CFP) have been established to help harmonize and rationalize the financing of the total country program, especially when counterpart financing issues are acute and potential rewards are high, e.g. social sector and CDD projects may be financed up to loo%, when appropriate, including selected on-going projects for disbursements going forward (iii) more flexible and simplified World Bank procedures are being introduced, including disbursement simplification, increased procurement thresholds for prior reviews and harmonized implementation arrangements; (iv) project monitoring and evaluation systems are being strengthened; (v) capacity buildingand scaling up good practices are enhanced; and (vi) projects will continue to be reworked inalignment with the CPS, as needed. 127. The portfolio restructuringunderway i s designed to improve performance of problem projects and other priority operations in full alignment with the objectives, principles and approaches of the CPS and NEEDS. A total of eight projects (about 54% of total commitments) are being restructured and another two operations based on the CDD approach are being harmonized and will be adjusted accordingly. The project revisions necessitate reallocation of resources within the project's development objectives rather than cancellation. The main thrusts of portfolio improvement are as follows: Country Partnership Strategy -40- Nigeria (i) restructuring of priority projects, including non-pelforming projects (total US$803m). Eightprojects (private sector support, universal basic education, secondhealth systems, community-based urban development, and community basedpoverty reduction, HTV/AIDS, Lagos urban transport and transmission development) are being restructured. The restructuring entails: simplifying the project design, allowing greater flexibility in identifying the activities to be financed at state level, strengthening community participation indecision making onresource allocation, allowing greater flexibility inthe use of resources at the state level and allocating more resourcesto states that perform well. (ii)harmonization and gradual consolidation of CDD-type operations (total US$430m).The review of the five CDD-type operations showed a dispersion of activities, uncoordinated approaches and operational practices and a variety of implementing arrangements with different level of effectiveness and efficiency. As a first step, the operational manuals of the projects are being harmonized to ensure a consistent approach, based on lessons learned about best practice inNigeria. A thorough evaluation of the CDD operations will be carried out in FY06 and will identify the performingaspects and approaches which will form the basis for the following consolidation. This consolidationwill allow greater efficiency and effectiveness of project management and improved service delivery to communities; and, (iii) retrofitting monitoring and evaluation systems. The portfolio review included an in-depth analysis of the M&Esystems of existing projects, which identified important gaps. M&E systems and result framework of specific projects are being strengthened and aligned to the framework of the CPS. 128. Short- and medium-termprospectsfor IDAportfolio improvements. As a result of portfolio reviews and the CPS preparation consultations, there are now encouraging signals that the portfolio is being repositioned in the context of the NEEDS. The portfolio restructuring and improvement measures are expected to trigger: (i)incremental improvements in the short term (e.g. faster implementation, increased disbursements, better M&E, especially in the performance of well positioned states and federal units); and (ii)visible and sustained gains in the medium term (e.g. intermediate resultdquick wins, harmonization, program cohesion at Federal and State level and further streamlining of the existing projects). As the restructured projects are relatively young and have disbursed only a small percentage of net commitments, they stand a good chance of using effectively the undisbursed credit balance. As a result, the outcomes of the closing projects, as evaluated by OED, also have a good chance to gradually improve and, thus, reverse Nigeria's country record on outcomes inthe near future. Decentralizationand staff organization around the CPS, as well as the DFIDmorld Bank partnership, are essential factors for significantly improved portfolio performance. The portfolio performance will be monitored systematically with respect to the aforementioned expectations. 129. DFZD Portfolio Management and Performance. DFID has managed its portfolio and pipeline to align with the NEEDWEEDS agenda and to become more focused onjoint working with multilateral agencies. This included realigning its focal state approach in favor of responding to a country-led initiative, based on the SEEDS process that will be amenable to a multi-donor approach. The new focus has been described inthe DFIDCountry Assistance Plan (CAP). The CAPbecame the foundation for work in support of Nigeria on a joint strategy with the World Bank Group (the CPS) and buildingcoherence with other development partners. 130. About 31% of the DFID budget i s focused on addressing the income poverty MDG, 44% on child and maternal mortality and 16% on W/Aids and malaria. DFID has focused on human development and governance for a number of years, and i s now increasing emphasis on supporting Country Partnership Strategy -41- Nigeria non-oil growth. Inworking towards delivering impact on the MDGs, DFID Nigeria had a portfolio and pipeline of 40 programs, totaling some ;E650 million towards the end of 2004, with about 2250 million of support for Nigeria over the first three years of this CPS. A portfolio and pipeline review in the last quarter of 2004 was established to improve impact and manageability. Duringthe life of the CPS, DFID Nigeria will move to fewer, larger programs and further increase financing through multilaterals. Currently about 25% of DFID Nigeria's budget flows through multilaterals, including the World Bank and UN agencies. This accounts for about 40% of DFID's support on human development. IDA Country FinancingParameters 131. The country financing parameters for Nigeria have been prepared and agreed upon by the government (see Annex 6). With regard to cost sharing,given the Government's strong commitment to its development program, the World Bank may finance up to 100% of project costs in Nigeria. These funds will be disbursed to projects selectively, on a case-by-case basis. The World Bank's financing share would be moderate in key economic infrastructure sectors for example in power, roads and transport, and especially in projects involving commercial parastatals. Projects in other sectors could be financed up to 100%depending on clear assessment and merit. 132. Recurrent Cost Financing. The World Bank will also finance recurrent costs on projects. This will be applied selectively inorder not to compromise fiscal sustainability or the achievement of individual project development objectives. Given the World Bank's small share of total public financing in Nigeria, this increased flexibility will not compromise fiscal sustainability at the macro level. The World Bank will continue to monitor the fiscal and debt situation in states, and their implications for recurrent costs financing. For individual projects, recurrent costs financing may be allowed to defray the cost of managing project implementation. The new approach in the CPS, whereby the bulk of the World Bank's assistance will be to a few core states that meet certain criteria and demonstrate prudent fiscal and budget management and attention to fiscaVdebt sustainability, should provide additional safeguards. 133. Local Cost Financing. Nigeria's financing requirements clearly exceed the country's own resources, even taking into account its domestic borrowing possibilities. While international oil prices have reached historic highs in the last four years, revenue receipts are outweighed by the costs of financing development and the need to accumulate external reserves to cushion against future adverse shocks to the economy. Inaddition, the financing of only foreign expenditures will not be sufficient for the World Bank to provide the requiredresources to projects to meet their development objectives. Several projects inthe Nigeria portfolio are in the social sectors4ommunity development, agriculture and urban development-where expenditures are largely local. It i s also likely that the CPS's pipeline projects will require substantial contracting of local goods and services. Therefore the World Bank will finance local costs and foreign costs in any proportions needed and as appropriate for individual projects. 134. Taxes and Duties. Nigeria's domestic tax rates are reasonable, tax administration i s being strengthened and the federal Government plans to move to the ECOWAS CET which will institute a four band tariff structure (5, 10, 15 and 20). However, import duties on goods typically imported under World Bank-financed projects are generally under 10%. Thus the World Bank may now finance all taxes and duties15. The World Bank would, however, consider at the individual project- level whether taxes and duties constitute an excessively highshare of project costs. l5Except the state sales tax, as in LagosState, which amounts to double taxationto the Value AddedTax. Country Partnership Strategy -42- Nigeria BoostingAid Effectiveness: Strengthening Donor Harmonization 135. The NEEDS, SEEDS and the new focus on MDGs in Nigeria provide a strong country- led framework for harmonizing donor assistance to Nigeria. The CPS builds on this and is a platform for working with the Government of Nigeria and other donors on the implementation of commitments adopted under The Paris Declaration on Aid Effectiveness o f March 3, 2005. The World Bank Group and DFID have coordinated closely with other donors in developing a new strategic approach and vision of greater aid effectiveness. The UN CPS"(see Annex 7) and recognizes that the CPS presents an agenda for building closer relations among donors. The ADB is in strong agreement with the thrust of the CPS and this i s reflected in its own strategyI6. 136. Donor co-ordination inNigeria involves harmonizationat boththe federal and state levels. At the federal level, bilateral donors are co-ordinated by the National Planning Commission (NPC), with multilaterals working with the Federal Ministry of Finance. Efforts are currently underway to bring the international development partners together into a coordinated framework to back the NEEDS. Working at state level i s an important aspect of donor support in Nigeria. Several key donors are now being selective in their strategies and interventions and plan to rely on the government-led SEEDS benchmarking process, and are jointly supporting the implementation of the benchmarking process. Based on this, an important area of work in the CPS will be to work towards a coherent strategy for support to SEEDS, including making progress towards joint donor SWAps and budget support. 137. The partners will monitor progress on aid effectiveness using the Paris Declaration and its indicators as a starting point. A Results Framework on Partnership and Aid Effectiveness is being developed (see Annex 7) and is supported by various pieces of analytical work and capacity building. The CPS i s perceived as a good basis for further harmonizing donors' activities and will work with the UN, ADB, the EC and other bilaterals to make progress. The prospects are now excellent for making improvements in donor harmonization during the lifetime of the CPS, given the small size of the donor community and indications of support from key donors. 138. The activities of the main donor agencies involved in Nigeria are presented in Annex 7, organized by CPS outcomes. These programs are already well-aligned with proposed interventions under the CPS. Priority areas of donor interventions include maternal and child health, polio immunization, malaria, HIV/AIDS, primary education, water and sanitation and environment. Donor programs also support non-oil growth, especially in agriculture (e.g. CIDA, USAID) and good governance (e.g. EC, USAID). "TheADB's CSP closelyalignedtotheCPS - -i currentlyunderdevelopment,tobepresentedtotheirBoardin2005. s Country Partnership Strategy -43- Nigeria 139. The World Bank and DFID will be building on a number of good examples of fruitful cooperation among themselves and with other donors. An emphasis on joint analysis and programs will be further strengthened during the CPS. The World Bank and DFID are co-financing the UBE and the Federal Government Economic Reform and Governance Project, and jointly supporting the privatization process. The African Development Bank in particular is successfully co-financing four operations with the World Bank - the Community Based Poverty Reduction Project, the second Health Systems Development Project, the HIV/Aids project and the Fadama project. UNICEF i s increasingly taking the lead on Health MDG interventions. DFID i s joining efforts with UNICEF in the areas of rural water supply and girls' education. USAID-a strong bilateral partner - is active in a number of areas where good cooperation has been established with the World Bank Group and DFID, including on the financial sector, agriculture policy, HIV/AIDS and strengthening the National Assembly. These collaborative efforts have also fostered a common position amongst donors on key sector policy issues and challenges. 140. On macroeconomic policy, the World Bank i s working closely and effectively with the IMF. Although Nigeria does not have a formal IMFagreement, the IMFi s providing close monitoring and technical assistance within the framework of an intensified surveillance program. This includes quarterly staff visits and semi-annual reporting to the IMFBoard of Directors. Cooperation with the World Bank i s very close inareas of expenditure managementand financial sector reform. Outcome-basedM o dtoring 141. In-country monitoring and evaluation capacity. Nigeria is committed to strengthening its monitoring and evaluation capacity to collect data and report on core indicators, to conduct impact evaluations of programs and to use M&E information in the management of programs and projects. With other development partners, the CPS will, therefore, support Nigeria's overall capacity for statistical data collection, processing, economic and poverty monitoring. The CPS will continue to provide support for the Federal Office of Statistics (FOS), under the National Planning Commission (NPC), and help with efforts towards comprehensive mid-term assessments of NEEDS and SEEDS (including through the SEEDS benchmarkingexercise). 142. The President has inaugurated a high-level MDG assessment and monitoring initiative in early 2005, which will be supported through the CPS. A high-level MDG Implementation Committee, comprising representatives of six key Ministries will oversee and guide implementation and monitoring efforts. It will help in coordination of MDG tracking among line ministries and the NPC, align MDG activities and budgetary priorities and track actual expenditure against MDG budgeted activities and their ultimate impact on MDGtargets. Increasingly civil society's role in the national monitoring system i s being defined and strengthened. Special effort will be made to help lead states build their M&E systems, linked and coordinated with the national MDG M&E system. The CPS will assist inharmonizing donor M&Esystems, buildingon Paris Declaration commitments. 143. Monitoring of CPS implementation. The Results Framework establishes the result chains for the World Bank Group and DFID program and defines the performance indicators for monitoring Partnership/Govemment progress vis-a-vis longer term strategic goals for the country (see Results Framework in Annex 1). In most cases, intermediate indicators and milestones are quantified with expected target ranges; in others, more qualitative information i s required. Where there are gaps in information, the World Bank and DFID will work with the Government in identifying specific measurements during the first year of CPS implementation. Country PartnershipStrategy -44- Nigeria Box14: Outcome-BasedManagement There are three key features of the CPS which need to be reflectedin the organization for implementationandmonitoringteam: (i) the DFID/WB Group partnership; (i) focus; and (hi) lead states approach. A joint management arrangement will therefore be outcome establishedand will comprise ajoint managementteam, joint outcome teams ledby OutcomeCoordinators,joint leadstateteamsanda partnership coordinator. Although the detailed descriptionsof the managementarrangementare still in progress, the following are key features: TheOutcomeTeam(OT) will becross-sectoralandincludeWB GroupandDFIDstaff relevantto the achievementof the Outcomes. Iti s conceivablethat onepersonmaybein morethan oneteam. TheOutcomeCoordinator(OC) will leadthe OutcomeTeam. She may beaProgramCoordinatoror TeamLeaderinadditionto takingon the function of OC.There willbeone OC for eachOutcomePlatformandshe may comefrom eitherof the Partners. She will ensurethat the teamshares avisionof the nationalstrategicobjectivesandthe alignmentof the CPS withthem, coordinatesmonitoringof outcome/milestones,ensuresthatthe partnershipbetweenDFIDandthe World Bank(andother donors) works effectively towardsoutcomes andthatit includesthe sustainedparticipationof the GovernmentCPScounterpart team. LeadStateTeams (UT)will becross-sectoralandincluderelevantWB GroupandDFIDstaff. The LSTwill be canyingoutthe policydialogueinleadstates, basedon SEEDSandwill identifyinvestmentgapsandactivities. The partnershipcoordinator will beresponsiblefor coordinatingCPS activities withthoseof other donorsandworkingto facilitate donorharmonization. As the partnershipbroadensto includeother donors, the outcome-basedmanagement arrangementswill alsoevolve. This will needto becarefullymanagedandmonitored, usingthe ParisDeclarationcommitments as guidingprinciples. 144. The CPS program effectiveness will need to be assessed from the outset. There i s much to learn. about which kinds of outcomes create the best conditions for producing strategic results. Because this cannot wait for ex post evaluation, intensive ex ante, self-evaluation methods will need to be used throughout the CPS period. The national MDG monitoring system i s unlikely to be fully operational at the outset of this CPS and, even when it become operational, it will not monitor all CPS performance indicators. The CPS will therefore establish an initial M&E learning based system to track progress and guide performance improvement incollaboration with Government counterparts. 145. Quarterly World Bank GroupDFID strategy meetings will review program implementation and progress towards achieving outcomes. Semi-annuallannual joint CPPR (World Bank/DFID/ Government) will be aligned with the results framework, assessing progress in achieving CPS outcomes, dealing with risksand problems that might hinder achievement, identifying systemic issues that may affect portfolio performance and facilitating mutual accountability. At mid-term, the CPS Progress Report will draw on an in-depth examination of the CPS outcomes and assess whether they remain relevant to the longer-term objectives, given country conditions. A Completion Report will be completed at the end of the CPS implementationto feed into the next CPS cycle. Communications Strategy 146. The completion of the CPS will provide the foundation for an intensified communications strategy in Nigeria. That strategy will aim to communicate an accurate and up-to-date understanding of the World Bank and its role in Nigeria; while in parallel, building an understanding of DFID and the nature of partnership for growth and poverty reduction. It will take forward the collaborative relationshipestablished with stakeholders during CPS consultations. 147. The CPS will first be disseminated and discussed with opinion leaders from four key groups: academics, the media, parliamentarians, and the private sector. Since the CPS i s necessarily a "living strategy,'' taking shape as it is put into practice, these discussions will continue so that key actors in all four target groups are aware of results on the ground and how the World Bank, DFID and their partners are meeting emerging challenges. Meanwhile, an expanded network of Public Information Centers- inAbuja and inother key urban centers - i s to provide a platformfor disseminatingthe CPS and discussing its main elements. 148. Broadly the three pillars of the CPS - strengthening governance and transparency, advancing growth in the non-oil economy and improving public service delivery for human development - Countly Partnership Strategy -45- Nigeria should become a focus for development debate inthe country; team members should help to informa national dialogue on these crucial issues. An expanded communications effort should strengthen and deepen understanding of the development program in Nigeria, building a more conducive climate for success. 149. This programpromises highreturns but is not without risks. Five significant risks threaten the success of the program and The World Bank and DFID are committed to supporting Nigeria in reducing them. First, domestic political support for reforms could evaporate, removing any possibility that the momentum created by the Economic Team will survive the 2007 presidential elections. The CPS tries to mitigate this risk by: (i) helping the executive and legislature build consensus and translate reforms into legislation (e.g. procurement, EITI, and fiscal responsibility bills); (ii) demonstrating the internationalcommunity's strong support for reforms, including through debt relief and increased financial flows; (iii)providing on-going support to analytical work on debt, as requested; (iv) restructuring the portfolio to achieve "quick wins"; and (v) helping to design and implement a communications strategy to transform basic attitudes about the role of government and civic society and increasing the demand for outcomes. The CPS will work to promote broad national dialogue on key issues such as service delivery, the management of oil resources and non-oil growth. This will help to raise awareness among citizens of their rights to oversee government commitments inbudgets and plans and to aquality of servicescommensurate with the resourcesavailable. 150. Second, Nigeria's great ethnic and religious diversity carries an inherent risk of conflict that has the potential to jeopardize development efforts. Conflicts in Nigeria are largely caused by competition for resources. For example, the conflict in the Niger Delta i s a reflection of the desire among Delta inhabitants to retaina larger share of the oil wealth producedin their region. The conflict in Plateau State began as a result of a dispute between pastoralists and farmers over access to land. Leaders often use ethnic and religious differences as a way ofjustifying divisive actions and positions which they see as furthering their objectives; these can exacerbate conflicts. Government and the political leadership, starting with President Obasanjo, are mitigating this risk through political reforms. Convening a National Council i s an important step in modernizing the constitution and the legal system, and removing some of the causes of conflict. Strengthening democratic institutions i s important in ensuring that different groups have voice and can influence political decisions without resorting to violence. Bilateral donors are also active in the security sector, such as police reform. The World Bank and DFID are increasingly introducing conflict avoidance and resolution mechanisms in their projects. For example, the Fadama project includes specific mechanisms to resolve conflicts over land use. At the same time, the World Bank i s supporting the efforts of oil companies to establish outreach programs to benefit communities in oil-producing areas. 151. Third is the risk posed by weak institutions, poor governance and widespread conuption. The Government's recent and decisive actions against corruption, and its ongoing commitment to building public support for its anti-corruption measures, have reduced this risk. At the same time, the CPS wants to improve public administration at the federal and state levels and the capacity of civil society and local communities to demand change. The selection of lead states allows the CPS to build state capacity, avoid dispersion and gain synergy across operations to produce irreversible results on the ground. By the end of the period the selected states would be assessed and are expected to become eligible for budget financing. The experience of the lead states would be transferred gradually to other states. The strategy i s flexible in the allocation of resources to accommodate the speed and quality of implementation in projects or states and/or any drastic shift in the basic economic parameters. Country Partnership Strategy -46- Nigeria 152. Fourth, the incentives for states to engage with a reform agenda have been weak, with the commitment to reform at state-level largely dependent on the predisposition of the governor. This inherent fragility may increase after the 2007 elections, when at least 20 new governors will be elected. Commitment to reform has already provedproblematic with regardto World Bank and DFID support to some states. The Government has recognized this as a risk to national development. Its work on ,political reform, the fiscal responsibility Bill and the SEEDS benchmarking process are notable examples of concrete steps it has taken to ease this problem. The CPS will look to support such initiatives wherever possible. While the political economy risk at state level remains high, incentives will be introduced to encourage state governors to build a constituency for improved service delivery, transparency and accountability. The lead state approach, includingthe flexibility to withdraw, will contribute to mitigating this risk. 153. F@h, Nigeria's economy remains vulnerable to oil price shocks. A sharp fall in oil prices would increase the financing gaps and make it much more difficult to achieve the program objectives, especially those relating to the MDGs. The Government, with technical support from the IMF, i s addressing this by developinga macro-economic framework that expressly takes into account oil price volatility. By basing spending decisions on the long-run price of oil, Nigeria i s building reserves when market prices are high that will be used when the prices fall. The World Bank and DFID are also helping Government to reduce this riskby working with other donors to ensure that adequate and flexible financing i s made available to the Nigeria program. 154. Working in partnership is not without its own peculiar risks. While both the World Bank and DFIDcurrently have excellent relations with the Government, there i s a risk that this may change, particularly after 2007. The partners will need to maintain positive engagement with this and any future administration. Where this proves problematic, the World Bank will minimize exposure by shifting to a low-case scenario which recovers much operational control of resources from government hands and shifts investment to non-government agencies doing community development work towards MDGs. DFID would also review its allocation to consider whether it can continue to demonstrate impact. As with the World Bank, it will shift resources from Government support to securing more direct impacts through civil society organizations and the private sector, while intensifying work on the demand side of governance around key issues. 155. Duringthe CPS period, the World Bank and DFlD will work to strengthen the partnership- recognizing that this i s an area open to some risk given the differences in the two organizations, their procedures and aid instruments. Joint implementation and monitoring team arrangements (see Box 14) has been defined and a Partnership Coordinator will be assigned - using a Partnership Results Framework guided by Paris Declaration indicators (see Annex 7) - to manage this risk while developing partnerships with the UN and others. Outcome Team charters cutting across partner agencies will be established to define the vision and norms for joint delivery of outcomes and further developing joint programming. A newly established joint management team will meet periodically with the Government and convene regularly to monitor the delivery of results and progress on the partnership. 156. A mid-term review of the CPS (by end of FY07) will allow the partners to take stock of the progress made towards achieving the outcomes, propose appropriate revisions and introduce greater detail into the second half of the partnership. . . . .. .. 0 0 a * . . . i o . a . . . 0 . 0 . 0 . . - 0 e . . rl r 6 a a a m + 5 a a 4Bw a . 8 . . a a . a a m a e!! a m e a m a m a a a a m a m d 9 z u 9 a a c a f .-Y rl BE n c .... Q . . . . . . . . . . 0 . 42 u 3 n 0 . 0 0 a s . v . . . . 3 4 H a . a . 42 u Annex 2 FEDERAL REPUBLICOF NIGERIA STRATEGY COMPLETION REPORT Country: Nigeria Date of Country Strategy Note: May 21,2000 Date of InterimCountry Assistance StrategyUpdate: May 21,2001 Date of InterimStrategy Update: February 13,2002 Date of SecondJoint InterimStrategy Progress Report, May 20,2004 Period Coveredby the Joint Interim Strategy: FY2000 -2005 Strategy CompletionReport preparedby: LuisAlvaro Sanchez, Consultant Galina Sotirova, Task Manager Date: May 4,2005 ExecutiveSummary 1. This CompletionReport (CR) takes stock of the implementation of the pastJoint Interim strategies for Nigeria. Its assessment and conclusions have informed the preparation of this Country Partnership Strategy (CPS). When the Bank came back to Nigeria in 1999, as a democratically elected government took power, several factors handicapped the extent and quality of its support: (i) lack of quality analytical work, due to disengagement from the country; (ii) broad and un-prioritized Government policy guidelines; (iii) significant institutionaldeteriorationafter two decades of military rule; and (iv) lack of a comprehensive evaluation of the previous Bank experience. Under these circumstances, Bank assistancewas often opportunistic, dispersed, and not structured aroundclearly articulatedmonitorable objectives. 2. With time, however, and despite arelatively young portfolio, significant achievements have been obtained and lessons learned. The stock of knowledge has improved, especially inthe areas of public sector governance, the management of oil resources, poverty assessment, and the pre-requisites for non-oil growth. Bank direct assistance has helpedimprove procurementpractices and the management of the public resources by the Federal Government. The assistance has also shown it possible to involve communities inthe allocation and use of public resources, delivering a wide range of infrastructure works at competitive prices as well as community education and health services. Advances have been made in setting the basis for improved services intelecommunications, electricity and water. The fight against polio has been effective. 3. However, attempts to assist a large number of states within a single project for the delivery social services have not worked well. Also, the Bank has yet to find effective ways to conduct policy dialogue inthe absenceof adjustment lending inNigeria. Lack of adequate attention to political economy issues has handicappedproject implementation. The Bank assistance couldhave placed greater emphasis on oil as a driver inthe economic transformationof the country through the various backward and forward linkages that it can create inthe economy. Some of these issues remain unexplored. 4. With hindsight,the Bank should have movedearlier and more forcefully with analytical work, policy dialogue and technical assistance, trusting the leadership of the government and its commitment to reform. The Government has truly been the driving force, especially after the 2003 re-election. Greater emphasis should have been given to dissemination of achievements bothat home and abroad. As of today, Nigeria's efforts and achievements have not ledto tumabout inthe commitment of the international community to support the country. This lack o f support, as shown by Page 1of 23 Annex 2 the delays to address the international debt issuecontinues to be a politically sensitive issue inthe country. Some key lessonshecommendations from the CR are: At the Strategic Level: Concentrate assistanceinpockets of highcommitment like the Federalgovernment and a few selected states 0 Stress AAA as the basis for a scaled-up policy dialogue and improved project preparation. LeverageBank assistanceagainst Government resources and those of other donors by continued support for the improvement inthe management of public resources Use the opportunity of a Country Partnership Strategy to develop realistic criteria to assess progress inNigeria. Increase support to remove the barriers to economic growth as a means to reduce poverty nationwide (infrastructure, macro-growth links) Donot limit assistanceto the managementof energy resourcesbut rather explore the potential direct contributions the energy sector can make to economic growth, as it i s now being explored inthe case of gas. 0 Maintaina productive engagement inthe country and make sure that the interventionscan withstand the political and economic riskinthe country. At the ProgramProject Level: Improved project design and implementationinthe future will require: Mandatory inclusion of realistic Monitoring and Evaluation systems; 0 Flexible designs that allow reallocationof resources and avoid the accumulation of unutilized funds; Taking account of the political economy reality through stakeholder analysis (or other methods) duringdesign and implementation. I.LONG-TERMSTRATEGICGOALS-OUTCOMES 4. The incoming civilian administration in 1999 sought a significant reversalof fortunes ina wide range of fronts: higher economic growth, improved governance, arresting the deterioration of basic social indicators, and better management of oil resources. The progress has been slow due mainly to the significant institutional deterioration that had taken place; however, positive changes are clear and evident, especially after 2003, when the civilian government was reelected. Economic growth has picked up; the macroeconomic situation has been stabilized; and, the stock of international reserveshas increased. Most importantly, the Government of Nigeria has produceda home-grown development strategy (NEEDS) and has taken a forceful stance infighting corruption and improving governance. These developments are reported ingreater detail inthe maintext of the CPS. 11.INTERIMSTRATEGYOUTCOMES 5. This chapter evaluatesthe impact of the Bankassistancefrom 1999to the present. The Bank Boardlast discussed a CAS inApril 1993. Since the democratically elected Obasanjo administration took power in 1999, the Board considered an InterimCountry Strategy Note dated May 11,2000. An Page 2 of 23 Annex 2 InterimCounty Assistance Update datedMay 21, 2001 and an InterimStrategy Update dated February 13,2002 followed. The SecondJoint InterimStrategy ProgressReport was considered by the Board inJune 2004. The InterimCountry Strategy Note and the follow-up updatestargeted assistance to three objectives: Improving governance and economic management Supportingeconomic growth Empowerment of the population through better services. 6. Moreover, the 2002 JIS mandated focused attention to Lagos. The following preliminary observations provide a framework for understanding the achievements and limitations of assistanceto Nigeria duringthis period. They also illustrate the difficulties with assessingachievements and impact inNigeria. 7. The Government'sDevelopmentStrategy has emerged more clearly only towards the end of theperiod. After coming to power the civilian administrationwas not ina position to develop a detaileddevelopment strategy; it lackedthe supporting analytical work and the technical capacity to do so. Furthermore, the Banklacked analytical work to guide its own programand project designs. NEEDS would not be developed until 2004. Inthe absence of clearly defines specific objectives and targets, it has been difficult for the Bank to evaluate the effectiveness of the program in the various updates of the InterimStrategy. The lack of clear targets has led to subjective and negative evaluations by the donor community of progress made inchanging institutions inNigeria. The donor community placedtoo highexpectations on what the civilian government could do. 1 8. The Bank did not take stock of the lessonsfrom past involvements on a timely basis. The Bank hadbeen very active inNigeria duringthe 1980sand early 1990s2,covering health, education, roads, agriculture, electricity, water and sanitation. However, OED didnot carry out a Country Assistance Evaluation; therefore, a comprehensive review of the previous Bank involvement was a~ailable.~The available information suggests a limitedimpact with past interventions. 4Arguably, the lack of a proper evaluation work has hindered the effectiveness of the current assistance. Some of the past lessonshadto be learned again. 9. Veryfew resources have been disbursed. The Bank portfolio inNigeria i s fairly young and available resourceshave beendisbursed slowly; therefore, it i s too early to evaluate the full impact on the ground of these on-going interventions. A. Improving Governanceand Economic Management 10. After a decade of arbitrary and corrupt military rule, the institutionaldecay inthe public sector was pervasive. "Standard procedures ingovernment that help ensure good policy formulation, implementation and accountability have been ignoredfor so long that they have been largely 'The IMFandDFIDhavemadeasimilarpointinthe assessmentoftheirowninterventions. Inthe 1980'sthe lendingportfolio stood at 1billion dollarsa year. OED, however, evaluated8 projects launchedbeforethe Bank suspended its programin 1995. An internalstudy of 20 projects initiatedbetween 1985 and 1992 found that 52% were unsatisfactoryinterms of impactandor sustainability and 85% of the projects reviewed had negativesustainabilityratings. Table 4 of the appendix shows that only 18 percent of the committedresourceshave been disbursed. In fact only, two projects approved duringthis period will havebeencompletedby the end of FY05. Page 3 of 23 Annex 2 forgotten."6 Understandably, the Government gave early priority to improving governance and reducing corruption. Donors, the Bank included', have provided support through analytical work and technical assistance. The progress has been significant since 1999.The government has beenthe driving force behind these initiatives and has had full ownership. The following advances can be noted: 11. Publicprocurement shows results.Followingthe CPAR of 2000, the Federal Government has made progress inimplementing procurement reform. The Budget Monitoring and Price Intelligence Unit (BMPIU), which i s located inthe Presidency, has instituted "due process" for all contracts and generatedsignificant savings to the budget. It has issued circulars directing the creation of a procurement cadre and the establishment of procurement unitsineach Ministry,Departmentor Agency, effectively decentralizing procurement. A Procurement Billhas been submitted to the National Assembly. Followingenactment of the Procurement Bill, a Bureauof Public Procurement will be createdwhich will oversee procurement policy, ensure quality, launcha broad procurement training program, and carry out procurement audits. A Lagos State Procurement Assessment Review was carried out in2003 and makes similar recommendations for procurement reformat the State level. However, at this stage, implementationhas been slow due to unavailability of adequatefunding (e.g. IDA funding). 12. Management of Oil resources is improving.Progresshas been made inthe management of oil resources.A price oil rule to smooth expenditure inthe federal budget was introducedin2004. This decision representsa first step inwhat can be a more sophisticated macroeconomicmanagement. The country can move, for instance, to usingthe non-oil fiscal deficit as key criteria for macroeconomic management. These efforts have to be extended to the state level for the approach to be even more effective. The proposed FiscalResponsibility Bill would allow the federal andthe state governments to coordinate fiscal and budgetary policy. 13. The government has begun implementation of the Extractive IndustryTransparency Initiative (EITI.) Itseffective implementationwould put Nigeriaat the forefront of oil countries inintroducing transparency to oil resource flows. The approach seeks to involve civil society and buildconsensus on how to manage and use oil revenues. Hopefully, this approach will help overcome the public's mistrust of the government after decades of military rule. EITIimplementationwill be arduous and will require the continuedsupport of the internationalcommunity, the bank included. 14. Takingthefirst steps in budgetary management reform. Coordination among government agencies with fiscal responsibilitieshas improved.* The first federal budget utilizing a modem budgetary classificationwas approved by the legislature in 2004 for the 2005 federal budget. The arrears of government appropriationaccounts and financial statements under the military have been 'Instrumentsto Interim CAS Note, 2000, page 13. support governance. Bank supportbegan with Country ProcurementAssessment Review (CPAR) (June 2000), and the Economic ManagementCapacity BuildingProject (EMCAP.)' Other AAA at the Federallevel includesa PublicExpenditureReview (FYO1) and a Country Financial Accountability Analysis (CFAA) (September 2000). Also it canbe mentionedthe Capital BudgetReview 2000; States Governance Report2002; and States FinancesReport 2003; with the priority given to Lagos in the 2002 Update, a Lagos State Procurement Assessment Report (November 2003), and a LagosSFFA (March 2004) have been undertaken. The Bank also undertooka review of the oil and gas sector in2003. A recent petroleumreview considersthe relationshipbetweenoil management and overall governance. * These includethe National PlanningCommission,the Budgetoffice and the expenditureministries. Specifically,the capacity of ministriesto deal with expenditureand procurement responsibilitiesis being increased. Page4 of 23 Annex 2 drastically reduced to two years. The treasury systemi s under modernization and the communication between the spending agencies and the Accountant General Office now takes place within the mandated time limits. The 1958FinanceManagement and Control Act i s under review to strengthen and update financial managementpractices. Civil service in-kindbenefits are being monetized to bringgreater transparency into public servicepay and reduce the burdenof the civil service onthe public purse. The Bank, DFIDand the EUhave been active supporters of these efforts. 15. External Control and accountabilityto Parliament. The federal government hasbrought its fiscal accounts to date and several states are beginningto do the same. Audited financial statements have been published. The Auditor General's office has made progress towards reporting to parliament on budgetary performance within the mandatory nine months after the end of the fiscal year. The Audit Act is under review. The Public Accounts Committees of Parliamenthas been reactivated, and plans are underway to create a budget and research office inthe National Assembly. 16. Anti-Corruption. The Government has created the Independent Corrupt Practices and the Economic & Financial Crimes Commissions. These agencies are pursuingseveral cases incourt. Some 138 functional Anti-Corruption Unitshave been created ingovernment agencies. Since 2003, a large number of highly placed government officials have been taken to court, including ministers, parliamentarians, admirals, etc. However, only one conviction has been secured, which was later overturned. The Public Accounts Committee of the Legislature took its oversight responsibilities more seriously in2004 and held public hearings on the findings of auditedpublic accounts. 17. Other efforts include some improvements inthe production of national statistics, and nationwide consultations on specific proposals for ajudicial reform. Despite all of these efforts Nigeria continues to be rankedlow on governance and corruption inrelationship to other countries, including sub-Saharan countries. Aside from measurement lags, the low rankings reflect the magnitude of the challenge aheadfor the Government, the country and the donor community, and the need to monitor continuously the outcomes of the interventions. B. Supporting Economic Growth 17. Growthof the non-oil economy duringthe 1990s was around 3 % p.a., marginally above population growth. Inthis decade, non-oil growth has increase to an average of 4.7 % annually. The new civilian government sought to move the country away from the previous strategy of industrialization basedon direct state investments towards reliance on private sector initiative. The Government and the Bank, lacking the supporting analytical backgroundto design a detailed growth strategy, proceeded tentatively, with emphasis on enterprise privatization, deregulation, and SOEs restructuring. A more detail programhas been unfolding overtime. With hindsight, the support for economic growth could have benefitedfrom earlier and more intensive sector work and a more active dialogue with government on issues of business environment and sources for growth.' Also, greater attention should shave beengiven to energy resources as drivers of economic change through forward and backwards linkages. Only, gas received some attention towards the end of the period. 18. The understandingof how oil impacts economic growth has improved. The understanding of how oil revenues flow into the economy has improved as a result ofjoint analytical work between the Bank and the Government." The use of an oil-price-rule for the budget preparationfollows from 38% intotal commitments have been made to support economic growth. The percentagedrops to 31% if the Fadamaproject (based on a CDD approach) is omitted. loOil/Gas studyandtechnicalassistance, PetroleumReview (2004), Policy Options for Growth and stability (2003) and Poverty and Vulnerability (2004). Page 5 of 23 Annex 2 the understandingthat fluctuations inoil revenueshavenegativeeffectsoneconomic growth. The commitment to transparencyinthe flow of oil revenueshighlights the importanceof check and balancesto preventopportunitiesfor graft andmisuse of resources.Also, there i s greater clarity about the economic opportunitiesthat derive from gas, andthe current losses andenvironmental risks from gas flaring. Moreover, the legal framework to allow private sector involvement ingas i s under preparation. Despite some progressit is necessary to continuethe work on the links between oil and the economy, especiallyby bringingthese issues into the national dialogueon development.It is also worthwhile to explore opportunitiesthat the oil industry directly provides for the development of local industry. 11 19. There is now a better understandingof the requirementsfor a high rate of sustained growth. Through analysis, dialogue and surveys, the Government, the private sector and the donors havean improvedunderstandingof the barriers to growth, anda sense of policy priorities has been emergingregardinginfrastructure,the investmentclimate, trade andthe overall determinantsof productivity growth.'* Regretfully, at the presentmoment there is not enough of a track record with surveys to know ifthe environmenthas beenimproving inrecent years as aresult of government policy. However, the basishas been set to track this progressinthe future. An up-coming Country Economic Memorandumprovidesthe opportunity to bring together the work that has beendone on the determinantsof competitivenessinNigeria. The Bank,jointly with DFID,hasbeen supporting private sector organizations to dialogue with Governmenton issues of investmentclimate. The dialogue on growth needs to be scaled-upto motivate national wide debate on the barriers to growth. 20. De-regulation of the telecommunicationssector has been very effective. The telecommunicationssectorhasbeenliberalized, aregulator hasbeenput inplace, andtele-density has increasedfrom .4 percent inDecember 1999to over 6.5 percentinDecember2004. The regulatory framework is state-of-theart. The response of the private investorshas been remarkable.Private investmentsrosefrom $50 million at end-1999 to $5.4 billion at end-2004, so that the sector i s second only to oil inFDI.This shows inequivocally that the private sector canplay a positive role inthe economy. The IFC largest investment inNigeria i s intelecommunications. The National Monopoly (NITEL)is beingpreparedfor privatizationnow. 21. Signifxant progress has been made to improve delivery of electricity services. Reportedly, the quality of the electricity servicesis the largestbarrierto business inNigeria. Some improvements monopoly)--its distribution sectorbeing unbundledinto 11Distribution BusinessUnits-DBUs(as of inservicedelivery havebeenmade, through the restructuringof NEPA (the state electricity Jan 1,2004) and the TransmissionBusiness Unit has beenset up on April 2,2004. Severalinitiatives havebeenpiloted under the Commercial Reorientation of the Electricity Toolkit (CREST) program. Basedon the success of the pilots, a scale-upprogramin 8 of the 11DBUsis being undertaken. With the passage of the Energy Bill(December, 2004), it is now possibleto unbundledefacto the state energy company (NEPA) andengage the private sector inthe electricity sector. IFC has beenactively cooperatingwith the Bankinthe reformof the electricity sector, includingpreparingthe basis for private sector off-grid investments.Rapid progress is needed inimproving the quality of electricity delivery and extending the coveragethroughout the country. 22. Privatization hasproceeded at apace slower than initially expected. The Bank and the Governmentplaceda highpriority on privatization as partof a growth agenda, which emphasized I'Past efforts inthis area did not work satisfactorily.For instance, some of the refineriesare not under operation and the country importsgasoline. l2The Bankhasproducedseveralprivatesector assessmentsandalsois now workingonbetterunderstanding the determinants of competitiveness, by focusing on value chains. This work is expectedto informthe CEM. Page6 of 23 Annex 2 active private sector participation inthe economy. Progress hasbeenvery slow. With hindsight, the slow progressininvolving the private sector in infrastructureservicepro~ision'~appears reasonable, given (a) the needto provide solid supportingregulatoryframeworks upfront and (b) the weak international market for basic network telecommunicationscompanies. Slow progressinprivatizing companiesinthe productive sectors seems less reasonable, andi s probably due to entrenchedinterests and lack of a stronggovernmentcommitment. The Bankoperationsupportingprivatization hasbeen restructuredandlower goals were set. It may well havebeenthat the early emphasison privatization proved premature, andabetter understandingof the political economy was necessary. As of recently, the privatization drive has gainedmomentum.Progresshas been made with preparing ports, airports (starting with Abuja) andrailway concessions. Also important assets intelecommunications andthe oil sector, including refineries,reportedly will beput up for sale. 23. The Bank returned to agriculture with a delay. Prior to 1999, the Bankhadbeenactively involved inagriculture.After 1999,14the Bank took the conscious decision not to lend for investmentsin agriculture untilfiduciary issues, relatedto previous Bank operations, were sortedout. At the same time, the Bank undertookRural Sector Strategy Study andother analytical work; regretfully, their impact on either policy or lending was very limited. A new agricultural sector review i s under preparation.The returnto lending under FADAMA-I1emphasizesa CDD approachto address concernsfrom the previousFADAMA-Ioperation, as conflicts arose amongst different beneficiariesat the community level. The CDD approachfor the delivery of agriculture services i s experimental, and, henceforth, impact monitoring will be highly important. 24. Also, it is recommendablethat FADAMA-I1concentrateson productive investmentsand coordinateswith efforts to improve rural roads. The previousFADAMAproject succeededinraising yields, but productscould not be taken to the market becauseof lack of transportation. With hindsight, the Bank's supportto agriculture could havebeen more forceful in (a) developing a more precisediagnosisandpriority actions for the sector, and(b) carrying out an effective policy dialogue with the government.A more active dialogue could haveencouragedthe government to undertake moredeterminedactions to introduce some dynamism into agriculture. The Bank could have found an alternative way to address the fiduciary concerns. 25. Support Economic Growth throughfocus on Lagos State. Lagos concentrates a large share of non-oil economic activity inNigeria. Support for the development of Lagos has a national impact. The 2002 JIS focusedon Lagos. The ensuing support has providedthe analytical basis to improve the public expenditure andprocurementpractices.Lagos has increasedcollection of local taxes significantly. The Bank is also supporting improvementsto the transport system, includingroads and the port. Regretfully, this assistance has beenhinderedby afailure of coordination betweenthe federal andthe state authoritiesregardingroads under federalresponsibility. Project design should havetaken into account of the possibleconsequence of the division of responsibilities of the state and federal government. The Bank is likewise supporting the preparationof aDevelopment and Poverty Reduction Strategy. Lessonsfrom the interventions inLagos will needto be studied carefully as the Bank movesto work more directly with other states. 26. The workings of thefinancial sector have improved, but access continues to be aproblem. The Bankjointly with the IMF supportedanalytical work inthe financial sector through FSAP. The CentralBank has already begunimplementation of several of the FSAP recommendations,taking steps to strengthenbankingregulation. IFC has worked with six commercial Banks, committingterm l3 The exceptionhas beenthe water sector where the privatesector has beenengaged inthe managementof severalwater utilities. l4 See here OED evaluations. Page 7 of 23 Annex 2 facilities totaling over $160 million. IFC is expanding its relationships with lendingbanks to support more small business financing options. C.Empowerment 26. The incoming Government found a disastrous situation: poor primary health care services; the prevalence of communicable deceases; nutrition deficiencies; limited availability of potable water; and coverage of primary education slightly above 60 percent by the end of the 1990s.HIV/AIDS was on the rise and Nigeria was one of the few countries inthe world where polio was still present.15Bank assistanceincluded health, education, polio, HIV/AIDS and, most importantly, it emphasized the role of the community in service delivery. This review focuses mostly on the impact of the mature operations and draws lessons for the delivery of assistanceinthe area of social services.16 27. Learning to work with and through the communities. The emphasis on Community Driven Development (CDD) was new. Through this approach, the Government and the Bank have sought to l7(a) deliver outcomes on the ground, such as increasesin incomes, poverty reduction and access to basic services, and (b) create constituencies for the reform of localgovernments. Lacking supporting analytical work, the Bank relied on the lessonsfrom other African countries. Project design has varied across the CDD operations, which arguably has affected their effectiveness. 28. Results from the Community PovertyReduction Project (CPRP) l8 have shown that it i s possible to work effectively through the community inthe delivery of basic services. Moreover, a recent review of the project showed that investments under the project have been less costly than under alternative delivery schemes." A salient characteristic of CPRP i s that work began first with the communities and only gradually sought to engage local governments, which it has done successfully.20Later projects have faced implementationdifficu1ties2l, possibly becauseof more complicateddesigns and different structures of the relationshipbetween the project, the community and the local governments. The on-going review of the CDDoperations inNigeria will provide a common framework from which to re-group current operations and design future interventions. 29. Simple design and clearly targetedobjectivespaid-off in thefight againstpolio. A Bank intervention to eradicate polio has proven highly effective (despite some early problems22),disbursing l5See mainbody of the CPS for details on social issues. Regretfully, polio is still presentand HIV/AIDS continuesto spread. l651 % of total commitments are going to support empowermentpillar. 23% of commitments havebeen disbursedso far. l7Three operations were directly CDD: Community BasedPoverty Reduction, Community BasedUrban Development,andLocal Empowerment & Environmental Management.Besides, CDD has beenan important component of other operations-FADAMA 11,SmallTowns Water andSanitationLILetc. Therecently completedPEP-I1project also has a CDD component, as well as the recently approved operation on mining. '*The operation will close within a year and is yet to disburse around50 percentof the resources. Internal Project Report (2004.) Additionally, CPPR has a fairly autonomousorganization, which may provide flexibility and facilitate implementation. The implementation of LEEMP and the Urban CDD is below expectationsand will most likely be reprogrammed.A variety of factors have affected the development and implementation of these projects, besidesdesign issues. For instance, there were delays intaking these projects to the Board. Arguably, these delays preventedan earlier and fuller implementation of the CDD strategy. 22Often, project implementation has had overcomepolitical andor culturalbarriers that arose. InHIV/AIDS, . project implementation has been marredby conflicting perceptionsof how best to deliver public messageson Page 8 of 23 Annex 2 on time and reachingits intended objectives. This operation was carried directly by the federal government, the objectives were quite straightforward and the design simple. Reportedly, the OPV for children under five has gone upfrom 83% inthe base line to 91-95% now. However, WHO provides much lower statistics, at 77-79% and further evaluation i s needed. 30. Theprogress made in improvingthe delivery of health and education services has been limited. It is difficult to track outcomes ineducation and healththroughout the country due to the lack of accurate statistics. However, the PrimaryEducationProject I1(PEP-11)just completed generated significant outputs on the ground (a) about 10,OOO primary schools benefited fromgrants for self-help improvements basedon development plans prepared with community participation; (b) a school basedmodel of teacher professional support was developed; and (c) supplementary reading materials, selectedby teachers, inaround 1000 schools were provided. Thus, PEP-11success, after restructuring in2002, contributed to a bottom up approach to improving the educational system. To assure implementation of the Primary EducationProject-11(PEP-11)it was necessaryto simplify design, skip state governments, and rely on direct transfers to schools and community participation. In fact, the self-help component of this operation was based on a CDDapproach and the project was managed at the federal level. However, efforts to improve the capacity of the states to manage education services have been less successful, as shownby the performance of the follow-up Universal Basic Education Project (UBE.) 31. The 1999 Constitution assigned to states responsibility for the delivery of social services. Hence, effective sustainable interventions to improve health and education have to strengthen the institutional capacity of the state governments to manage service delivery. Ideally, the Federal Government should take the lead indevelopingbroadly-owned sector strategies and inproviding technical assistanceto the states for service delivery. However, the relations betweenthe federal government and the states are strained. The Bank's attempt to work directly with many states proved daunting, partly due to rigidand ineffective project designs.23Thus, for instance, the resources allocated per state per year within a project (UBE)are often small and do not provide the necessary leverage to induce the requiredinstitutionalchanges to improve service delivery. While the coverage of numerous states increased supervision effort andcosts, implementation suffered becauseof the unclear responsibility of the federal and state level. 32. With hindsight,an initialevaluation of implementationrisks would have pointedout: (a) that it is very costly to assist many states within one project, and (b) that fundamental agreements (possibly around a common strategy) between the federal and the state governments are needed to be effective indelivering assistancefor social services. For future effectiveness of capacity building efforts and institutionalup-grading, the Bank should concentrate its work with committed states. 33. Settingthe basisfor improved delivery of water services. Some Progress was made in improving delivery of potable water, but achievements on the ground have fallen short of reaching intended objectives. For instance, a recent ICRfor the Small Towns Water Project highlighted the fact that the original intent to involve communities inthe management of delivery of water services was not fully possible, becausethe federal government did not transfer ownership of the assets to the local governmentskommunities. Reportedly, however, the government considers the effort quite satisfactory and plans to continue on its own, which may prove the exercise not only effective but sustainable. As to Bank interventions inlarge cities, the emphasis has been on involvingthe private the urgency andthreat of AIDS, while not alienatingimportantconstituencies sensitive to how the messageson AIDS preventionare communicated. 23 Table 5 of the appendix showsthat basic services operate inlargestnumber of states. Page 9 of 23 Annex 2 sector inthe management of water utilities and to achievefinancial sustainability andquality of services. The private sector is already involved inthe delivery of water inseveralcities. 24 111.MEASURINGBANK PERFORMANCE 34. The Banksupportedthe governmentto developandimplement its statedpriorities. The Bank acceleratedpolicy dialogue, AAA andlending as the Government's reformeffort picked up in2003. Overall, however, the Bank has beencautiousin supportingthe reformgovernment, raising the lending envelops to upto $500 million only with the 2004Joint InterimUpdate. Also, the Bank could have move faster andearlier to develop analytical work to supportoperationsand policy dialogue. A greater effort at disseminationof analytical work andgovernmentachievementswas called for. A. Quality ofServices 35. Lending Services. Froma broadperspective, the Bank could have moved more forcefully andquicker to supportthe reform-minded governmentof Nigeria. The Bank actedcautiously at the beginning, perhapsbecause of previous experience.However, it has beenslow inpickingup the pace inview of the government's opencommitmentto reform. The 2002JISUupdateemphasizedthe concept of a track recordand set benchmarksthat would eventually placethe strategy in a low case scenario. The 2004 JIT Update was conceived as transitory anddid not depart significantly form the past inevaluating the accomplishmentsandprospectsinNigeria. It did, however, upgradethe strategy to the basecase. One of the key problemsthat the Bank has faced inNigeria has beenthe development of clear benchmarksto assess performanceunder the present circumstancesinNigeria. The tendency has been to expect too much, which may not be warranted on a weak institutional environment. The consequence hasbeen limited support to a government committed to reform. 36. As was already pointed out, Bank lending serviceswere dispersedand lacked synergy. This has beenparticularly true at the state level, as projectshavefollowed their own guidelines in selecting states to work with. Additionally, projects sometimeslackedclear andprecisedevelopment objectives, and often proper monitoring andevaluation systems.25The Bank team has moved to address these flaws. This has meant, however, that projectshavetaken time to mature andoften have fallen into non-performing status. Some of the initiatives to improve lendingservices include: (i)harmonizationandconsolidationofCDDoperations; (ii)retrofittingmanagementandevaluationinitiative; (iii)restructuringof non-performing projects; and (iv) re-organizationof projects. 37. With hindsight, the Bank could haveactedearlier andmore forcefully to consolidate interventions inthe strategy and strengthenproject design andM&Esystems. Some timid initiatives were undertaken.The 2002 Joint InterimStrategyUpdateidentification of Lagos as a priority canbe seenas trying to concentrateefforts inone large andimportant state. The experience with this initiative is that even inone state, efforts can end up beingdispersed. Lagos has yet to develop a comprehensivedevelopment strategy. Therefore, future targetedinterventions at the statelevelhave to begin with developmentof vision for progress, which canbe perfectedovertime. The current SEEDS initiative could well provide suchplatform. Ithasbecomegradually clear to the Bank The National Water Project under implementation seeks to involve the private sector inthe delivery of water services. 25Refer hereto internal review of AFTOS. Page 10of 23 Annex 2 that to be effective inNigeria interventions have to be selective, targeted, and, leveragingpublic resources. 38. AAA. The Bank sought to regainthe lost groundandbuildan adequateknowledge base in the country. The AAA has been rather effective in oil, gas, governance, and inidentifying the barriers to growth. With some additional efforts, it should be possible to have more precise insights into the question of how to improve the competitiveness of the non-oil economy and upgrade the nationaldialogue on growth, use of oil resources, and poverty alleviation. Slowly, the knowledge base for service delivery insocial sectors has improved, especially ineducation. There i s also an improved understanding of the poverty pattems inthe country. Significant lacunae remain in: health, agriculture, international trade, regional integration, infrastructure, the linkbetween non-oil economy and poverty reduction, political economy, the potentialfor the use energy resources for growth, etc. The forthcoming CEMprovides the opportunity to bringtogether under common analytical framework efforts undertakenthus far. 39. However, AAA has not always been available to support lending and policy dialogue. Partly, this has beendue to the time lagingenerating knowledgeand partly to the lack of basic statistical information. But also, the Bank has not actively sought to cooperate with other donors in knowledge development and sharing. The Bank should have moved more aggressively not only in the development of highquality analytical work, but inits dissemination. This includes presenting the results to the general public, at home and abroad, with accurate and even-handed evaluations of the programs and achievements of national initiatives. Lastly, it is important to highlight that the last Client Survey identified analytical work as the major contribution the Bank could make to Nigeria. 40. CountryDialogue. The dialogue with the government began with great expectations as the first democratic government took over power. Then, the dialogue dwindled. However, the dialogue pickedup after the secondelection (2003.) There are at least two reasonsthat the policy dialogue i s difficult inNigeria. The lack of background analytical work i s clearly a problem. Another problem arises from the fact that the Bank often conducts policy dialogue in many countries, especially on macro and growth issues, around adjustment operations. This i s not possible inNigeria. The Bank has been slow to find alternative avenues. Tryingto induce policy dialogue and reforms through investment operations i s difficult and, as intemational experience shows, often it does not work well. 41. InNigeria, theeffectiveness ofthepolicydialogue hasbeenthehighestintheareasofhigh political commitment-for instance, governance and management of public resources. Inother areas, such as non-oil growth, where there may be a common understanding of the needto improve the business environment or the quality of infrastructure, the barrier to effectiveness comes from entrenched interests. The Bank could have focused more on helping government identify the political barriers for change and buildcoalitions for change. This could have been an option inprivatization. Also, at the state level, a more concerted effort, perhaps with the concurrence of other donors, could have been made to strengthen the reliance on civil society organizations as key to generate demand for changeat the local levels. IV. LessondRecommendations At thestrategic Level: 42. The Bank needsa strategy on how to calibrate assistanceina difficult or risky environment like Nigeria while maintaining a productive engagement. The Nigeriaexperience shows that total disengagement from 1995 to 1999 from Nigeria had negative consequences, as the Page 11of 23 Annex 2 lack of updatedanalytical work andthe lack of athoroughreview of the pastinterventions reduced the effectivenessof Bank assistance after re-engagementin 1999, leading to dispersedinterventions andunfocusedobjectives. Also, it may haveaffectedthe ability of the Governmentto develop a more targetedstrategy, which the Bank could support. The future strategy needs to guarantee a continued basic engagement(analytical work, possibleCDD, etc.), even if the overall assistancewere to be downsized. Also, it is important to select sturdy and sustainableinterventionsthat can withstand the vagaries andrisks of future implementationenvironments.This lessonis also relevant as well for the direct engagementwith the states. 43. The Bank should avoidscattered interventionsall throughoutthe country and concentrateina few states to betruly effectiveInworking with states, the Bank should concentratein a few states anddevelopmodalities of interventionthat assure botheffective assistance andbuildingof long-term institutions bothto improve the quality of public expenditure andfacilitate economic growth. Instates with limitedcommitment or capacity, the Bank can buildCDD interventions, with simple designs, that work through autonomous managementstructures to deal directly with the communities andbypass local and state bureaucracy. 44. The Bank should target the bulk of its support to areasinwhich there is highlevel of government commitmentand actionshavebeentaken onthe ground. This approachhasproven effective inthe areas of public sector reform, where the analytical work andthe technical assistance havebeeneffective. Currently, it makes sense to support the FederalGovernmentwhere a highlevel of commitment resides.This includes supportfor critical infrastructure, the development of gas resources, transportation, andregulatory andlegalreform. Also, it pays off to identify those states where there i s commitment andexperienceandwork directly with themand avoid dispersion like in the past. Rebalancingof assistancetowards supportinggrowth related activities seems should be a priority. 45. Greater stress should begivento AAA as the basisfor policy dialogueand project preparations. Continuedanalytical work is neededto upgradethe quality of the dialogue regarding how best to use the oil resources (fiscal managementandlinkageswith domestic industry)andhow to facilitate non-oil growth especially inagriculture. AAA will be particular importance inworking directly with states andinimproving the relationship betweenthe federal government andthe states. Itis important to include inthis dialoguenotjust the governmentbutthe broadpublic opinion as well 46. The Bank should not shy away of assistingthe government inexploring the direct use of itsenergy resourcesto support growth. Perhaps, because of past negativeexperiencewith direct government inindustrialization, the Bank has not examinedthe potential role on energy resourcesin developing the country. Many other oil countrieshavebenefitedfrom the backwardand forward linkagesenergy provides.The Bank shouldassist Nigeria to explore these options. 47. The Bank shouldseek to leverageits assistance againstthe government's resources and those of other donors. The resourcesthe Bank provides are small by comparison to the budgets of the federal andstate governments. To have an impact, the Bank should continue helping the federal government andafew selectedstates improve public expendituremanagementand servicedelivery, bringing government anddonor resourcestogether. 48. The Bank shoulduse the opportunity of a resultsbased Country PartnershipStrategy to develop criteria, correspondingto institutional capacity and politicalfeasibility, to assess progressinNigeria. Iti s important to berealistic andnot generateunreasonableexpectations. A realistic stance will allow moreeven-handedevaluationsof the advancesmadeby the country to the international community. The Bank shouldlikewise not shy away from supporting the Government Page 12of 23 Annex 2 'Nigeria with a domestic andinternational disseminationstrategythat buildson the achievements obtained. Hopefully, this will help inducethe internationalcommunity to re-engageinNigeria. . At the ProgramProject Level: Project designandimplementationcan be improvedinthe future through: Mandatory inclusion of realistic MonitoringandEvaluation systems; Flexible designsthat allow reallocation of resourcesandavoid the accumulation of unutilized funds; Take account of the political economyreality through stakeholders' analysis (or other methods)duringdesignandimplementationt Page 13of 23 ed .9 5 3 4 ) 39 0 0 0 % 0 9 v B 3 L2 0 3 c % Annex 2 TABLE2: PLANNEDVS AC `UALLENDINGDELIVERABLES CURR NTSTATUS FY Project status I IDA 2000 SmallTownsWater 5.O SmallTowns Water [Projectapprovedin FY2000 closedin June, 2004) 2000 EconomicManagementCapacity 20.0 Economic 20.0 Building ManagementCapacity Building(Project approvedinFY2000) 2000 SecondPrimaryEducation 55.0 SecondPrimary 55.0 Education(Project approvedinFY2000 was closedin December,2004) 2000 Community RuralDevelopment 60.0 CommunityBased 60.0 Poverty Reduction (Projectwas approved inFY 2001) 2000 Balanceof Payments Support 200.0 - Balance of Payments Operation 300.0 Support Operationwas dropped. 2001 PrivatizationT.A. 45.0 PrivatizationSupport 114.3 (increasedto (Project was approved 115.0 ) inFY2001) 2001 MicrowatershedandEnv. 100.0 LocalEmpowerment 70.0 (changedto LocalEmpowerment (Changedto andEnvironmental andEnvironmentalManagement 107.0) Management(Project FY03) was approvedin FY2004) 2001 Community UrbanUpgrading 60.0 (changed Community Based 110.0 (Changedto Community Based to 10.0) UrbanDevelopment UrbanDevelopmentinFY2002) (Project was approved inFY2002) 2001 FadamaI1(Changedto 2004) 70.0 SecondNational 100.0 FadamaDevelopment (Project was approved inFY2004) 2002 ElectricPower Transmission 100.0 Transmission 100.0 Development (FY2002) 2002 HealthSystems Support 120.0 SecondHealthSystems 127.0 Development(Project was approvedin FY2002) 2002 LagosUpgradingProject 100.0 LagosMetropolitan 150.0 Development(Project to be approvedin FY05 2002 CDDUmbrella 100.0 Project was dropped. I 2002 HIV 90.0 HIV/AIDSProgram I 90.3 Development(Project was approvedin Page 18 of 23 Annex 2 2004 StateGovernance 50.0 State Governanceand Capacity Building(to be approvedin FY2005) 2004 Lagos Water SectorRestructuring 100.0 SecondNationalUrban 200.0 (changed to FY2006) Water (to be approved inFY05) 2005 Governanceand Economic Sector 200.0 Economic Reformand 140.0 Reform Governance(Project was approved inFY05) 2005 Youth and Urban Development 300.0 2006 SustainableManagementof 50.0 Sustainable 120.0 MineralResources (Reserve) Managementof MineralResources (Project approved in FY05) 2006 Energy Project 200.0 Beingproposedfor FY06 Page 19of 23 E 9 B E $8 3 * O E 0 -B 3 z ri m *0 el M Annex 2 Table 5: Numberof Statesper ResultsPackage ResultsPackages ProjectName I Numberof States ImprovedBasic Services for Community Based 12 (8 states supported by the 1 Human Development PovertyReduction World Bank and 4 states supported by AfDB) Community Based Urban 7 Development 0 SecondHealth Systems 36 Development HIV/AIDS 36 Polio Supplement I 36 Universal Basic Education 16 LocalEmpowerment and EnvironmentalMgt. l1 Improved Environment and 0 Privatization Support Services for Non-oil Growth Ilo Transmission Development Lagos UrbanTransport lI o1 MSME 3 National Urban Water 3 Sector Sustainable Management 7 of MineralResources 0 Second NationalFadama 17 (11states supported by the Development World Bank and 6 states supported by AfDB) EnhancedTransparency and Economic Reform and 0 Accountability for Better Governance Governance EMCAP 0 I Page 23 of 23 Annex 3 Working with Lead States A country-led processof transformationfor growth and poverty reduction States matter ! - Working at state-level is critical for growth and poverty reduction. The average Nigeria state i s larger than many African countries. The 36 states together with their 774 local governments, exercise considerable political and fiscal autonomy, control some 50 percent of government resources and have responsibility for primary education and health care. Improvements in service delivery for human development and growth at state and local government levels will drive achievement of most MDGs - effective state-level working is key. This will touch the lives of Nigerians in tangible ways and further build support for reform. Yet, the alignment of state and local governments with reforms at federal level cannot be taken for granted. Working with states committed to reform is a key aspect of a medium-term transformational agenda - of value reorientation - as articulated in the NEEDS. The Federal Government i s therefore exploring creative ways of working with state governments for a consensus on moving Nigeria forward. Alignment with the SEEDS framework i s part of the Government's initiative for donor coordination and harmonization. The CPS will support these efforts. The objective i s to increase the capacity of states to deliver services, by increasing demand for reform, sharpening incentives - for both public officials and civil society - and strengthening systems. The strategy sees its impact in helping develop - and rewarding - a number of `models' of development and growth in the lead states, leveraging improvements in the effectiveness and efficiency of public expenditure to broaden and sustain impact. The Bank has developed a sophisticated framework for providing assistanceto countries inAfrica that have different qualities of policies and institutions26. The same framework i s applicable to working at state level in Nigeria, given their relative autonomy and range in government performance (see Figure 1). The challenge is great. Experience of working at state level to date highlights the significant challenge for supporting improved transparency, accountability and service delivery at state-level. The incentives for states -particularly the political leaders -to engage with a reformagenda have been weak. The resources (both financial and technical) that development partners' engagement has brought to the states have often been insufficient to compensate for the loss of highly personalized, discretionary use of resources, that engagement with the reform agenda would entail. Rent-seeking behavior that damages the business environment has been the norm. This i s the `oil curse' in action. Supporting transformation at the state level will be critical for turning around Nigeria's three underlying constraints of a history of mismanagement of oil revenues, lack of accountability and transparency, and poor non-oil growth. The NEEDS and SEEDS agendas provide a more robust framework for reform, and, if implemented, will begin to change the 26Strategic Framework for IDA'SAssistance in Africa (2004). Page 1of 5 Annex 3 political behaviors at state level, delivering services that can reduce poverty and create opportunities for growth. Fig 1: EmergingState-levelPartnershipModel: Formsof Support" CPS A transformational agenda - Working withafew, `lead' States. Several state governments have completed and are implementing their SEEDS, or are advanced in their preparation, which, together with NEEDS form the national framework of Nigeria's home-grown poverty reduction strategy. Some states are fighting corruption, strengthening their systems and improving service delivery, often from a low base. The CPS will work with a number of these `lead' states to enable them to deepen reforms and make more rapid improvements in service delivery. A key element of the strategy i s to also leverage improvements in the effectiveness and efficiency of public expenditure to broaden and sustain impact. This focus and geographical selectivity i s a radical departure in our way of working, yet one that is firmly country-led. Working with a few reforming states was universally endorsed during the CPS consultations. State governors and their officials in particular welcomed the focus on their plans and priorities, rather than their being included in an externally-determined project over which they had limited control or commitment. The CPS aims to provide incentives for a set of lead states that can demonstrate they are committed to reforms and greater transparency. Thus, the strategy sees its impact in helping develop - and rewarding - a number of `models' of development and growth in the lead states. The strategy in lead states will also support states to work with local governments in developing medium-term plans. By working to strengthen accountability and efficiency of public expenditures across all levels of government, it i s expected that by the end of this CPS period, the basis for using more flexible instruments for assistance, such as budget support, will be established for lead states. In this CPS, budget support will not be provided, though support for public expenditure management reform will enable progress to be made. Where possible, IDA and DFID will use SWAPS to finance social sectors in lead states (where possible, in collaboration with other development partners). State level engagement will be intensified during the CPS usingstate teams facilitated by DFID's existing regional office infrastructure. 27Adaptedfroma SPIA presentationmadeby JohnPage,World Bank ChiefEconomistfor Africa, during the first partners' workshopfor the developmentof the CPS, September 2004. Page2 of 5 Annex 3 Lead State Selection Up to six lead states will be selected for the CPS. States may be added each year for the CPS period, depending on the resource envelope (including that which may be made available by other development partners as donor collaborationbroadens). Two basic parameters are at the core of selecting lead states: demand and performance (Fig. 2). States will need to express an interest in cooperation with the Bank and DFID based on transparency, accountability, sound public resource management and pursuit of the MDGs. The government-led SEEDS benchmarkingwill indicate states that are committed to and demonstrate, at a minimum, a satisfactory performance on good governance and service delivery. Given the large number of states involved (28), this process provides a competitive approach for selecting a few states and can contribute to the incentives for reform. Making the SEEDS benchmarking an annual event, where additional states can enter partnership, will further strengthen incentives. Fig 2: Annual LeadState Selection Process SEEDS Benchmarking. The process i s being managed by the National Planning Commission and overseen by the National Council on Development Planning and the National Economic Council - as a consensus instrument of federal and state governments. Participation in the SEEDS benchmarking exercise, signaled in NEEDS as a mechanism for setting aspirational standards for public management, i s entirely voluntary. In early 2005, some 28 States submitted themselves for the first round of SEEDS Benchmarking. The process is backed by the international community, including DFID, UNDP, World Bank, EC, ADB, CIDA. Benchmarks will provide a good indicator of the quality of public financial management and service delivery systems in a state. Benchmarking will be repeated within a year, to measure states' trajectory of reform and enable others to come on board. The four key areas for the benchmarks are: 0 Policy-ensuring that the state government develops, publishes and implements a strategy that advances its policy targets; e FiscalManagement and the BudgetProcess-ensuringresponsibleand prudent fiscal management that effectively contains the negative impacts of revenue Page 3 of 5 Annex 3 fluctuation. This will also analyzethe budget as a comprehensive, transparent and binding tool for the implementationof governmentpriorities; 0 Service Delivery -ensuringgovernmentstrategiesinplaceto improve service delivery, both interms of quality andreach; 0 Communication, Transparency and Corruption-to ascertainthat policies are planned andimplementedina transparentandaccountablemanner. States which do not have satisfactory performance in the first year can take effective action to raise performance to become eligible in later years, following subsequent rounds of benchmarking. States on the shortlist that fall-short in the benchmarking exercise and who demonstratea clear willingness to improve performancemay be eligible for technical assistance. Where groups of similar performing states emerge, up to six states will be selectedon the basis of their levels of poverty and population size, in order to maximize impact on shared growth and poverty reduction in the CPS period. Moving forward effectively with partnershipin lead states will require a history of political stability and of positive cooperation with developmentpartners, where there has beenpreviousengagement. State partnership process The partnership with states will be driven by: (i) building a long-term strategic partnership - aligned to a common agenda of achieving the MDGs - as opposed to specific project financing; (ii)responding to States in support of their own strategies; (iii) providing signficant resources transfers, relative to a state budget, that can leverage change; (iv) working towards providing budget support; and (v) supporting effective collaboration among tiers of govemment. In order to makeprogressthe partnershipmust develop andprovide graduatedsupport accordingly, andbe co-ordinatedwith other developmentpartnerswho work at state-level. Aligning support behind State-owned strategies. BasedSEEDS, states and the Bank/DFID will develop initial time-bound action plans for strengthening systems and delivering services28. In addition, DFID will undertake a political economy evaluation of likely blockages to effective SEEDS implementation that will be usedto calibrate demand-side, coalition-building initiatives in support of positive change. This will include an assessment of the relationship between the state and local governments. WBDFID will then work with government to develop implementation plans and costs, etc., identifying financing and capacity gaps. The Bank and DFID would align support behind these action plans and would provide technical assistance and policy dialogue to enablelead states to moveforward effectively. A differentiated approach to assistance. Choice of Bank andDFIDinstrumentswould be guided by the quality of policies and institutions. To reduce transaction costs, a standard menu of assistance would develop over time, i.e. off-the-shelf choices for States29. Inorder to harmonize support, the Bank and DFID will have a division of responsibilities with respect to the menu. Assistance will follow state priorities and plans. The Bank has a number of instruments that can be deployed, depending on the performance of a State. These include, a) diagnostic and 28 Action plans would bridge the gap (ifany) betweenthe strategicprioritiesof SEEDSanddetails of s ecific activities required to guide Bank and DFID support. "The menucould include: i)TA support (e.g. PEM, educationihealth systems), ii)demand side activities, iii)SWAps,iv)PRSCPRBS(seeFigure1). TheaimwouldbeforStatestograduatefromTAandsector investmentinstrumentsto SWAps to more programmatic forms of donor support over time. The volume of assistance shouldalso increasewith performanceto reinforce the incentives. Page4 of 5 Annex 3 assessment tools, and b) gradlending instruments - TA, SWAPS,PRSCs etc.. DFID has a number of instruments that are not currently provided by the Bank; including promoting demand for reform (with the possibility of more direct relations with civil society and the private sector), flexible short-term advisory support and provision of grants. Other donors, such as the UN, EC and ADB, have aid instruments that can be amenableto a similar approachto state level working. DFIDalsohas anetwork of regionaloffices that canfacilitate stateengagement. Rigorous monitoring and evuhation. States' progress against SEEDS targets and action plans will be reviewed annually, including through repeat SEEDS Benchmarking exercises. An on- going policy dialogue with states will be facilitated byjoint regional offices. It is anticipated that continued performanceby a state, based on annualassessments, will enablethem to obtain further Bank support to help deliver on their priorities, as a means to strengthen incentives. Flexibility would be built into the engagement of development partners with lead states, in order to manage potential reversals in state performanceandimplement an exit strategy. Graduation of performing States. During the end-term review of the CPS, the Bank and DFID would review: a) State progress against SEEDS targets and action plans, and b) effectiveness of support to partner States. For those States demonstrating sufficient commitment and progress, consideration would be given to graduatingthemto more flexible instruments on the menu (e.g. Poverty Reduction Support Credit (PRSC)/Poverty Reduction Budget Support (PRBS); see Figure 1). The Bank and DFID would then prepareto deliver this phase of State support, where possibleinclose collaboration with other development partners. Risks Commitment to reform at state-level has been largely dependent on the predisposition of the governor. This makes commitment to reform fragile in the light of the 2007 elections, with at least 20 new governors. Variable commitment to reform has proved a problem with both Bank and DFID support to some states. While the NEEDS and SEEDS provide a new framework, establishing fundamental principles for government performance, commitment may be ephemeral. The mid-termreview towards the end of 2007 will be critical for establishing the credibility of any particular state-level partnership. As part of the initial engagement process, DFIDwill carry out apoliticaleconomyassessmentto moreclearly helpunderstandsuchrisks. Support to lead states will have flexibility. New commitments will be on the basis of continued and strengthened performance, highlighted through annual SEEDS benchmarking reviews and other measures. The Bank will have a stronger field presence with more intensive management of relations with states, jointly utilizing DFID's existing regional office infrastructure. As part of addressing political economy constraints, work on the demand-side of good governance will include building transparency, accountability and citizen voice at state-level. This can also benefit from non-partisan support for greater focus on `issues' in the 2007 election process from DFID and others. While the political economy risk at state level remains high, progress will be made to strengthen the incentives for state governors to build a constituency around service delivery, transparency andaccountability. The federal-state relationship can be conflictive. More attention is being given to building consensusandcoordination betweenthe different tiers andthe FederalGovernment is designing a system of incentives and rewards to challenge more states to improve their performance. The fiscal responsibility legislation and the SEEDS benchmarking process are key elements in building enhanced coordination. The Government is introducing legislation to make reforms on Page5 of 5 Annex 3 coordination among tiers of government more difficult to reverse. The National Political Conferenceis a welcomedevelopmentandcan further contribute to changeinpoliticalbehaviors. Page6 of 5 Annex 4 Nigeria's Opportunity of a Generation: Meetingthe MDGs, ReducingIndebtedness3' 1. This Annex assessesthe resourcesandactionsrequiredto achieve the MDGsin Nigeria, while at the same time reducing indebtednessto a manageablelevel. Poverty is deep and pervasive inNigeria, and with about 57% of Nigeria's 130million people living inabsolutepovertyonly China andIndiahavemorepoorpeople. Nigeriamustovercome enormous challenges in order to reachthe internationally agreedMillennium Development Goals; the resourcesand actions required are daunting, but the Nigerian government i s showing determination and demonstrating results. However, excellent performance and good luck -inthe form of continued high oil prices -will not be enough to achieve the MDGS without runningup unsustainable debts. International support - inthe form of debt relief and new grants - i s necessaryto sustain the momentum of reform and achieve the MDGs. A. Poverty, Aid and PublicDebt 2. Nigeria the giant of sub-Saharan Africa, butit is also desperately poor. It has second largest economy and the most number of people; just over a fifth of the continent's total population. However, 75 millionNigerians live on less than $1 a day and Nigeriahas some of the worst social indicators inthe world; one in five children die before the age of five, there are over a million AIDS orphans and inthe poorest parts of the country one infifteen mothers die during childbirth. 3. Net transfers to Nigeria have notjust been small, they have been negative since the 1990s. In2003, net transfers per capita amounted to minus $11, well below the average (minus $1.3) and median (approximately $1) levels for LICs excludingNigeria. The difference i s even more pronouncedwhen grants are included. In2003, net transfers including grants per capita to Nigeria amountedto minus $9,compared to an average of $37 and $28 for the median LIC. 4. Meanwhile, Nigeria's external publicdebt -at 50 percent of GDPat end-2004 - is well inexcessof the 30 percent threshold in the Bank-FundDebt Sustainability Framework (DSF) for low-income countries (LICs). Addingdomestic debt inthe form of treasury bills and bonds, and domestic arrearsto contractors and on wages and pensions, pushestotal public debt to over 80 percent of GDP at end-2004. B. Policy Performance and Challenges 5. Recent performance has been commendable. The National Economic Empowerment andDevelopment Strategy (NEEDS) was launched inMay 2004. This is a comprehensive, entirely homegrown, economic reform and poverty reduction strategy. 30This Annex is a summaryof a report under the same title producedby a teamledby BrianPinto (PRh4ED). Page 1of 8 Annex 4 It is underpinned by State level strategies(SEEDS). It is strong on analysis, ownership, stakeholder consultation andplans for monitoring and implementation. 6. Governance has improved. Macroeconomic stability has been restored. This has been largely due to prudent fiscal policy, the implementation of an oil price basedfiscal rule and considerable savings in2004 ($5.9bn). As a result, inflationary pressures subsided and inflation fell tojust under 10% at end-2004. Improvedbudget and procedures-including an MTEFand procurement reforms - have been introducedto improve the efficiency of expenditure. Moreover, the Obasanjo administration i s taking courageous and decisive action against corruption; includingsome very highprofile prosecutions. Nigeria i s negotiating with the Swiss government to have illicitly acquired state funds ($500m) returned. Nigeriai s also providing global leadership inthe ExtractiveIndustryTransparency Initiative (EITI). 7. Conditions are also improving for growth and poverty reduction. There hasbeen a large increaseininvestment ininfrastructure -notably power and roads. The restructuring and privatization of key utilities (power, telecommunications and ports) i s accelerating. Nigeriai s committed to the ECOWAS common external tariff. 8. There is an opportunity of a generation for Nigeria to convert its "oil curse" into a blessing. The Obasanjoadministration is showing determination to implement economic reforms and the oil windfall provides an opportunity for increasing spending on the MDGs. Making visible progresstowards MDGsinthe most populous country of Sub-SaharanAfrica i s of significance for the whole region. The resources and actions are daunting, and will require careful balancing with a goal of reducing indebtedness. The key challenges facing Nigeria are to: (i) make more efficient use of economic resources and assets, (ii) rejuvenate and sustaingrowth of the non-oil economy, and (iii) seek increasedinternational assistanceinthe form of debt relief and new grants. C. The BaselineScenario 9. The baseline scenario underlyingthe debt sustainability analysis projects growth to pick up to 7-8 percent in2005-2006 and then stay at 5 percent after 2007 reflecting strong non-oil sector growth31. As described above, the baseline scenario is predicated on the implementation of prudent macroeconomic policies, andreforms to ensure efficient use of economic resources and rejuvenate the non-oil economy. Other key assumptions are: (i) pricespeakat$46.5perbblin2005,andthendeclineto$34perbblin2015,(ii) oil real exchange rate appreciates sharply in2005 and then maintains a small depreciation trend, (iii) over the mediumterm, fiscal policy i s consistent with a non-oil primary deficit of 40 percent of non-oil GDP, and (iv) the authorities keep external debt service payments at their current level, implying an annual addition to external arrears of $1-1.5 billion at a penalty interest rate. 31 The Baselinescenarioresults were obtained using thejoint Bank-Fund Low Income Country (LIC) Debt Sustainability Framework (DSF) template with a time horizonof 2025. Page2 of 8 Annex 4 10.The Baselinescenarioimplies a gradual reductioninbothtotal public debt and external debt. The NPV of external debt falls from 38 percent of GDP in 2005 to 28 percent in 2010 andthen to 8 percentby 2025. Similarly, the NPV of public debt falls from 51percent of GDP in2005 to 39 percent by 2010 and 11percent by 2025. 11.However, thisfinding ishighly sensitiveto oilprices,with oil accounting for 80 percent of consolidated government revenuesand 90 percent of exports. Any oil price decline greater than $4 per barrel -just half standarddeviation - would derail debt sustainability. D. The MDGScenario 12. Achieving the MDGsby 2015 is a costly task for Nigeria; estimates of MDG- related expenditures are summarized inFigure 1below. The Baseline corresponds to levels of normal spendinginline with progress towards the MDGs. The incremental costs are those that needto be incurred over and above the Baseline inorder to fully meet the h4DGsset by 201532.The average total cost i s $12.5bn per year; about $80 per person. Figure 1:Estimated Cost of MDGs,2005-2015 25 20 -.-E c 15 0 +Incremental * 10 Baseline 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 13. Under the h4DGScenario real non-oil GDP growth will need to average 7-8 percent per year - about 2-3 percent higher than inthe Baseline - while oil GDP growth i s the same as inthe Baseline. Investment, bothpublic and private, will need to rise substantially to deliver such growth. It i s assumedthat the real exchange rate appreciates at a much faster rate than inthe Baseline, reflectingthe much higher spending on MDGs. The expectation is that this will increaseproductivity inthe MDGScenario, allowing the 32The estimates provided below should be looked uponas rough numbers neededfor further analysis of macroeconomic implications of meeting MDGs andreducing indebtedness. Page 3 of 8 Annex 4 non-oil sector to maintaininternational competitiveness. Together with faster growth this will erode the external debt-to-GDP ratio with the passage of time. The highlights of the results are as follows: Compared to the Baseline, the primarynon-oil deficit i s higher 3-4 percentage points of GDP on average as aresult of the incremental outlays requiredfor fully meeting the MDGs,but oil revenuesare substantially lower as a share of GDP especially inthe outer years becauseof faster growth andreal appreciation. The debt-to-GDP ratio falls by 13 percentagepoints of GDPin2005 as aresult of automatic debt dynamics. The surplusleft over after oil revenues are usedto finance the non-oil primarydeficit i s addedto the savings cushion (9.9percentage points) and to "top up" the savings inherited from the previous year. Public debt falls below the 60 percent of GDP threshold in 2005 itself and thereafter falls rapidly until2007. In2008, it reverses course andreturns to the 60 percent threshold by 201233. 0 Cumulative fiscal savings (thecushion) rise to the target of 20 percent of GDP in 2006 and stay at that level with the helpof a small amount of topping up. An external financing gap appears immediately as savingsfail to accommodate higher privateconsumption and reservesare built up. On the public finances side, from 2008 onwards, the non-oil primary deficit exceeds oil revenues. Public debt- to-GDP ratio starts risingthe next year to finance the deficit untilit reachesthe threshold of 60 percent by 2012, the first year in which a significant fiscal gap appears34. The fiscal gap grows rapidly until 2015. Its net present value i s $50 billion at a discount rate of 5 percent, the rate usedinthe Bank-FundDSF, far in excess of Nigeria's external public debt of $36 billion at end-2004. ~~~ ~ 33 The 60 percentpublic debtthreshold is basedupon the 30 percent external public debt threshold inthe Bank-FundDebt SustainabilityFramework (DSF) for low-income countries (LICs). It is assumed that Nigeria can sustaina level of domestic public debt of 30%. 34 A fiscal gap would emergemuch earlier if a lower public debt to GDP threshold closer to what would be more acceptablein lower incomecountries was usedfor the analysis. Page 4 of 8 Annex 4 Figure 2: Debt, Savings and Fiscal Gap (9% of GDP) MDGsCase - 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 mmDomestic Debt Extemal Debt -A- Cumulatiw Fiscal Savings +Fiscal Gap (right scale) 14. The projections exacerbate under the assumptionof an oil price shock. Even under the average difference of $6 pb, which is a little less than the one standard deviation of $8 pb identifiedunderthe Baseline, the following observations indicate a rapiddeterioration in fiscal and debt outcomescompared to the highoil price scenario: 0 While the debt-to-GDP ratio falls rapidly to below 60 percent in 2005 and 2006, it rises thereafter andreaches the bindingindicative ceiling of 60 percent by 2008. 0 The non-oilprimary deficit exceeds oil revenues by 2007. There i s not enough leeway for cumulative savings to reach the 20 percent of GDP target; these level off at 16 percent instead. 0 A fiscal gap appears as early as 2008, four years earlier than with highoil prices. It grows rapidly andhas anet presentvalue of close to $90 billion, morethan twice the amount of external debt at end-2004. E. Resources and Actions to achieve the MDGs 15. The analysis shows that excellentperformance and good luck inthe form of continued highoil prices -will - not be enough to achieve the MDGS without running upunsustainabledebts. Further, any negative oil price shock couldquickly trigger a debt and macroeconomic crisis that could setback reforms -as shown by the rise inthe net present value of the fiscal gap from $50billion to $90 billion - when oil prices fall even by a relativelymodest amount. 0 Nigeria should continue with the break established in the 2004 Budget between government spending andcurrent oil revenueswhile monitoringthe non-oil primary deficit, and buildingup a fiscal savings cushion against oil price shocks. With oil prices expectedto be so highabove trend for the next few years, the Page 5 of 8 Annex 4 Government's approach of devoting a portion of the oil price windfall to the MDGs makes sense. 0 The government should continue to put inplace systems and measures to ensure that these resourcesas well as any additional resourcesmade available by the donor community are usedwell. Ithas taken several steps to bringgreater transparency into public expenditure andfinancial management. 0 Nigeria also needs to do more to rejuvenatethe non-oil economy, including continuingto scale up investment inroads, power, ports and water (especially in rural areas), accelerating the privatization program (especially for utilities), sustainingthe financial sector reforms, andimplementing the ECOWAScommon external tariff and removingother barriers to investment and trade. 0 Additional external funding and donor support will be neededif Nigeria i s to reduce bothpoverty and indebtedness. Finding affordable funding sources, includingthrough a higher grant financing andpossible debt reduction, for financing the MDGs and relatedinfrastructure inpower, transport and water and sanitation, will give Nigeriaa chance to truly grow out of its debt problemover the longrun. 0 16. The present combination of a reformist government andhighoil prices representsthe opportunity of a generation for Nigeria to embed systemic reforms and instillgreatertransparencyandaccountability throughout government. The international community should seize this opportunity to send a clear signal to Nigeria that it supports the reformprogram. Page 6 of 8 Annex 4 Table 1FiscalandPublicDebt Outcomes-MDGsCase (% of GDP, unlessindicatedotherwise) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1.Public Sector Debt 72.0 58.7 51.2 48.0 48.1 50.7 52.9 57.6 60.0 60.0 60.0 60.0 Domestic Debt 22.1 19.2 14.7 13.5 16.3 20.9 25.4 30.0 30.0 30.0 30.0 30.0 ExtemalDebt 49.9 39.5 36.5 34.5 31.8 29.7 27.5 27.6 30.0 30.0 30.0 30.0 2. Auto Debt Dynamics -13.3 -2.5 -1.9 -2.9 -2.2 -2.7 -2.3 -2.9 -2.0 -2.6 -1.9 Contributionfromreal GDP growth -4.7 -4.9 -3.1 -3.6 -2.9 -3.7 -3.1 -4.0 -3.4 -3.9 -3.4 Contributionfrom real interestrate -0.8 2.5 1.6 1.1 1.2 1.7 1.8 2.0 2.3 2.2 2.4 Contributionfrom real exchangerate -7.9 -0.1 -0.4 -0.4 -0.5 -0.7 -1.0 -0.9 -0.9 -0.9 -0.9 3. Oil Revenue 33.9 32.6 27.8 25.9 23.2 22.2 19.6 18.0 16.0 14.6 12.8 4. Non-Oil PrimaryDeficit 22.5 24.5 25.3 27.5 26.8 25.8 25.5 25.7 25.3 25.7 25.9 Non-OilPrimary Expenditure 31.3 34.0 35.4 36.1 36.8 37.0 36.7 37.1 36.9 37.4 37.6 Non-Oil Revenue 8.9 9.5 10.1 8.7 10.0 11.2 11.3 11.4 11.6 11.7 11.7 5. FiscalSavings 9.9 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cumulative 8.1 18.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Toppingup 1.5 1.3 1.1 1.4 1.1 1.3 1.2 1.4 1.1 1.2 1.0 6. FiscalGap % of GDP 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.7 8.5 9.8 12.1 $ Billion 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.3 18.2 23.4 32.2 A0 0 Page 7 of 8 Annex 4 Table2 MDGs CaseWith Oil PriceShock - (% of GDP, unless indicatedotherwise) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1.Public Sector Debt 72.0 58.7 56.4 58.3 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 DomesticDebt 22.1 19.2 19.7 23.7 27.8 29.6 30.0 30.0 30.0 30.0 30.0 30.0 ExtemalDebt 49 .9 39.5 36.7 34.6 32.2 30.4 30.0 30.0 30.0 30.0 30.0 30.0 2. Auto DebtDynamics -13.3 -2.3 -1.9 -2.9 -2.1 -2.9 -2.4 -3.0 -2.0 -2.6 -1.9 Contribution from real GDP growth -4.7 -4.9 -3.5 -4.4 -3.6 -4.4 -3.5 -4.2 -3.4 -3.9 -3.4 Contribution fromreal interestrate -0.8 2.7 2.0 1.8 1.9 2.1 2.1 2.1 2.2 2.2 2.4 Contribution from real exchangerate -7.9 -0.1 -0.4 -0.3 -0.5 -0.6 -0.9 -0.9 -0.9 -0.9 -0.9 3. Oil Revenue 30.7 26.9 22.4 20.8 18.4 17.2 15.9 15.2 14.1 13.4 12.4 4. Non-Oil PrimaryDeficit 22.5 24.5 25.3 27.5 26.8 25.8 25.5 25.7 25.3 25.7 25.9 Non-OilPrimaryExpenditure 31.3 34.0 35.4 36.1 36.8 37.0 36.7 37.1 36.9 37.4 37.6 Non-OilRevenue 8.9 9.5 10.1 8.7 10.0 11.2 11.3 11.4 11.6 11.7 11.7 5. FiscalSavings 6.7 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cumulative 8.1 14.9 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2 Toppingup 1.5 1.1 0.9 1.1 0.9 1.1 1.0 1.1 0.9 1.0 0.8 6. FiscalGap % of GDP 0.0 0.0 0.0 3.1 7.2 6.8 8.2 8.6 10.1 10.7 12.4 $ Billion 0.0 0.0 0.0 4.0 10.1 10.7 14.3 16.8 21.8 25.7 33.0 Page 8 of 8 Annex 5 Analytical, Advisoryand CapacityBuildingActivities by Outcomes I r-------r--------- 1 Core Diagnostic ~0r"alEswo j 1 _____ n i t o r i n g *Health Country Status j' 1 HealthlEducation Poverty 1Report(+DFID input) 1(FY06) 1 ReformTA (FY07-08) I ImprovedService AssessmenflSIA (+DFID j Report PovertyMonitoring TA Delivery for Human , input) (FY06) (secondary & (FY07-08) Development tertiary)(FY06) Implementing"IFC I ! AssessmenflSIA (FY09) *Poverty j 1 Against AIDS" programs ~ ,j I oHDCSR(FY08) (IFC) (FY06-08) ~ i*state HD Platforms !(FY06-09) . 11 EITI (DFID) (FY06) i EITIMgmtJOil andGas Sector Policy (FY06-08) j i Issues-baseddebate on pro-poorgrowth (DFID) Businessenvironment I (FY06-09) assessment (recurrent FinancialSector Policy survey, FY06-09) j/ Dialogue(+DFID) (FY07) Sub-nationalbusiness i Trade Policy Analysis & environmentsurvey Dialogue(+DFID input) ' (DFID) (FY06-09) (FY08-FY09) Trade Policy Analysis & variousPSP/privatization Advisory serviceson CEM (focusingon Dialogue(+DFID input) ' sources of growth, trade (FY07) projects(IFC) (FY06-08) ImprovedEnvironment etc.)(+DFID input) (FY06) National Infrastructure I TA on revitalizationof andServicesfor Non-Oil FSAPUpdatelBanking StrategylTransport, the Nigeriancapital Sector Reform(+DFID including RuralWater 11market (IFC) (FY06-08) input) (FY06) (+DFID input, +UNICEF) Debt Management (FY07) (DFID) (FY06-09) Laborrelationsanalysis Supporting (DFID) (FY06) NEEDSlSEEDS LaborMarket 1 Implementation(WBI) Studylupdate(FY07) i (FY06-09) State Growth Platforms 1 Information, (FY06-09) 1 Govemance,and the j Media(WBI) (FY06-09) j 0 TA on IFC investment 1 projects(IFC) (FY06-08) Privatesector support i 1 within IFC Africa Ir. ...... . . . ._ . . . ~Strategy (IFC) (FY06-08) ~ I 1 Govemance and Govemanceand corruptionrisk assessment : corruptionrisk assessment (recurrent, +DFIDinput) PEMFA (including fiscal (+DFIDinput) (FY06) (FY07-09) EnhancedTransparency decentralization)(+DFID Niger Delta Strategy 1 Debt Management andAccountability for 11 input) (FY06) (DFID) (FY06) j (DFID) (FY06-09) Understandingcivil Communication I BetterGovemance j CPARJCFAA(FY09) society from afaith jjAdvicelDialogue(FY06- perspective (DFID) j09) (FY06) j Coalitionbuilding and 1 1public debate onkey issues (DFID) (FY06-09) Page 1of 2 Annex 5 1 __.I- .I"(_..- . .. Outcomes i Core Diagnostic i FormaVLnformalESW .I_--. Fi/Monitoring _l_-" I " _l---l -- Support on elections (DFID)(FY06-09) Supportto census (DFID) (FY09) G8 Transparency Initiative (DFID)(FY06- 07) Strengthening Parliament(DFID) (FY06-09) Support to National Assembly (WBI)(FY06- 09) Information, Govemance, andthe Media (WBI)(FY06-09) TA on corporate governance (IFC)(FY06- 08) Supporting NEEDSlSEEDS Implementation(WBI) (FY06-09) Note: All three packages assumeCDD Evaluation for Non-Core States. There will be a Core State Analytical and Advisory Facility to support the World Bank/DFID interventions inselected states. Page 2 of 2 Annex 6 NIGERIA COUNTRYFINANCINGPARAMETERS Item Parameter RemarkdExplanation Cost Sharing upto 100% 100% or high share of Bank financing is expectedto Limit on the proportion of be applied-selectively in individual projects on a individual project costs that case-by-case basis. Bank financing share would be the Bank may finance moderateinkey economic infrastructure sectors e.g. power, roads and transport and especially inprojects involving commercial parastatals. Projects in all other sectors could be financed up to 100% dependingon clear assessmentof merit. Recurrent Cost Financing No country-level Recurrent cost financing will be used selectively in Any limits that would apply limit. order not to compromise risks to fiscal to the overall amount of sustainability, especially at the level of states. The recurrentexpendituresthat Bank will continue to monitor the fiscal and debt the Bank may finance situation in states, and its implications for recurrent cost financing. In line with the proposed country partnership strategy (CPS), the Bank will channel the bulk of its assistance to a few core states that meet certain criteria includingdemonstratedprudent fiscal and budget management, including attention to fiscaVdebt sustainability; and limit interventions in other states. This approach provides additional safeguards against any risks to fiscal sustainability at the state level from implementation of this new policy. In individual projects, recurrent cos1 financing will be applied on a careful case-by-case assessment of merit taking into account sector and project sustainability issues. Local Cost Financing Yes Nigeria meets requirements for local cost financing Are the requirementsfor The Bank can finance local costs in any proportions Bank financing of local required by individual projects. expendituresmet, namely that: (i)financing requirementsfor the country's development programwould exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domesticborrowing; and (ii) the financing of foreign expendituresalone would not enablethe Bank to assist in the financing of individual projects Taxesand Duties State sales tax for The Bank may finance the costs of taxes and duties Are there any taxes and Lagos State associated with project expenditures, other than the duties that the Bank would state sales tax for Lagos state, since these have been not finance? judged to be reasonable and non-discriminatory. At the project-level, the Bank would consider whether taxes and duties constitute an excessively high share of project costs. Page 1of 1 Annex 7 NIGERIA Donor Activities and Aid Effectiveness - 1.CPSAidEffectivenessandPartnership ResultsMatrix 2. UNDPResponseto CPS 3. Donor Activities Matrix Page 1of 11 c t a 3 8 P B L 2 Annex 7 2. UNDPResponseto Joint WBDFID Country PartnershipStrategy The Joint WBDFID Country Partnership Strategy (CPS) provides a common platform for assistance to the Government of Nigeria's development and reform efforts because it i s strategically linked to three key NEED priorities: (i)Empowering people; (ii) Promoting private enterprise; and (iii) Changing the way government works. In the same way UNDP's country programme has been formulated to support NEEDS in four thematic areas including Governance and Human Rights, Poverty Reduction, Energy and the Environment, and HIV and AIDS. Thus there i s considerable scope for partnershipthat is explored inthis note. Analytical work in the areas of Human Development, Non-oil Growth and Governance. The CPS includes significant analysis in support of the three NEEDS pillars in partnership with Nigerian institutions and other developmentpartners(poverty assessment, Healthcountry status report, Education Report, State Specific Analytical Work, Labor Market, Financial sector analysis, Sourceof growth etc). UNDPhas producedseveral useful analytical tools that can be useful in enriching these studies (Private Sector Development, MillenniumProject, various Global andNational HumanDevelopmentReports); Increased resource flows: The strategy is based on an increased IDA envelope and DFID grant assistance. Previous portfolio reviews have identified significant capacity constraints especially at the state level. UNDPthrough its pastandongoing activities has gainedextensive experience in capacity development at decentralized levels. This provides a golden opportunity for partnershipin improving strategic planning, transparency and accountability at federal and state levels andbetter implementationof projects andprograms; Alignment with NEEDS and SEEDS and MDGs: Aimed at embedding the gains of key reforms made by government, this strong country-led framework i s useful for harmonization of donor assistance to Nigeria. In addition there is a newly invigorated focus on MDGs in Nigeria and the opportunity to build a global partnership for growth and poverty reduction. UNDP has an important role as the coordinator of the MDGs in the UN System, which provides a platform for strong collaboration in advocacy and the implementation of projects and programstargetedat the achievementof the MDGs. Increased aid to performing states: Inrespondingto country-led transformation at the state level based on a multi-donor scaling up of aid to performing (lead) states, WB and DFID are laying the groundwork for pilot interventions that can be replicated. A concentration of resources in performing states demands a high degree of coherence for enhanced impact. UNDP is willing to work together with the WB andDFIDin states where it is presentand will extendtechnical support to non-performing to improve performance; Increased partnership with multilaterals: UNDP fully supports the CPS focus on joint working with multilaterals and increasedcoherence with other development partners. As the focus shifts to fewer, bigger programs and further increase financing through multilaterals, UNDP will seek to provide opportunities for partnership in support of human development through the implementation of its innovative poverty reducing interventions as well as implementing World Bank fundedprojects; Increased focus on support to non-oil growth by fostering private sector development. Private sector development i s one of UNDP's core poverty alleviation strategies. Existing interventions for informal sector development andproposedUNDP/UNIDO partnership could be exploredfor joint programming. Page 3 of 11 Annex 7 (vii) Capacity development through a series of NEEDS Implementation workshops: Topics include costing and implementation in a federal system; federal-state relationship for implementation and coordination; expenditure tracking and citizens report cards; developing and institutinga national M&E system; MTEF. UNDP can contribute constructively to the design and enhanced participationby CSOs in workshops; (viii) Strengthening donor coordination mechanisms: UNDP is committed to working with the Bank and DFlD to strengthen the existing donor coordination mechanisms and to promote a more strategic approach. (ix) Strengthening the monitoring of NEEDS and SEEDS: Support to Nigeria's high-level MDGassessment and monitoring initiative and the enhancementof Nigeria's monitoring and evaluation capacity through improved data collection and reporting which is envisagedin the CPS i s a fruitfularea for partnership. UNDPis already involved incapacity strengtheningand building of in-country monitoring and evaluation capacity. Thus the opportunity exists for greater collaboration to ensureconsistency and sustainability of MDGbased monitoring. Table 1outlines some opportunities for partnershipincluding: (i) Strengthening service delivery in health, HIV/AIDS through the advocacy and capacity- buildingwork inthe LeadershipDevelopmentProgramme; (ii) Collaborating in improving environment and strengthening services for non-oil growth including provision of power generation infrastructure through mini/micro hydro generation; and (iii) Enhancedtransparency and accountability for better governanceespecially inreforming legal, tax and regulatory frameworks, anti-corruption efforts, elections, establishment of a poverty monitoring andtracking systemandpoverty assessments. Page4 of 11 e e . e . 0 6. Annex 7 s. uonor ACIitiesMatrix Classifiedby N - )utcome Donor NEEDS Pillar I. E E D SPillar III. CPS CPSOutcomeI: CPS OutcomeD[: lutcome m: ImprovedServiceDelivery for Human ImprovedEnvironment Cnhanced Development and Servicesfor Non-oil rransparencyand Growth Lccountabilityfor Setter Governance Qfrican Health: jovemance: Development HealthSystems Development(Health 1Institutional Support Bank(AfDB) IV) 'roject for Govemance, CommunityDevelopment: :apacity Building and CommunityBasedPovertyReduction 'overty Reduction (co-financedwith the World Bank) Water andSanitation: lbadanEmergencyWater Supply Multi-StateWater Supply SociallEnvironment: NigerDeltaSocialandEnvironment Study Canadian Health: *PrOpComSpecial SEEDSFund [nternational Polio EradicationPhase I11 Activities Fund(SAF) Development School of HealthTechnology and Agriculture: Agency ( C I W PrimaryHealthCare *African Stockpiles Tentative andPlannedHealthInitiatives Program for 2005: *Agriculture Policy RoutineImmunizationInitiative SupportFacility Safe MotherhoodInitiative NationalPrimary HealthCare Personnel Audit StrengtheningPrimaryHealthCare HIVIAIDS: Support to UNICEF HIV-AIDS NigeriaAIDS ResponsiveFund (NARF) Environment: CrossRiver EnvironmentProject (CREP) StrengtheningParliamentary Capacity inEnvironment Canada-NigeriaEnvironmentProgram (CNEP) Department for Health: Economic Infrastructure: Public Sector Reform: InternatiOnal Partnershipfor TransformingHealth *Ekiti Rural Access Public Sector Reform Development Services (PATHS) Programme Govemance: (DFm(VK) HealthCommodities *Joint Wetlands Supportto the HERFON(former HealthChange Livelihoods Programme Legislature Agents Programme) (JWL) State andhcal EnablingBusiness Govemment Programme PlannedHealthInitiatives for 2005, 2006: Environment: (SLGP) HealthMDG's UNSupport (2005) .Policy and Knowledge ServiceDelivery: Malaria (2005) Facility ServiceDelivery SEEDS: HealthComponent(2006) *Pro-poor Financial Initiative HIVIAIDS: Services StatePerformance PromotingSexual andReproductive Privatization: Programme (planned) Healthfor HIVIAIDS Reduction *Privatization Macroeconomic (PSRHH) Agriculture, Management: Strengthening Nigeria's Response to Manufacturing, Economic HIVIAIDS Industry: Management and HIV/BBC World Services Trust *Promoting Pro-poor Capacity Building Page 8 of 11 c Annex 7 NEEDS wlar I. WEDSPillarIL NEEDSPillar m.CPS CPS Outcome I: 3 s Outcome 11: OutcomeIIk ImprovedServiceDeliveryfor Human hprovedEnvironment Enhanced Development mdServicesfor Non-oil Transparencyand 3rowth Accountab Better Governance PlannedHIVlAIDS Initiatives2005: Opportunitiesfrom Debt Management HIV HealthSectorMulti Sector CommodityandService Transparency: Response Markets Extractive Industries Education: PlannedAgriculture, Transparency Initiative UniversalBasic Education(UBE) Manufacturing,Industry 'rogramme Programmefor the Advancement of Initiative for 2005: Security&Justice: Girls' Education ,Shared Growth 1 Security, Justice & Water andSanitation: Programme 3rowth (SLG) Water andSanitationProgramme statistics: (WATSAN) 1 Supportto2005 JigawaUrbanWater Supply and :ensus Sanitation Zlections: Rights,Participation,Democracy, Peace Supportto Elections andConflict Prevention: 1007 Security, Justice & Growth(SLG) Voices Support to the 2007 Elections Driversof Change Conflict Prevention Joint Wetlands LivelihoodsProgramme (JWL) Plannedin2005: DemandingChange Embassyof Health: JapanIJapan EnvironmentalSanitationandMalaria Control MalariaControl with anEmphasison Agency (JICA) InsecticideTreatedBednets(ITNs) and HouseholdManagementof Malariaby Mothers InfectiousDisease Preventionfor Children EnhancingCapacityfor the Prevention andTreatmentof Obstetric Fistula Women's Initiative for Sex Education andEconomicEmpowerment HIVIAIDS: EnhancingHumanSecuritythrough Gender Equality inthe Contextof HIVlAIDS Education: Constructionof Additional Classrooms of PrimarySchool (alsoplannedin2005 and2006) NigeriaEducationSector Analysis European Health: Governance: Commisslon PRIME-Partnershipto Reinforce SPSA Supportto (EC) ImmunizationEfficiency (Routine ParliamentandState ImmunizationComponent) Assemblies Micro-projects: Public Financial MPP3 Micro-projectsprogrammein Management, three states: Rivers, Bayelsa, Delta Macroeconomic MPP6Micro-projectsprogramme insix Management: states: Edo, Imo, Akwa-Ibom, Ondo, BMPBudget Page9 of 11 Annex 7 NEEDSPillarII. EDSpillarIII. CPS Outcome I: CPS OutcomeIk come m. CPS ImprovedServiceDeliveryfor Human ImprovedEnvironment Enhanced Development andServicesfor Non-oil Transparency an Growth Accountabilityfor BetterGovernance CrossRiver, Abia Monitoring Projectwith Water andSanitation: Coalition of NGOs Water SupplyandSanitation State EnhancingCivil ReformProgramme(WSSSRP) Society's RoleinPublic Small Towns Water Supply and Budgets SanitationProgramme(STWSSP) UnitedNations HIVIAIDS: *Poverty Eradication Development Responseto Fight HIV/AIDS Programme Programme Rights,Participation,Democracy, Peace Energy: (UNDP) andConflict Prevention: *Energy and -see also UNDP DemocraticGovemance Environment Responseto Programme CPS UnitedNations Health: Children'sFund Matemal, Infant & U5 Mortality (UNICEF) Reduction ImmunizationPlus Early ChildNutrition andCare HIVIAIDS: HIVIAIDS PreventionandCare Education: Learning/Girls Education PlanningandCommunication Programme: CommunicationandAlliance Building Community DevelopmentProgramme: AFO BFO CFO DFO Water andSanitation/Environment: Water andEnvironmentalSanitation Rights,Participation, Democracy,Peace andConflict Prevention: Rights,LegislationandProtection Services Adolescent Health, Participationand GenderEmpowerment EmergencyPreparednessandResponse UnitedStates II SO 13: Increased Use of SocialSector *S012: Improved Govemance: Agency for Services Livelihoods inSelected SO11: Strengthened International HIVIAIDS: Areas Foundationsfor Development SO 14: ReducedImpactof HIVIAIDS Democratic Govemance (USAW inSelectedStates WorldBank I1Health: Energy: Govemance: Group(WBG) SecondHealthSystems Development *Transmission Economic Reform Polio Eradication Development andGovemance Polio EradicationSupplemental *IFC off gridelectricity Information, HIVIAIDS: projects Govemanceandthe HIVIAIDS ProgrammeDevelopment PlannedEnergy Initiative Media(WBI) Education: in2007: SupportingNEEDS UniversalBasicEducation *National Energy Implementation(WBI) PlannedEducationInitiative in2007: EconomicInfrastructure: PlannedGovemance Post Basic Education& Knowledge *Lagos UrbanTransport Initiative in2005: Page 10of 11 Annex 7 Donor NEEDS Pillar L WEDS PillarIL WEDSPillarIaCPS CPS OutcomeI: EPS Outcome Ik ImprovedServiceDelivery for Human hprovedEnvironment Development mdServicesfor Non-oil Fransparencyand Srowth Accountability for BetterGovernance Economy ?lannedEconomic State Govemanceand CommunityDevelopment: Infrastructure Initiative Capacity Building CommunityBasedPoverty Reduction in2006: SupportingSEEDS CommunityBasedUrbanDevelopment ,Lagos Metropolitan [mplementation(WBI) Project Development(2006) Macroeconomic Local Empowermentand ,Federal Roads(2006) Management: EnvironmentalManagement Mining: Economic PlannedCommunityDevelopment ,Sustainable Managementand Initiative in2006: Managementof Mineral CapacityBuilding CDD Social Resources Water andSanitation: EnablingBusiness NationalUrbanWater SectorReform Environment: PlannedWater andSanitationInitiative in ,MSME 2006: BIFCSupport for Private SecondNationalUrbanWater Sector SectorParticipation mIFC financing andTA inmanufacturingand services Telecoms: DIFCFinancingSupport to Mobile Telecoms *IFC Advisory Services to the Privatizationof NITEL Privatization: .Privatization Project .Advisory serviceson PSP PlannedIFC PrivatizationInitiative inFY06-08: .Advisory Serviceson PSPPrivatization projects Agriculture: .FADAMA I1 PlannedAgriculture Initiative in2007: *CDD Productive (FADAMA) PlannedTrade Initiative in2006: Customs andPort Modemization Page 11of 11 Annex 8 Nigeria: Country Partnership Strategy (CPS) -Participation and Consultationwith December 2004 -April 2005 Stakeholders (Summary) 1. The Country Partnership Strategy (CPS) presents the joint World Bank Group and DFID36 support over the coming four years to Nigeria's development agenda - the NEEDS and SEEDS37 and Nigeria's progress towards achievement of the Millennium Development Goals (MDGs) inNigeria. This note describesthe participatory and process followed during the preparation of the strategy. It also summarizes the feedback received through the stake- holder consultations, which provided invaluable insightsandhelpedstrengthenthe strategy. 2. Partnership with Government. At the outset of strategy discussions, a CPS Core Team was formed, which included members of the World Bank and DFID teams and government officials from the key government agencies. The Core Team worked between September 2004 and April 2005, holding two team retreatsto develop the concept of the strategy, agree on principles and approaches and through regular (bi-weekly) video conferences where the details around expected outcomes and the program of support were elaborated. Nigeria's home-grown poverty reduction strategy-the NEEDSand SEEDS-was the starting point for deliberations on the strategy anda referencepoint throughthe preparation. 3. Stakeholder consultcrtions. A two round consultation with broader Federal and State during December 2004 - April 2005. This built on earlier strategy consultations undertaken Government, the Legislature, civil society, academia, the private sector, and media took place by DFIDon its Country AssistancePlanfrom May - August 2004. 4. In the period December 2004-February 2005, the CPS team held a first round of consultations. Meetings were held with stakeholders in Abuja and Lagos. State level consultationswere hostedby 4 states Imo, Bauchi, Kebbiand Ogun, where stakeholdersfrom all 36 neighboring states were invited. Thus, the consultation processinvolved more than 500 people from more than 12 states. The participants included representatives from key ministries and agencies of the Federal Government, the National Assembly, six State Governors, two Deputy Governors, the Speaker of the House of Assembly, Commissioners, senior government officials, academia and more than 300 representatives of civil society organizations at the federal, state and local levels. Discussions were very productive, thoughtful and creative; contributions were made on the overall CSP content, the preparation process as well as specific areas of focus. In addition, there was strong interest among participants in further contributing to CPS preparation, as well as in its implementation, and monitoring andevaluation. 5. The discussions were organized around the key CPS focus areas which were based on the NEEDS three pillars: (i) improved service delivery for human development; (ii) improved environment and services for non-oil growth; and (iii)enhanced transparency and accountability for better governance. Participantswere askedto provide overall comments on the proposed strategy framework, approach and to discuss particular issues, such as priority 36 InNigeriathe World Bank Group comprises the InternationalDevelopment Association (IDA),the International FinanceCorporation (IFC), the Multilateral Investment GuaranteeAgency (MIGA) and the World Bank Institute (WBI). DFIDis the UK Government's Department for InternationalDevelopment. 37 NEEDSis the National EconomicEmpowerment andDevelopment Strategy launched inMay 2004, and SEEDS is the state equivalent. Together they comprise Nigeria's development agenda. Page 1of 10 Annex 8 issues to be addressed, selectivity (focusing on a few states and thematic areas of intervention), and state selection approaches. Participants were also asked to discuss how to buildcoalitions and partnerships to achieveresults. 6. The first roundof consultations gave the CPS strong support with five mainpoints emerging: confirmation and elaboration on the fundamental constraints facing Nigeria, on mismanagement of public resources, lack of accountability and transparency and poor non-oil growth; affirmation that the CPS team i s on the right track in selecting priority issues and areas for interventionbasedonthe NEEDS, though minor adjustments could be made; focusing on a few states and responding to their own plans and priorities to strengthen impact i s appropriate. State performance and capacity shouldbe used as criteria for the selection of states, with clear indicators, but geographical balance should also be considered; availability and quality of information (federal and state levels) deserves special attention; and, strong civil society engagementinthe CPS preparation, implementation, monitoring and evaluation i s important for success. 7. Specific feedback on imuroved service deliverv for human develoument included: the human development agenda with its "focus on children", and HIV and AIDS should be strengthened to include attention to youth issues, maternal mortality and malaria, basic and tertiary education. Poverty, education and health matters can successfully be dealt with if addressed inamulti-sectoral manner (e.g. waste disposal inthe case of health). 8. Specific feedback on imuroved environment and services for non-oil growth included: focusing on non-oil growth i s critical for wealth creation and increased employment. Agriculture and SMEs deserve particular attention; the major impediments to non-oil growth are poor infrastructure (mainly roads & power) and limited access to financial services. Organized private sector could demand government make changes in business environment, minimization of discretionary powers etc. 9. Specific feedback on enhanced transuarencv and accountability for better govemance included: good governance i s based on transparency and accountability, which could be achieved through improved budget preparation and implementation, transparent procurement and civil society engagement in monitoring and evaluation of public sector performance. Strengthening local communities i s crucial for creating demand for better governance and accountability at the grassroots level. There i s also an urgent need for legal and judicial reform which i s among the key obstacles to Nigeria's development. 10. A second round of discussions with stakeholders in Nigeria took place at the end of March 2005 (and early April with Nigeria's Economic Management Team) when a draft document and feedback from the first round of consultations was circulated. The discussions confirmed strong support for the key principles and approaches of the joint WB/DFID Strategy, namely, selectivity, targeting for results and alignment with NEEDS/SEEDS. Participants made valuable suggestions on the criteria and process for selection of states, result-based framework, the program of interventions, potential risks, M&E arrangements and the role of the CSO. A special topic for discussion was implementation of the strategy and the role of Page 2 of 10 Annex 8 different stakeholders. Stakeholders were encouraged to send in any further written comments at their earliest convenience to help shape a final draft of the CPS. 11. The following key concerns emerged at this stage of consultations: (i) coordination and poor institutional capacity of the Government at all levels creates risks for the implementation of the CPS, (ii) a stronger public informatiodeducation strategy around M D G N E D S B E E D S would help develop public support and understanding of Government's intentions and achievements, (iii) weak capacity of the CSOs, absence of coalitions deprives them from becoming a strong partner in the development process, from playing an important advocacy role, carrying out independent assessment of government performance and disseminating information to the public, (iv) huge debt burden remains one of the key unresolved issuesthat jeopardizes the ability of the country to move towards achieving MDGs, (v) the role of media inM&Eis indispensable andshouldbe strengthened. Page 3 of 10 00 4 E I t i 9 m 00 -I- 4 8E rr 9 a I I bl I 12 %. us VJ h E a 3 Qo T 00 L - 00 Y Annex 9 CAS ANNEXES Annex A2 Nigeria at a glance 5117/05 Sub- POVERTYand SOCIAL Saharan Low- Nlgerla Africa Income Developmentdiamond' 2003 Population, mid-year(millions) 136.5 705 2,312 GNIper capita (Aflasmethod, US$) Lifeexpectancy 350 500 440 T GNI (Aflasmethod, US$billions) 47.6 351 1,021 Average annual growth, 1997-03 Population(%) 2.4 2.3 1.9 Labor force (%) 2.5 2.4 2.3 Gross primary Most recentestimate(latest year available,1997-03) capita Poverty (% of population below nationalpoveqline) Urbanpopulation(% of totalpopulation) 47 36 30 Life expectancyat birth (years) 47 46 58 1. Infantmortality (per 1,000live births) 98 101 80 Childmalnutrition(% ofchildrenunder5) 29 44 Access to improvedwater source Access to an improvedwater source (% ofpopulafion) 60 58 75 illiteracy (% ofpopulafionage 15+) 33 35 39 - Grossprimaryenrollment (% ofschool-agepopulation) 87 92 Nigeria Male 94 99 ..~.~~~~.. Low-incomegroup Female 80 85 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1984 1994 2003 2004 Economicratios. GDP (US$ billions) 28.2 23.7 58.3 72.0 Gross domestic investmenffGDP 19.6 23.8 22.3 ExportsOf goodsandseNicedGDP 14.9 41.8 49.7 54.6 Trade GrossdomesticsavingdGDP 11.4 20.6 32.4 39.7 Gross nationalsavingdGDP 8.2 12.8 21.5 27.1 CurrentaccountbalanceIGDP -3.8 -8.8 -2.4 4.8 InterestpaymentdGDP 4.4 4.5 2.7 Total &bffGDP 63.1 139.6 60.0 49.8 Total debt servicelexports 32.7 19.5 5.7 Presentvalue of debffGDP Presentvalue of debffexports Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annualgrowth) - GDP 5.0 3.4 10.9 6.1 7.4 Nigeria GDP per capita 2.0 0.9 8.4 3.7 4.6 Low-incomegroup ExDortsof goodsand SeNiCBS 3.9 1.6 31.9 3.1 7.0 STRUCTUREof the ECONOMY 1984 1994 2003 2004 Growthof InvestmentandGDP(%) (% of GDP) Agriculture 37.8 28.6 26.4 16.6 BOT Industry 27.8 50.2 49.4 56.9 Manufacturing 7.8 4.9 4.0 Services 34.4 21.2 24.2 26.5 Privateconsumption 70.9 65.1 43.9 38.1 -20 Generalgovernment consumption 17.6 14.3 23.7 22.2 Importsof goodsand setvices 13.0 40.8 41.2 37.2 1984-94 1994-04 2003 2004 (average annualgrowth) Growthof exportsand Imports(%) AgriCUltUre 4.5 4.3 6.5 6.5 4o Industry 3.6 2.2 22.4 4.6 ManUfactUrhg 4.7 2.9 6.2 Services 7.4 3.6 1.2 8.1 1; Private consumption -2.0 -5.9 -20.1 6.6 -10 Generalgovernmentconsumption 4.0 16.2 14.9 3.3 -20 Grossdomesticinvestment 13.4 12.5 -7.0 10.6 - Eworts +Imports importsof goodsand setvices -3.2 8.8 11.6 2.3 Page 1of 2 Annex A2 PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domesticprices (% Change) Consumer prices 39.6 57.0 14.0 15.0 20 ImplicitGDPdeflator 16.9 27.8 20.8 19.9 i o Governmentfinance (56of GDP, includescurrentgrants) 0 Current revenue 18.5 37.1 43.1 -io Current budget balance 1.5 8.7 4.2 14.0 - Overallsurpluddeficit 1.9 -1.3 7.4 GDPdeflator ' O ' C P I I TRADE 1984 1994 2003 2004 (US$millions) Export and Importlevels (US mill.) Total exports(fob) 11,891 9,415 27,250 37,297 Fuel 11,568 9,171 24,648 33,357 LiquifiedNaturalGas 1,867 3,063 111 Manufactures 47 90 110 2 5 , m Total imports(cifl 9,839 7,162 18,816 21,018 m , m Food 1,442 738 2,444 2,742 1.5.m Fueland energy 153 86 7,552 8,928 1o.m Capitalgoods 5 , m 0 Export priceindex (1995=100) 167 91 161 212 Import price index (1995=100) 61 92 100 109 Terms of trade (1995=100) 273 99 161 194 BALANCEof PAYMENTS I 1984 1994 2003 2004 (US$millions) Current account balanceto GDP (K) E q " of goods and sewices 12,324 9,533 28,629 38,968 Importsof goods andservices 10,749 9,298 23,700 26,544 T Resource balance 1,575 235 4,929 12,424 10 Net income -2,309 -2,353 -8,388 -11,727 5 Net current transfers 500 1,657 1,860 0 Current account balance -1,066 -1,618 -1,373 3,448 5 Financing items (net) 1,541 1,617 1,160 6,039 -10 Changes in net reserves -475 1 213 -9,487 -15 Memo: Reservesincludinggold (US$ millions) 1,486 1,409 7,468 16,955 Conversion rate (DEC, iocaVUS$) 2.3 52.3 129.2 132.9 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$milions) Composltlonof 2003 debt ( U S mlll.) Total debt outstandingand disbursed 17,770 33,092 34,963 35,900 IBRD 900 3,286 1,201 1,027 A 1,201 IDA 36 181 787 967 F:2,385 8:787 Totaldebt service 4,064 1,872 1,636 IBRD 111 645 265 265 IDA 1 2 22 25 Composition of net resourceflows Officialgrants Officialcreditors 305 168 -788 Privatecreditors -409 -316 -248 Foreigndirect investment 588 2,891 4,409 Portfolioequity 0 17 World Bank program Commitments 163 0 231 380 A IBRD E Bilateral Disbursements 261 318 63 155 6 IDA -- D Other mitilateral .- ~ F Private Principal repayments 38 385 220 235 C IMF . 0 -Short-term Netflows 223 -67 -157 -80 Interest payments 74 262 67 55 Net transfers 149 -329 -224 -135 DevelopmentEconomics 5/17/05 Page 2 of 2 Annex B2 Page 1of 1 Nigeria SelectedIndicators* of Bank PortfolioPerformance and Management - As of Date: 05/17/2005 Indicator 2002 2003 2004 2005 Portfolio Assessment Number of Projects Under Implementation ' 9 12 15 16 Average ImplementationPeriod(years) 1.2 1.8 2.2 2.6 Percent of ProblemProjectsby Number ', 11.1 41.7 33.3 37.5 Percent of ProblemProjectsby Amount 8.1 45.1 40.3 40.1 Percent of Projects at Riskby Number', 88.9 75.0 53.3 43.8 Percent of Projects at Riskby Amount ', 81.4 79.3 66.4 42.2 DisbursementRatio(percent) e 5.5 3.5 ' 12.8 12.3 Portfolio Management CPPR duringthe year (yeslno) No Yes Yes Yes SupervisionResources(totalUS$) 845,000 1,359,000 1,826,000 1,769,000 Average Supervision(US$/project) 94,000 123,000 130,000 104,000 MemorandumItem SinceFY 80 LastFive FYs ProjEvalby OEDby Number 83 3 ProjEvalby OEDby Amt (US$ millions) 5,641.5 355.6 Percentof OEDProjects RatedUor HUby Number 55.4 100.0 Percentof OEDProjects RatedUor HUby Amt 53.1 100.0 a. As showninthe Annual Report onPortfolioPerformance (except for currentFY). b. Average age of projectsinthe Bank'scountryportfolio. c. Percent of projectsratedUor HUondevelopmentobjectives(DO) and/or implementationprogress(IP). d. As definedunder the PortfolioImprovementProgram. e. Ratioof disbursementsduringthe year to the undisbursedbalanceof the Bank'sportfolioat thebeginningof the year. Investmentprojects only. * All indicatorsare for projectsactive in the Portfolio,with the exceptionof DisbursementRatio, which includesall active projectsas well as projectswhich exitedduringthe fiscal year. Annex B3 Page 1of 2 Nigeria ProposedIBRDDDA ProgramSummary FYO5-09 - As of Date: 05/17/2005 Fiscal Year Proj ID Strategic Rewardsb Implementationb US$(M) (H/M/L) Risks(HIMIL) 2005 State Governance& Cp Bldg 18.1 H M Result 18.1 2006 Customsand Port Modernization 28.0 H M National Energy 172.0 H M Second Natl. UrbanWater 200.0 H H State Platforms 100.0 H M Result 500.0 2007 Post Basic Educ. & Knowl. Econ. 50.0 M H CDD SociaVFADAMA 100.0 M H State Platforms (2) 100.0 H M Federal Roads 250.0 M H Result 500.0 2008 Health MDGs TBD H M NationalEnergyII TBD H M CDD Productive(FADAMA) TBD H M State Platforms (2) TBD H M Result TBD 2009 State Platforms (2) TBD H M CDD Social TBD H M Governance II TBD H M Federal RoadsII TBD M H Result TBD Overall Result TBD a. This table presents the proposedprogramfor the next four fiscal years. b. For eachproject,indicatewhether the strategic rewardsandimplementationrisks are expectedtobe high(H),moderate (M),or low (L). Annex B3 Page2 of 2 Nigeria IFCand M I G A Program, FY 2002-2005 - (Asof Date: May 17,2005) 2002 2003 2004 2005 IFC approvals (US$mil) 130.00 25.00 31.00 86.89 Sector (percent) Accommodation &Tourism 35 Finance & Insurance 23 65 48 Information 77 52 Oil, Gas andMining 100 Total 100 100 100 100 Investmentinstrument (percent) Loans 58 100 100 86 Equity 19 9 Quasi-Equity 5 Other 23 Total 100 100 100 100 MIGA guarantees (US$ mil) 100.00 199.54 112.84 0.00 Annex B4 Nigeria Summary of Nonlending Services - As of May 17,2005 Product CompL In FY Cost (US$OOO) Audience' Objectiveb Recentcompletions SocialRiskAssessment N O 2 66.3 KG,PS PrivateSector Assessment N O 2 407.4 KG,PS StatesPublic FinancesStudy NO3 221 KG,PS Environmenfloverty NO3 156.8 KG,PS StrategicConflictAssessment NO3 179.2 KG,PS ServiceDelivery Survey N O 4 128.3 KG,PS Macro& Growth N O 4 124.1 KG,PS EducationCSR N O 4 49.7 KG,PS Lagos SPAR N O 4 82.3 KG,PS LagosCFAR N O 4 68.0 KG,PS PensionsReformDialogue FY04 114.5 KG,PS RiskandVulnerability N O 4 28.5 KG,PS Anticorruption N O 4 62.9 PS Power Sector Policy FYO4 75 KG,PS EFA PreparationSupportStrategy N O 4 200 KG,PS Country Gender Assessment NO5 76 KG,PS Basic Agricultural Servicesfor PoorFarmers FYO5 156 KG,PS ForestryReview FY05 140 KG,PS Underway Oil RevenuesManagement NO5 309 KG,PS HealthCSR N 0 5 , N O 6 250 KG,PS Lagos Strategyfor Economic Development N O 5 397 KG,PS CPPR N O 5 107 PS Agriculture Sector Review NO5 87 KG,PS LSMS N O S 115 KG DebtManagement FYOS 220 KG,PS Planned Country EconomicMemorandum(CEM) N O 6 200 PS FSAPUpdatdBankingSector Reform N O 6 150 KG,PS CDD Evaluation N O 6 100 KG,PS PovertyAssessmenflSIA FYO6 100 KG,PS EducationReport N O 6 80 KG,PS PEMFA FY06 250 KG,PS Govemance andCorruptionRisk Assessment FYO6-09 240 KG,PS BusinessEnvironment FYO6-09 50 KG,PS NationalInfrastructureStrategymransport FY07 19 KG,PS HumanDevelopmentCSR N O 8 100 KG.PS a. Government(G),Donor (D), Bank (B), PublicDissemination(PD). b. Knowledgegeneration,public debate, problem-solving. Page 1of 1 Annex B5 Nigeria Social Indicators Latest single year Same regionhncome group sub- Saharan Low- 1975-80 1985-90 1997-2003 Africa Income POPULATION Total population, mid-year (millions) 71.1 96.2 136.5 704.5 2311.9 Growth rate (% annual average for period) 3.0 2.9 2.5 2.3 1.9 Urban population ("7'0 of population) 26.9 35.0 46.6 36.5 30.4 Total fertility rate (birthsper woman) 6.9 6.5 5.6 5.2 3.7 POVERTY ("hofpopulation) Nationalheadcount index 43.0 Urban headcount index 31.7 Rural headcount index 49.5 INCOME GNI per capita (US$) 780 270 350 500 440 Consumer price index (1995=100) 2 14 269 Food price index (1995=100) 2 15 239 INCOMElCONSUMPTlONDISTRIBUTION Gini index 50.6 Lowestquintile(% of incomeor consumption) 4.4 Highestquintile (% of incomeor consumption) 55.7 SOCIAL INDICATORS Publicexpenditure Health (% of GDP) 1.2 2.6 1.5 Education (% of GDP) 3.3 3.2 Net primaryschool enrollment rate ("hof agegroup) Total 60 77 Male 67 82 Female 53 72 Accessto an improvedwater source ("hof population) Total 49 60 58 75 Urban 78 72 82 89 Rural 33 49 46 70 Immunization rate ("A of childrenages 12-23months) Measles 54 35 61 65 DPT 56 25 59 67 Child malnutrition(% under 5 years) 35 29 44 Lifeexpectancyat birth (yea@ Total 45 49 45 46 58 Male 43 48 44 45 57 Female 47 51 45 46 59 Mortality Infant (per 1,OOO live births) 108 115 98 101 80 Under5 (per 1,OOO live births) 216 235 198 171 123 Adult (15-59) Male (per 1,OOO population) 535 476 443 519 319 Female (per 1,000population) 453 401 393 461 268 Maternal(modeled, per 100,000 livebirths) 800 916 689 Birthsattended by skilled health staff (%) 31 35 39 38 ~~~ ~ ~ Note: 0 or 0.0 meanszero or less than half the unit shown. Net enrollment rate: break in series between 1997and 1998due to change from ISCED76to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age. 2005 World Development Indicators CD-ROM,World Bank Page 1of 1 Annex B6 Nigeria Key Economic Indicators - Actual Estimate Projected Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 Nationalaccounts(as % of GDP) Gross domestic product' 100 100 100 100 100 100 100 100 100 Agriculture 29 31 31 26 17 17 18 19 20 Industry 44 48 44 49 57 59 57 55 54 Services 28 22 25 24 26 24 25 26 27 Total Consumption 67 68 74 68 60 64 66 69 72 Grossdomestic fixed investment 18 23 26 24 22 22 25 27 28 Governmentinvestment 9 12 10 10 9 10 11 11 13 Privateinvestment 8 11 16 14 13 12 14 16 16 Exports(GNFS)b 53 43 41 50 55 53 50 45 43 Imports(GNFS) 38 34 41 41 37 38 41 40 42 Grossdomestic savings 33 32 26 32 40 36 34 31 28 Gross nationalsavings" 27 25 15 22 27 26 25 24 21 Memorandunz items Gross domestic product 42078 47841 46548 58304 72047 94370 105115 128228 128228 (US$millionat currentprices) GNI per capita(US$,Atlas method) 260 300 300 350 390 Realannualgrowthrates (%, calculated from 1987prices) Gross domesticproduct at factor cost 5.6 3.3 1.4 10.9 6.1 7.O 9.1 6.5 8.1 Realannualper capitagrowthrates(%, calculatedfrom 1987prices) Grossdomestic productat marketprices 3.1 0.9 -0.7 8.4 3.7 4.3 6.1 4.2 5.4 Totalconsumption 2.0 16.9 15.8 -9.2 2.9 6.0 4.3 4.8 5.5 Privateconsumption -16.5 11.9 49.8 -22.3 4.4 4.5 4.5 5.O 5.5 Balanceof Payments(US$ ) ~xports(GNFS)~ 22363 20592 18692 28629 38968 49586 52703 51580 54695 MerchandiseFOB 21395 19598 17672 27250 37297 47743 50761 49569 52562 Imports(GNFS)~ 15777 16356 18798 23700 26544 35965 42824 46392 54435 MerchandiseFOB 11068 11482 13342 16997 18986 27636 34297 37459 45052 Resource balance 6586 4236 -106 4929 12424 13621 9880 5188 259 Netcurrenttransfers 1568 1278 1399 1657 1860 2896 2983 3072 3164 Currentaccount balance 4173 1256 -5108 -1373 3448 3690 240 -3706 -9157 Netprivateforeign direct investment 1502 2051 2481 2891 4409 5167 4285 4199 3865 Long-termloans (net) -1570 -1643 -1267 -1292 -1286 2114 4168 4179 10018 Other capital(net,incl. errors&ommissions) -146 -641 1152 -439 2916 626 631 755 870 Changeinreservesd -3959 -1023 2742 213 -9487 -11598 -9324 -5426 -5596 Memorandum items Resourcebalance(% of GDP) 15.7 8.9 -0.2 8.5 17.2 14.4 9.4 4.0 0.2 Realannualgrowthrates ( YR87 prices) Merchandiseexports (FOB) 19.4 -4.7 -12.0 33.5 3.7 6.2 12.8 4.0 9.0 Merchandiseimports (CIF) 4.3 12.6 12.8 13.6 2.0 13.0 19.3 9.5 11.8 (Continued) Page 1of 2 Annex B6 Nigeria Key Economic Indicators - (Continued) Actual Estimate Projected Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 Public finance (as % of GDP at market prices)' Current revenues 45.0 42.1 36.2 37.1 43.1 46.3 46.1 43.0 40.0 Current expenditures 32.2 34.6 34.1 32.9 29.0 28.1 28.4 28.6 27.7 Currentaccountsurplus (+) or deficit (-) 12.8 7.5 2.1 4.2 14.0 18.1 17.7 14.3 12.3 Capitalexpenditure 6.4 12.4 7.4 5.5 6.6 10.7 11.5 12.1 13.1 Foreignfinancing -3.7 -3.4 -2.8 -2.3 -2.1 -1.7 -1.2 -0.9 -1.6 Monetary indicators MZGDP 24.2 24.6 28.4 26.4 23.6 23.8 23.8 23.8 23.8 Growthof M2(%) 48.3 27.2 21.5 24.1 14.0 32.0 13.4 10.3 13.4 Price indices( yR87 =loo) Merchandiseexportpriceindex 157.4 136.2 139.6 161.2 212.7 256.5 241.8 227.0 220.9 Merchandiseimportpriceindex 125.8 115.9 119.3 133.9 146.6 192.4 200.1 199.7 214.8 Merchandiseterms of tradeindex 125.2 117.6 117.0 120.4 145.1 133.3 120.8 113.7 102.9 Consumer priceindex (% change) 6.9 18.9 13.7 14.0 15.0 GDPdeflator (8change) 27.9 10.8 3.9 20.8 19.9 21.2 4.1 3.0 4.8 a. GDP at factor cost b. "GNFS" denotes "goods andnonfactorservices.'' c. Includesnet unrequitedtransfersexcludingofficial capitalgrants. d. Includesuseof IMFresources. e. Consolidatedcentralgovernment. f. "LCU" denotes"localcurrencyunits." AnincreaseinUS$/LCU denotesappreciation. Page 2 of 2 Annex B7 Nigeria Key ExposureIndicators - ~~~~~~~~~ Actual Estimate Indicator 2000 2001 2002 2003 2004 Total debt outstandingand 31355 31042 30476 34963 32700 disbursed(TDO) (US$m)" Netdisbursements(US$m)" -696 -1497 -1501 -1089 -1476 Total debt service (TDS) 1845 2543 1490 1636 (US$m)" Debt and debt service indicators (a) TDOIXGS~ 138.5 148.7 160.5 125.1 88.5 TDOIGDP TDSXGS 8.1 12.2 7.8 5.9 Concessional/TDO 4.6 4.3 4.8 43.7 IBRDexposureindicators(%) IBRD DS/public DS 21.8 11.6 17.4 16.3 Preferredcreditor DS/public 34.4 18.8 31.4 30.0 DS (%)' IBRDDSXGS 1.7 1.4 1.3 0.9 0.7 IBRD TDO (US$mld 1625 1337 1275 1201 1027 Of which present value of guarantees (US$m) Share of IBRDportfolio (%) 1 1 1 1 1 IDA TDO (us$m)d 644 621 676 787 967 IFC (US$m) Loans 8 35 78 100 Equity andquasi-equity /c 9 8 8 9 MIGA SO 69 a. Includespublic andpublicly guaranteeddebt, privatenonguaranteed, use of IMFcredits and net short- term capital. b. "XGS" denotesexports of goods and services, includingworkers' remittances. c. Preferredcreditorsare defined as IBRD, IDA, the regionalmultilateral development banks, the IMF,and the Bank for InternationalSettlements. d. Includespresentvalue of guarantees. e. Includesequity andquasi-equitytypes of both loanand equity instruments. Page 1of 1 Annex BS Page 2 of 2 NIGERIA Statementof IFC'sHeldandDisbursedPortfolio - Amounts in USDollarMillions As of April 30,2005 Held Disbursed FiscalYear Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1998 AEF Ansbby 0.1 0 0 0 0.1 0 0 0 1999 AEF GlobalFabri 0.32 0 0 0 0.32 0 0 0 1999 AEF Hercules 1.3 0 0 0 1.3 0 0 0 1999 AEF Hygeia 0 0.1 0 0 0 0.1 0 0 2000 AEF Oha Motors 0.84 0 0 0 0.84 0 0 0 2000 AEF SafetyCenter 0.5 0 0 0 0.5 0 0 0 1997 AEF Telipoint 0.08 0 0 0 0.08 0 0 0 1995 AEF Vinfesen 0 0 1 0 0 0 1 0 1994 Abuja Int'l 1.75 0 0 0 1.75 0 0 0 2005 Accion Nigeria 0 1.89 0 0 0 0.41 0 0 2003 Adamac 0 0 25 15 0 0 11.56 6.94 2005 Africa Re 0 0 10.4 0 0 0 10.4 0 2000 CAPEFUND 0 6.44 0 0 0 6.03 0 0 2001 DeltaContractor 0 0 15 0 0 0.2 2000 DiamondBank 0 0 8 0 0 8 2000 FSB 7.35 0 9.75 7.35 0 5.25 1992 FSDH 0 0.86 0 0 0.86 0 2000/04 GTB 20 0 0 20 0 0 2000 IBTC 20 0 0 20 0 0 1981/88 IkejaHotel 0 0.01 0 0 0.01 0 2002 NTEF 20 0 0 0 0 0 2001 UBA 0 0 10 0 0 0 2004 UPDCHotelsLtd 11 0 0 0 0 0 0 0 ApprovalsPendingCommitment Loan Equity Quasi Partic 2005 ZenithBank 30 6 4 0 Total Pending Commitment: 30 6 4 0