Documentof The World Bank FOR OFFICIAL USE ONLY ReportNo: 28191-ET PROJECTAPPRAISALDOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OFSDR66.9 MILLION (US$ 100MILLIONEQUIVALENT) TO THE FEDERAL DEMOCRATICREPUBLIC OF ETHIOPIA FOR A PUBLIC SECTORCAPACITY BUILDING PROGRAMSUPPORTPROJECT March25,2004 PublicSectorReformand CapacityBuildingUnit CountryDepartment2 AfricaRegion This document has a restricted distribution and may be usedbyrecipients only inthe performance oftheir official duties. Its contents mav not be otherwise disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective as March25,2004) Currency Unit: = EthiopianBirr ETB 1.0 = US$0.11696 US$1.0 = ETB8.63 FISCAL YEAR July 8 - July 7 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank BCB RegionalBureauo f Capacity Building BOFED RegionalBureauo f Finance and Economic Development CAS Country Assistance Strategy CAD Central Accounts Department CFU Counterpart FundsUnit CIDA Canadian InternationalDevelopmentAgency CPR Council o fPeoples' Representatives COMESA Community of Eastern and South Africa CSRP Civil Service Reform Program DCI Development Corporation o f Ireland DCA Development Credit Agreement DLDP District Level DecentralizationProgram DfID Department for International Development EA Executing Agency EC European Commission ECuA EthiopianCustoms Authority EMCP Expenditure Management and Control Activities FIRA Federal Inland Revenue Authority ICB InternationalCompetitive Bidding ICT Informationand Communication Technologies IDA InternationalDevelopmentAssociation IEC Information, Educationand Communication IMF InternationalMonetary Fund IT InformationTechnology JSRP Justice SystemReform Program KfW Kreditanstalt fuer Wiederaufbau GOE Government o f Ethiopia LIG Proposed Local Investment Grant Program GTZ German Technical Cooperation MAB Ministries, Agencies, and Bureaus MDG MillenniumDevelopmentGoals M&E Monitoringand Evaluation MFA Ministryof FederalAffairs MOFED Ministry of Finance and Economic Development MOJ Ministry of Justice MOR MinistryofRevenue NCB National Competitive Bidding FOROFFICIAL USEONLY NCBP National CapacityBuildingProgram OFAG Office ofthe FederalAuditor General PPD Planningand ProgrammingDirectorate PRSC PovertyReductionSupport Credit PSCAP Public Sector CapacityBuildingProgram PIP ProgramImplementationPlan SDP Sector DevelopmentProgram SIDA SwedishInternationalDevelopmentAgency SIL Sector InvestmentLoan SDPRP Ethiopia's Sustainable DevelopmentandPovertyR ducti nProgram TA Technical Assistance TD Treasury Department TSRP Tax Systems Reform Program UMCBP Urban ManagementCapacityBuildingProgram UNDP UnitedNations DevelopmentProgram USAID United States Agency for InternationalDevelopment WTO World Trade Organization Vice President : Callisto Madavo Country Director : Ishac Diwan Acting Sector Manager : Guenter Heidenhof Task Team Leader : NavinGirishankar The core World Bank team involved in the preparation of the operation was led by Navin Girishankar (Sr. Public Sector Specialist) and included Shenaz Ahmed (Program Assistant), Elsa Araya (Operations Analyst), Deepak Bhatia (Manager), Reynaldo Castro (Consultant), David DeGroot (Sr. Local Government Specialist), Steve Gaginis (Financial Officer), Prasad C. Mohan (Sr. Communications Specialist), Brighton Musungwa (Sr. Financial Management Specialist), Edith Ruguru Mwenda (Sr. Counsel), Samuel Haile Selassie (Sr. Procurement Specialist), David Savage (Sr. Municipal Development Specialist), Vivek Srivastava(Sr. Public Sector Specialist), EshetuYimer (Sr. Financial Management Specialist). Inaddition, a larger World Bank and multi-donor team contributed during the preparation of this multi-sector operation. A complete list of these team members is provided inAnnex 7. The Quality Assurancepeer Review Team for the operation (including participants in the Quality Enhancement Review) included Herbert Acquay, Arvil Van Adams, Vidoje Brajovic, Michael Engelshalk, Larry Hannah, Jim Hicks, Rogati Kayani, Junaid Ahmad, Ali Hashim, and Anand Rajaram. The team would like to dedicate its efforts to the memory of Jit Bahadur Gill, Sector Manager (AFTPR), whopassed suddenly duringprojectpreparation. Mr. G i l l sguidance, support, and appreciation of the client's needsproved invaluable topreparation. Hispresence as a colleague andfriend will be sorely missed by the Bank and Government teams. I This documenthas a restricteddistributionand may be used by recipients onlyin the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ETHIOPIA PUBLIC SECTOR CAPACITY BUILDINGPROGRAM SUPPORT PROJECT CONTENTS A. Project Development Objective................................................................................................. 2 1. Project development objective............................................................................................ 2 2. Key performance indicators................................................................................................ * . 2 B. Strategic Context........................................................................................................................ 3 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ............3 2. Main sector issues and Government strategy ..................................................................... 5 3. Sector issues to be addressedby the project and strategic choices................................... 12 C. ProjectDescription Summary .................................................................................................. 15 1. Project components .......................................................................................................... 15 2. Key policy and institutionalreforms supported by the project......................................... 19 3. Benefits andtarget population.......................................................................................... 20 4. Institutional and implementationarrangements ................................................................ 21 D. Project Rationale...................................................................................................................... 28 1. Project alternatives considered and reasons for rejection................................................. 28 2. Major related projects financed by the Bank and/or other development agencies........... 29 3. Lessons learned and reflected inthe project design ......................................................... 30 4. Indications of borrower commitment and ownership ....................................................... 32 5. Value added of Bank support inthis project .................................................................... 35 E. Summary ProjectAnalysis....................................................................................................... 35 1. Economic.......................................................................................................................... 35 2. Financial........................................................................................................................... 36 3. Technical .......................................................................................................................... 36 4. Institutional....................................................................................................................... 36 5. Environmental.................................................................................................................. 40 6. Social................................................................................................................................ 41 7. Safeguard Policies............................................................................................................ 42 F. Sustainability and Risks ........................................................................................................... 43 1. Sustainability .................................................................................................................... 43 2. Critical risks ...................................................................................................................... 44 3. Possible controversialaspects .......................................................................................... 47 G. Main Credit Conditions ........................................................................................................... 47 1. Effectiveness conditions ................................................................................................... 47 2. Financial and other covenants .......................................................................................... 48 H. ReadinessofImplementation.................................................................................................. 49 I . Compliance with BankPolicies.............................................................................................. 49 ANNEXES 1. Project Design Summary.................................................................................................. 50 2. DetailedProject Description............................................................................................. 55 3. EstimatedProject Costs.................................................................................................... 62 4. Cost Benefit Analysis Summary....................................................................................... 63 5. Financial Summary........................................................................................................... 64 5a.Financial Management Assessment Technical Annex ..................................................... 65 6. Procurement and DisbursementArrangements ................................................................ 73 7. Project Processing Schedule............................................................................................. 81 8. Documents inthe Project File .......................................................................................... 83 9. Key Features of Resource Allocation and Management under PSCAP........................... 86 10. "Harmonization Issues for Bilateral Donors" ................................................. :.................98 11. Statement of Loans and Credits........................................................................................ 98 12. Country at a Glance........................................................................................................ 100 13. Letter of Sectoral Policy ................................................................................................. 102 MAP: IBRDNO. 31158 ETHIOPIA PUBLIC SECTOR CAPACITY BUILDING PROGRAM SUPPORTPROJECT ProjectAppraisalDocument Africa RegionalOffice AFTPR Date: March25,2004 Team Leader: NavinGirishankar Country Director: IshacDiwan Acting Sector Managermirector: GuenterHeidenhof Project ID: PO74020 Sector(s): BA-CivilServiceReform, BD-Decentralization,BF-Public FinancialManagement, BI-InstitutionalDevelopment,BJ-JudicialReform LendingInstrument: Theme(s): Public Sector Specific hvestmentLoan(SIL) Poverty Targeted Intervention: N ProgramFinancingData [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Project Cost (US$m): $397.8 Co-financing: None Total Bank Financing (US$m): $100.00 Proposed Terms (IDA): StandardCredit Commitment Fee: 0.00-0.50% Grace Period (years): 10years Years To Maturity: 40 years Commitment Fee: 0.50% Service Charge: 0.75% FinancingPlan (US$m): Source Local Foreign Total BORROWER 137.5 137.5 IDA 65.4 34.6 100.0 CIDA 25.3 13.4 38.8 SIDA 5.6 3.O 8.6 Other Donors 73.2 39.8 113.0 Total: 307.0 90.8 397.8 FY2005 FY2006 FY2007 FY2008 FY2009 Annual 9.9 22.2 30.0 21.4 16.5 Cumulative 9.9 32.1 62.1 83.5 100.0 Disbursementprofile 10% 22% 30% 21% 17% Project implementation period: FY2005-2010 Expected effectivenessdate: July 8,2004 Expectedclosing date: July 7,2009 - 2 - A. ProjectDevelopmentObjective 1. Project development objective The objective o f the Public Sector Capacity Building Program (PSCAP) Support Project is to improve the scale, efficiency, and responsiveness o f public service delivery at the federal, regional, and local level; to empower citizens to participate more effectively in shaping their own development; and to promote good governance and accountability. This objective will be achieved by scaling up Ethiopia's ongoing capacity building and institutional transformation efforts in six priority areas under PSCAP-(i) Civil Service Reform; (ii)District-Level Decentralization; (iii)Urban Management Capacity Building; (iv) Tax Systems Reform; (v) Justice System Reform; (vi) Information and CommunicationsTechnology. 2. Key performance indicators While specific output indicators across contributing subprograms are provided in the logical framework, the key performance indicators for PSCAP overall (and therefore, the Bank's Support Project) are providedbelow: . Expectedimpact on "institutionalquality" Contributing PSCAP Subprograms .. 1.Increasedpredictabilityand adequacyoffinancial resources flows (in-year and across years) Civil Service Reform Reducedbudget variance Tax Systems Reform ... Reducedfederal-regional and regional-local fiscal gaps .. 2. Greater inclusivenessand transparencyof planning and prioritization processes Civil Service Reform Establishedpractice ofparticipatory budgetingand District-Level Decentralization public reporting on budgetsand performanceat all levels w UrbanManagementCapacity Building Regular involvement o fcivil society inplanningand Tax Systems Reform policymaking, budgeting, and review processes 3. Enhancedrevenue performanceand fiscal autonomy District-Level Decentralization Increasedown revenues and unconditional transfers as a UrbanManagementCapacity Building share oftotal expenditures at sub-nationallevels Tax Systems Reform Increasedtax effort at all levels ICT . 4. Enhancedincentiveenvironment for publicservants .. (gender disaggregated) Civil Service Reform Increasedaverage civil service salary as percentage of District-LevelDecentralization UrbanManagementCapacity Building . 5. Improved quality and efficiency of operations .. livingwage Private-public wage comparison Wage decompressionratios . Improved service levels interms of access, responsiveness and cost efficiency inpriority sectors All Subprograms Reducedunit costs and processingtime for essential rural, urban, social, and legal services inpriority sectors 6. Improved transparencyand accountability .. . Reducedincidenceo f corruption and arbitrarinessinrule enforcement (asjudged by economic agents) Increasedaccess tojustice, recourseand redress All Subprograms Enhancedindependence ofthejudiciary Increasedaccess to government information - 3 - B. Strategic Context 1. Sector-related CountryAssistanceStrategy (CAS) goalsupported bythe project Document number:n>A/R2003-0050 Date of latest CAS discussion:April 17,2003 Capacity building across the public, private, civil society, and higher educationsectors constitutes a key pillar of Ethiopia's poverty reduction strategy, the Sustainable Development and Poverty Reduction Program (SDPRP). In supportingEthiopia's SDPRP, the Bank's 2003-2005 Country Assistance Strategy has designatedpublic sector capacity building a "critical underpinning" to the achievementofthree high-level objectives: pro-poor growth through improved provision of productivity-enhancing services including rural and urbanland developmentandmanagement, agricultural extension, and infrastructure; improvedhuman developmentoutcomesthrough improveddecentralizeddelivery of social servicessuch as health, education, and water; good governance through strengtheningof public financial management systems, deepening democratic decentralization inworedas and municipalities, and implementing comprehensive legal andjudicial reform. Accordingly, the Bank's support for PSCAP serves as one o f three multi-sectoral programmatic instruments within the CAS (figure 1). The second instrument is the Poverty Reduction Support Credit (PRSC) series, which provides annual balance of payments support for the Government's budget as a whole, including the general purpose transfers or subsidies that finance service delivery in regions. The third is a Local Investment Grant (LIG) Program intended to help finance the capitalrequirementsof decentralizeddelivery across key sectors. Figure1.The role of PSCAPand other multi-sectoralinstrumentsinthe 2003-2005 CAS Poverty Reduction Support Credits * Provides predictable budget S U Q Q O ~through serial credits ~ Finances inter olio the federal-regional revenue shares including the recurrent service delivery needs of regional and sub-regional authorities a & a n m Local Investment Grant Program Provides performance oriented transfers for multiscctaral service delivery investment needs a1 the local level Based on successful PSCAP impiementation - 4 - The Bank's PSCAP Support Project complements the budget and decentralized fiscal support operations inthree ways. First, the capacity building support under PSCAP is acknowledgedas a key requirement for effective implementationof the PRSCs andLIG inter alia by capacitatingthe federal, regional, and local levels to better utilize additional fiscal resources provided to meet their recurrent and capital needs. For the LIG in particular, access to investment support for woredas and municipalities should be conditioned in part on satisfactory completion of basic local level capacity building activities under PSCAP. Second, as noted in the CAS document, support for PSCAP is basedon IDA'Sstrategic decisionto helpthe Governmentclarify the "rules of the game" for large scale capacity building support, and thereby strengthen Ethiopia's intergovernmentalfiscal system by introducing a performance-orientedcapacity building transfer alongside the equity-oriented federal-regional general purpose subsidy (enhanced year-to-year through PRSCs). Third, the bottom-upPSCAPplanning process-by which federal and regional institutions make formal commitments to institutional reform and capacity building targets- provides a robustmechanismto ensurethat refinementsto the SDPRP matrix constitute a realistic aggregation of regional and local commitments. Inso doing, the PSCAP planning and budgeting processeshelps providethe Government-Donordialogue aroundPRSCs with an increasingly sub- national perspective on public sector reform issues critical to poverty reduction (for example, fiscal decentralizationor urbanlandmanagement). Other operations inthe CAS that are intendedto complementthe PSCAP Support Project are the proposed Information and Communications Technologies Assisted Development Project (ICTAD), which will inter alia help develop the regulatory and coordination framework for IT- basedapplications, as well as the proposedRural Capacity Building Project, which is intendedto help develop vocational and technical skills for the agricultural sector, improve the delivery of agricultural services, and strengthenagricultural researchsystems. Analytical underpinningsof PSCAP. A rich body of analytical work in the Bank's country program underpins support for PSCAP. These include a series of annual Public Expenditure Reviews datingbackto the mid-1990s that reviewedprogressof expendituremanagement reforms (especiallythe 2000,2001, and 2002 reports); the 1999Regionalization Study;the 2000 review of the Civil ServiceReform Program(CSRP); a 2001 RapidAssessment of Municipalities; the 2001 WoredaStudies series. More recently, the Bank and several other donors jointly supported the preparation of the 2003 Country Financial Accountability Assessment, and the 2003 Country ProcurementAssessmentReport alongwith actionplans. Regionalvisits during the FY2001-2002 contributed to three Regional PSCAP Technical Notes on civil service reform, municipal development, and decentralization in Amhara, Oromiya, and Tigray. Background papers have also beenpreparedon monitoring and evaluationmethodology as well as options for the designof intergovernmental fiscal transfers as inputs to PSCAP preparation. In addition to ongoing analyses of performance management and information technology initiatives in Ethiopia, the Bank's forward looking analytical agenda includes a Legal and Judicial Assessment and a flagship, multi-donor financed Institutional GovernanceReview on public sector transformation, both of which are under preparationand should contributeto Government's thinking on how best to utilize PSCAP resources over the medium-run. Joint Budget and Aid Management Reviews as well as IntergovernmentalFiduciary Assessments are also envisagedas part ofthe annual SDPRP review cycle, and are designed to foster robust Government-donor and intergovernmental dialogue on public expenditure analysis and fiscal management. Documentation on these reviews are included in the project files and are posted, where appropriate, on the following website: http://www.worldbank.ordethiouia/uscau.htm. 2. Mainsector issuesand Government strategy Following the fall of the Derg regime in the early 1990s, the EPRDF-coalition Government embarked on a long term strategy of "state transformation" characterized by bold attempts to implement multiple reforms inparallel; the massive scale-up of institutional developmentefforts across tiers of government; and the deliberate expansion of the scope of public sector capacity building initiatives. Spanning nearly a decade, Ethiopia's transformation agenda has evolved over three phases in response to growing awareness that pervasive deficits in capacity have hamperedthe ability of the state to secure the fundamentals of poverty reduction and democratic development such as responsiveservice delivery, citizen empowerment, and goodgovernance. 2.1 Regionalizationand public sector modernizationinthe mid- to late-1990s During the 1990s, Ethiopiaembarkedon a series of unprecedentedinstitutional reforms designed to establisha durable federal state system and further its democratic transition. The first phase of the Government's state transformation strategy, launched in 1995, involved the creation of a federal state structure based on ethnically delineatedregional states responsible for a broadrange of the country's political, economic, and social objectives including the delivery of essential public services. Inaccordance with the 1994 Constitution, the Governmentformally established an intergovernmentalfiscal system and initiated the annual transfer of a formula-driven general purpose grant or subsidy to regions, consistent with its policy of "balanced regional progress." It also undertook a significant redeployment of civil service staff to newly empowered regional executives. As a result, by the late 1990s, staffing levels inregional administrations reached over 320,000, while the size ofthe federal civil service reached 43,000. Even as it established a radically new decentralizedpolitical and state system, the Government acknowledgedthe deep institutional constraints on basic functions such as policymaking, service delivery, and regulation. Core publicmanagement systems at the federal and regional levels were hampered by outdated civil service legislation and working systems; the absence of a medium- term planning and budgeting framework; ineffective financial and personnel management controls; inadequate civil service wages and inappropriate grading systems; poor capacity for strategic and cabinet-level decision-making; and insufficient focus on modern managerial approaches to service delivery. Inrecognition of these constraints, the Governmentembarkedon a comprehensive Civil Service Reform Program (CSRP) in 1996. Indicative of Ethiopia's "first generation'' capacity building efforts, the CSRP sought to build a fair, transparent, efficient, effective, and ethical civil service primarily by creatingenabling legislation,developingoperating systems, and training staff in five areas: (i) Expenditure Control and Management, (ii) Human Resource Management, (iii)Service Delivery, (iv) Top Management Systems, and (v) Ethics. Successful efforts (for example, budgeting, planning, and accounting reforms) at the federal level were intendedto provideprototypes for regional authorities. The first phase CSRP was implemented over the 1996-2000 period, albeit with intermittent lags due to poor coordination, particularly during the Ethio-Eritrean border conflict. The results of these efforts were mixed. Notable achievements includedthe developmentof new legislation (for example, a financial management proclamation, a civil service law, a code of ethics, complaints- handling procedures, and a service delivery policy) as well as operating systems for budgeting, procurement, and some aspects of personnel management such as salary surveys and records management. Development of prototypes for expenditure management including a new budget - 6 - classification system, a macro-economic fiscal framework and medium-term planning system, a double entry modified cash accounting system, and procurement reforms were also important achievements. Diagnostic work in these areas also progressed. While commendable, these initiatives have had only modest impact in relieving the institutional and capacity constraints within the Ethiopian civil service. There was little evidence of sustained improvement in output performance at the federal or regional levels. Core functions such as medium-term planning, accounting and auditing, and personnel management remain weak. Attempts to develop an affordable, medium-termpublic sector pay policy were also delayed, and civil servants-despite an across-the-board salary increase in 2001-continued to receive low salaries. Operational efficiency across federal ministries and regional bureaus remained poor. Furthermore, lags inthe prototyping phase at the federal level forestalled CSRP implementation in regions and woredas. The considerable opportunity costs interms of foregone improvements ininstitutional and service delivery performance at the regional and local levels were widely acknowledged. Complementary tax policy and administration reforms were also undertaken in line with the Government's objectives of improving revenue performance to reduce aid dependency and adequately finance the expanding development agenda. The passage and implementation o f a Value-Added Tax, as well as the implementation of a Taxpayer Identification Number (TIN) system proceeded. Early efforts in the justice system including the strengthening o f court administration and the reform of the penal code and family law sought to deepen implementation o fthe 1994 Constitution. Weaknesses inthe design of reform initiatives such as an overly top-down approach, inexperience with managing national and internationalconsultants, and funding gaps limitedthe impact of this first phase of transformation. Implementation delays resulted from the inordinate demands that the border conflict placed on the time of senior officials. Nevertheless, the Government's generally pragmatic approach to implementing an ambitious regionalization and civil service reform agendaestablishedEthiopia as a serious state reformer by the late 1990s 2.2 Nationalcapacity buildingduringthe post-conflictyears By late 1999, Ethiopia's early public sector reform experience had significantly deepened its leadership's appreciation of the role o f institutional capacity building in securing the economic and political fundamentals of sustainable poverty reduction. Duringthe conflict period and its immediate aftermath, the Government undertook-in many cases, with the support o f donors-a range o f in-depth diagnostics and reviews to systematically identify the factors that hindered public sector efficiency, grassroots empowerment, and accountability. These factors, described below, spanned all branches and tiers of government, and helped shaped the scope and scale of the secondphaseofstate transformation. Ineficiencies resulted from unpredictable Jinancial management, poor incentives, lack of a strategic or performance orientation. Unpredictable resource flows have undermined the allocative and operational efficiency the public sector at the federal, regional, and local levels in Ethiopia. The 2003 CFAA identified many o f the critical challenges in public financial management that remain at all levels. At the federal level, there is a widely acknowledged need to ensure compliance with the financial calendar; strengthen political ownership o f the macroeconomic fiscal framework and its indicative planning figures as a basis for integrated, medium term planning; revitalize federal level efforts to develop a Public Expenditure Program or Medium Term Expenditure Framework (including the proper integration o f planning and finance functions in the newly mergedMOFED); strengthen internal and external audit systems; improve budget monitoring and fiscal reporting; reconcile fiscal and monetary accounts; and - 7 - reducing the federal accounts and audit backlogs. Continued leadership of MOFED and coordinationwith the MCB on these issues will be a key factor inthe success of Ethiopia's overall public sector transformation program. Within regions, fiscal decentralization has placed additional pressures on bureaus and woredas to bring their accounts up-to-date, roll out of the new chart of accounts and accounting procedures, develop planning modalities, and strengthen other critical functions such as procurement and auditing. Similar efforts in urbanjurisdictions remain part of the unfinished business of municipal reform across four major reforming regions as well as Addis Ababa and Dire Dawa City Administrations. Revenue performance remained weak across tiers of government inpart due to insufficient tax autonomy and poor administration. The incentive framework for personnel also needs to be reformed, given the current needs o f the civil service. In terms of modernizing personnel management, the Government has sought to introduce a performance management system through the development o f a Results-Oriented Performance Evaluation or ROPE system that seeks to link individual performance with outputs laid out in institution-wide strategic plans. However, the underlyingproblems o f poor incentives across levels o f government remain. Attempts to develop an affordable, medium-term public sector pay policy were also delayed, and civil servants at all levels-despite an across-the-board salary increase in2001-continue to receive low salaries. Personnel rules for woredas including procedures for hiring, firing, transfer, and promotion remain unclear. Inmunicipalities, which sit outside the core civil service system, the Government has identifiedthe need to develop a distinct set of rules for setting wages, hiring and firing municipal workers. O f particular concern is the sustainability of capacity building investments particularly in urban management and ICT, without complementary efforts to retain workers through adequate pay. Anecdotal evidence indicates increasing incidence o f migratingtalent to the private andNGO sectors, or abroad. The functions, systems, structures, and work practices of ministries, agencies, and bureaus (MABs) at the federal and regional levels were generally not aligned with Government's medium-term development priorities and resource constraints. The efficiency and quality of government operations-particularly in strategically important areas such as business licensing, investment promotion, customs, public procurement, and land management-were widely acknowledged to be poor, with the exception o f a few islands o f performance. In many cases, business processes and work organization were not appropriately automated to enable civil servantsto function in a client-oriented, efficient, or transparent manner. Empowerment required greater fiscal and administrative autonomy for woredas and municipalities. Despite the success of regionalization in the mid-1990s, woredas or districts enjoyed little fiscal or administrative autonomy to respond to the local needs o f their constituencies. For instance, local level planning and prioritization processes-while consultative-were typically short-circuited by zonal officials, who would vet woreda levels plans in line with regional priorities. Project and program implementation were also burdenedby overly centralized procedures for procurement of goods and services, and management of frontline personnel. The resulting inefficiencies were further exacerbated by endemic staffing and skills shortages, unclear accountability relationships, and inadequate organizational structures. By 2001, woredas were still deconcentrated units o f regions rather than genuine, democratically elected executives intheir own right. In addition, municipal governments were not adequately integrated into the larger legal and accountability framework o f regional governance, andtherefore, have been limited-in providing essential services to their residents-by their ability to raise own-source revenues. Personnel shortages have also hampered municipal performance. Ethiopia's woredas share jurisdictions - 8 - with municipalities, and require further harmonization o f intergovernmental fiscal arrangements to effectively meet service delivery needs of local communities. Weak checks and balances on the executive limited accountability, recourse and redress. The SDPRP emphasizes the centrality of thejudiciary and legislative oversight institutions inensuring the effective implementationof the constitution including expanding the writ of democratic and human rights, as well as the establishment of the legal and regulatory framework for private sector development. Significant institutionalweaknesses and capacity deficits are acknowledged across Ethiopia's justice system including in areas such as lawmaking, law execution and enforcement, the functioning of courts, and the development o f the legal professional. Specifically, while progress has been made in reforming laws such as the family, penal, and commercial codes, preparation of the federal administrative procedure, the stock market, the notary public, and the vital events registration laws constitute elements o f Ethiopia's unfinished law reform agenda in 2001. Institutional constraints continued to hinder the Ministry o f Justice and regionaljustice bureaus from carrying out their basic tasks as they relate to providing legal advice and contributing to law execution and enforcement; ensuring the necessary incentives and training for staff (lawyers and administrative staff); modernizing efficient filing and case management systems; and establishing expectations interms o f operational performance. Weaknesses in the vertical and horizontal independence o f the judiciary resulted from lack of transparency in the selection o f judges, unclear organizational structures in the courts, outdated systems and procedures, shortages in trained judges and support staff, and lack o f basic infrastructure and facilities. A lack of adequate budgetary resources have also hindered the emergence o f a well-functioning judiciary, particularly in first instance courts in the federal system and woreda courts inthe regions. Access to justice continues to be limitedby supply-side constraints (for example, increasing representation and legal aid, reducing the costs o f access, simplifying court documents, establishing alternative dispute resolution mechanisms), and demand-side constraints (for example, increased awareness o f constitutional and legal rights, education of the poor about options for recourse and redress). The legal profession remains weak with few qualified lawyers andjudges acrosstiers o f government. Ethiopia's homegrownresponse of national capacity building. Followingpolitical reforms in 2001, the Government responded with the launch o f a comprehensive homegrown National Capacity Building Program (NCBP) as a multi-sectoral, intergovernmental program responseto the capacity building demands of rapid transformation. The national capacity building framework envisages as capacity building system that (i)ensures efficiency and sustainability; (ii)supportsthecomprehensive development ofhumanresources,organizations, systems and processes as a means o f achieving the country's development goals; (iii)affords flexible implementation modalities in order to accommodate the dynamics of institutional change. A super-ministry, the Ministry o f Capacity Building, was established in 2001 to provide policy direction, coordination amongst other partner institutions (for example, the Ministries of Finance and Economic Development, Revenue, and Federal Affairs), as well as monitoring and oversight o f capacity building efforts. The Ministry, along with its counterpart regional bureaus and woreda offices, is tasked with programming and financing fourteen capacity building subprograms that support the dual SDPRP goals o f state and structural transformation (Box 1). Six o f these fourteen subprograms directly involve the public sector and comprise (i) woreda a (district level) decentralization program that rapidly transferred delivery responsibilities with substantial fiscal and administrative authority to ruraljurisdictions; (ii) municipal reform efforts designed to restructure and empower urban centers; (iii)reformulated civil service reforms focused increasingly on strengtheningthe public sector fiduciary framework and service delivery - 9 - Box 1: Ethiopia's NationalCapacity BuildingProgram(NCBP) 1. Civil service reform 2. Justice reform 3. Tax reform 4. District-leveldecentralization 5. Urbanmanagement 6. Informationand communication technology 7. Cooperatives 8. Private sector 9. Textilesand garments 10. Constructionsector 11. Agricultural trainingofvocationalandtechnical levels 12. Industrialtrainingofvocationalandtechnical levels 13. Higher education 14. Civil Society results on the ground; (iv) bold nation-wide initiatives to enhance connectivity and develop e- government applications such as the woreda- and school-net projects; (v) efforts to strengthen formal checks and balances and accountability mechanisms through reform o f the justice system including the courts, law making and law enforcement institutions, and the legislative process; and (vi) an ongoing tax systems reform program that continues to align tax policy and administration at the federal and regional level with the demands of Ethiopia's evolving macro- fiscal policies. In FY2002-03 and FY2003-04, the Government-through its Ministry of Capacity Building, Bureaus o f Capacity Building, and other lead institutions-advanced the implementationo f all six subprograms. Considerable domestic resources-ETB 108.4 million in FY2002-03 alone-were mobilized through the federal budget to carry out public sector capacity buildingactivities. Progress-to-date is detailed inthe first Annual Progress Report on the SDPRP and summarized below along with the Government's forward looking strategy ineach area. Civilservice reform. Since September 2001, a reorganization of Government andthe launch of its NCBP has given new impetus to the CSRP. The Government has moved quickly to prepare the CSRP for its "full implementation" across regions and levels o f government. Noteworthy initial steps include the establishment o f focal points responsible for implementation o f reforms across tiers o f government; a series o f workshops undertaken to sensitize the political leadership and civil servants across the country; and the launch of a "special program" of Performance and Service Delivery Improvement in priority Ministries, Agencies, and Bureaus (MABs) designed to deepen the implementation o f performance management. In addition, the CSRP CO is strengthening coordination and change management(from line ministries, regional bureaus, woredas and municipalities); completing prototyping in human resource and expenditure management, and preparing the CSRP for nation-wide scale-up. This approach should promote civil service performance in terms of financial and human resource management, responsiveness to citizens' needs, strategic prioritization o f public resources, efficiency o f program implementation, and enhanced accountability. Woreda or districtleveldecentralization. Within the pastyear, the Government has moved quickly to remedy these constraints at the woreda level. A radical fiscal and administrative district level decentralization agenda-based on far-reaching constitutional reforms in four regions-has been pursued since the start of FY2001-2002. Decentralization has involved the transfer of a significant portion ofthe regional subsidies(in some cases, between 60 and - 10- 75 percent) to woredas in the form of formula-driven block grants. By implication, the devolution o f fiscal management responsibilities requires a massive redeployment of skilled staff, typically from regional bureaus and zonal sections, to woredas to effectively carry out basic public management functions such as budgeting, planning, accounting, and service delivery implementation. Some regions have already taken bold steps towards rationalizing and restructuring what were top-heavy administrative structures. The District-Level Decentralization Program has sought to scale up these efforts through the systematic assignment of revenue and expenditure responsibilities within regions, role restructuring of regional bureaus, transfer of sector-specific functions to woredas, roll-out o f basic financial and personnel management systems at the regional and woreda levels, development of fiscal transfer mechanisms and monitoring systems within regions, demarcation and harmonization o f woreda and municipal structures, implementation o f institutional structures for woredas, and bulk training o f local officials, electorates, public servants, and other stakeholders, all o f .whom are critical to the success o fthis current wave o f "democratic decentralization." Urban management and development. Since 2001,Government has become increasingly concerned with the economic and social needs o f Ethiopia's rapidly growing urban population, as well as the role its cities and towns play in promoting rural development and growth more generally. Historically, municipal governments were not adequately integrated into the larger legal and accountability framework o f regional governance, and therefore, have been limited-in providing essential services to their residents-by their ability to raise own-source revenues. Personnel shortages have also hampered municipal performance. Furthermore, the majority of Ethiopia's woredas share jurisdictions with municipalities, and therefore require a more systematic approach to coordination and harmonization between these two forms o f local government. In addressing the needs o f municipal government, the Government has prepared an Urban Management Program in the context o f the NCBP to establish an appropriate framework for urban government through the development of enabling legislation for municipalities within regions, restructuring and staffing o f municipalities, strengthening o f planning and management capacity, mobilization of fiscal support from own and other sources to meet investment and recurrent needs, and improvements inland management and basic service delivery. Such efforts infour reforming regions o f Amhara, Oromiya, Tigray, and SNNP have been undertaken with assistance from .the IDA-financedCapacity Buildingfor Decentralized Service Delivery (CBDSD) Project. Tax systems reform. Following the Government reorganization in mid-2001, a separate Ministry o f Revenues was created and the Tax Reform Taskforce strengthened to ramp up Government's revenue performance. Efforts that followed under the Tax Systems Reform Program (TSRP) included strengthening oftax policy capacity o fthe Ministryo fFinance and Economic Development (MOFED), overhaul and codification of the income tax law; introduction o f presumptive and value-added taxes; adoption o f a tax payers identification system; reorganization o f the Federal Inland Revenue Authority (FIRA) and its various branches; development and implementation o f operational manuals for tax officials and training manuals for taxpayers; and computerization o f tax administration at the federal, regional, and local levels. Strengthening of customs administration is also envisaged in the future. Revenue performance since the end of the war (excluding grants) has increased to approximately 14% o f GDP and is expected to increase following the recovery after the 2003 drought year. - 11- Justice system reform. While the comprehensiveJustice Systems Reform Program is still under development, the Government continued to pursue reform efforts over the 2001-2003 period including a nation-wide baseline assessment of the full range of justice systems institutions, law revision and law reform activities; a second phase of court administration reform including records and case management; the establishment of a judicial in-service training institution; and the roll-out of training for judges. Information technology solutions for e-government. Several PSCAP subprograms including CSRP, DLDP, UMCBP, and TSRP sought to implement IT-based applications as part of Ethiopia's broaderpublic sector modernizationefforts. While these early applications development efforts continued during the 2001-2003 period, the major initiative of the Government in 2002-2003 was the design and implementation of large scale woreda- and school-basedV-SAT networks to provide the backbone for a range of educational and public sector applications. As follow-up to these efforts, the Government has also continued with work on strategic and policy development; training of senior and technical personnel; and upgradingand improvementof facilities. Despite their rapidly expandingscope and scale, Ethiopia's public sector capacity buildingefforts through 2003 have been largely supported by fragmented donor projects and financed in an ad hoc manner. Inmany cases, direct capacity building support provided to regions has been offset inthe generalpurpose transfers.Inaddition, concerns relatedto the degree oftransparency inthe implementation of capacity building, problems in effectively leveraging global knowledge, as well as the bias towards intensive off-site training activities need to be addressed. Finally, the financing requirements of scaling up each of these above-mentioned subprograms indicated that Treasury resources alone would not suffice; significant external assistance would be required. The 2001-2003 experience with multiple reform efforts undertaken in parallel demonstrated the importance of exploiting the synergies between subprograms described above; using a flexible mechanism of support that could respondto the rapidly evolving needs of various subprograms; empoweringregions and local authorities in setting priorities and achieving results; harmonizing donor support around a single design; and improving coordination across branches and tiers of government. 2.3 Scaling up "state transformation" in2003 and beyond InMay 2003, the Governmentrespondedto above-mentionedchallenges by launching the third and most ambitious phase of its state transformation agenda. Specifically, the MCB announced its intention to rapidly scale up support for the six core public sector reform programs as subprograms under a consolidated five-year federal program called the Public Sector Capacity Building Program or PSCAP. The Government's vision, reflected in its national program document for the PSCAP, was based on three pillars+) simultaneous, nation-wide implementation of six subprograms, sequenced in line with regional and local priorities, (ii) alignment of program support with Ethiopia's public financial management and intergovernmental system, and (iii)harmonization of the fiscal, fiduciary, and reporting requirementsofvarious donors arounda Sector-Wide Approach(SWAP). In the months that followed, several bilateral donors, in close collaboration with IDA, have respondedfavorably with commitments to support the SWAP approach and the pooling of funds around a single design solution including CIDA, SIDA, and EC along with anticipated support from DCI, DfID, KfW, and the Netherlands. Non-pooling donors that have committed to leverage support to the SWAP includeAfDB, France, Germany, Italy, UNDP, and USAID. The bilateral perspectiveon the Program was conveyedto the Governmentthrough an issues note on - 12- harmonization, which was prepared by representatives of donor agencies that participatedin the joint donor appraisalofthe Government's program(Annex 10). 3. Sector issues to be addressedby the projectand strategic choices Sector-WideApproach. Inaccordancewith the requirementsof a Sector-WideApproach, Bank support to the Government's PSCAP will address the full range of "sector" issues across the six public sector capacity building subprograms of PSCAP in a holistic and integratedmanner. The main exception involves activities precluded under the Bank's Articles, such as police, prosecutions,and prisons, which other participatingbilateral donors will seek to support. Salient Design Features. In line with its vision for PSCAP, Government has defined the following features ofprogramdesign: Designation of PSCAP as a federal specific purpose transfer program, appropriated at the federal level and thereforenot subjectto offsets inregional subsidies; Incorporation of donor commitments under PSCAP within the Government's overall macroeconomic fiscal framework and therefore, the overall vertical division of revenues betweenfederal andregional levels; Alignment of donor procedures with Government's rolling medium-term planning, annual budgeting, and monthly SOE-based disbursementprocedures; Explicit identification of rules of the game governing access, allocation, and execution including an established vertical division of resources between federal and regional levels, and a simple formula to horizontal division oftime-bounddrawing rights to PSCAPresources across regional states, followed by performance-baseddisbursements as well as mid- and end-year reallocationofa share of drawingrights to performers(Box 2 and Annex 9); Regular bottom-up regional, and eventually woreda and municipal planning of capacity building activities within assignedmedium-termand annualizedresource envelopes; Poolingof donor resources arounda single design inline with SWAP guidelines; Development of "matrix management" structure, in which federal subprograms provide the prototypes, technical advice, quality assurance, and technical recommendationson approvals of plans, and regions set prioritize resources and implementation activities based on a menu of subprogramactivities through mediumterm and annualplans. Implications for intergovernmental fiscal relations. Two broad intergovernmental issues relatedto PSCAP design are worthy of special mention. First, the establishment of this program marks an important step forward in the evolution of Ethiopia's intergovernmentalfiscal system. As a federal specific-purpose program, it provides the legal basis for PSCAP transfers to be appropriated federally, and therefore, enables regions to draw down external assistance without being subject to "offsets'' in their general purpose transfers. PSCAP also complements the largely equity-oriented general purpose (or the "subsidy") and food security transfers to regions with a performance-oriented capacity building transfer to help sub-national authorities achieve their institutional transformationgoals. Second, support provided under PSCAP is intended to rapidly build up the basic regional and local capacitiesneededto effectively manage the fiscal additionality generated (i) at the regional level, through the 22% p.a. average increase insubsidy transfers over the past three years, and at the local level, through the regional-to-woreda block grants and lump sum, agency fee, and project-basedcapital transfers to municipalities, institutedinthe four largest regions over the past two years. In the current fiscal year, the woreda block grant constituted 45% of total regional expenditures inTigray, 51% inAmhara, 47% inOromiya, and 81% inS N " regions. Even as capacity building "catches up" to Ethiopia's fast moving fiscal decentralization agenda, Government is planning to further develop capital funding mechanisms for localjurisdictions to meet their investment service delivery needs. In order to provide additional incentives for effective demand at the local government level for capacity building under PSCAP and to ensure the sustainability of intergovernmentalfiscal arrangements, Government should condition access to fiscal support for investment on the completion of a specified sequence of capacity building activities under PSCAP subprograms. Such an approach is under implementation in municipalities on a pilot basis under IDA'Songoing Capaciq Buildingfor DecentralizedService Delivery (CBDSD) Project and is plannedfor scale-up underthe proposedLIG inthe future. - 14- Box 2: "Drawing rights" and how they apply to Ethiopia's PSCAP To ensure that sub-national authorities participating in a specific purpose federal program are sufficiently motivated to perform, access to program resources must be a fair and transparent, predictable, and performance-oriented. An establishedapproach to designingprograms inthis manner is to provideregionswith drawing rights. Elements o fthe approachare describedbelow. Understandingdrawing rights. Drawingrightsaretypically assigned-on the basisof a formula-to access a defined quantity o f finance over a fixed period of time upon meeting key eligibility criteria such as the submissionand approvalof relevantmedium-termstrategiesand plans. Once assigned, an initial disbursementagainstthe plan is made, andthen additional disbursementsare made periodically as each implementing agency submits progress reports. Such an approach provides implementing agencieswith assurancethat predictablefunding is available, but does not unnecessarilytie up funding or cash balances with those agencies and sub-nationalauthorities or regions that are not performing per plan. Periodicredistribution ofunutilized drawingrights providesfurther performance incentives. Why drawing rights-additional to general purpose transfers-should be assigned within the macro-fiscal envelope. Specific-purpose transfers that provide fiscal additionality to sub-national authorities need to be placed within the context of macro-fiscal fundamentals. Planned expenditures under such transfers should be reflected within the Government's overall macroeconomic fiscal framework, mediumterm expenditureplans, and proposedverticaldivisionof revenues. For example, inEthiopia, this would require incorporationof external and Treasurycommitmentsto PSCAPwithin the Macro-Economic Fiscal Framework (MEFF), and alignment of PSCAP planning with the Government's financial calendar, budgetclassificationsystem, andother financialregulations. How funds flows can be effectively designed. The flow o f funds under large federal specific purpose programs should be simple. Based on the agreed allocation formula, the federal government releases funding to regions (as a significant portionof the annualrights allocated), which in turn release funds to local authorities (a portion upfront, and the balance as periodic reimbursement). Periodicallythe regionsshouldreview local governmentimplementationand expenditureperformance, and the federal government should similarly review state performance. Inthe event that any implementingagencies are not performing,their unutilizedrights shouldbe subjectto reallocationintoaperformancepooland then to better performers inneed of additional funding. Reallocationshould be limitedto a maximum percentage-for example, 50% o f the unutilized drawing rights-in order to provide a significant incentive for good performance, but not unduly penalizing under-performers that may, due to circumstancesbeyondtheir immediatecontrol, encounterimplementationhurdles. How funds should be released against allocated rights. Once rights are allocated and eligibility criteriamet, periodic releases are made to regionsby the federal government. All initial releases are made against approved plans. Subsequent releases are made against documented performance and satisfactory expenditures from two periods prior to disbursement. For example, disbursement in Period4 will depend on meetingoutputtargets inPeriod2. How a mandatory minimum levelof capacity buildingshould be defined for eligible institutions. All sub-national authorities receiving such transfers should commit to and complete the minimum requiredcapacitybuildingactivities-or the first in a sequenceofbasic humanresource, systemic, and logisticalactivities such as the establishment of local government structures or hiring of a core staff complement-necessary to utilize these transfers in a responsiblemanner. For those regions or local governmentsthat do not have this minimumrequirement in place at the outset, the first application of transfers shouldbe to acquire and implant that capacity. The minimumrequirementswill vary among implementing agencies. For example, in decentralizing settings, most woredas in Ethiopia will probably require less staff and systems than most urban centers, but these minimum mandatory requirementsneedto be defined andmet as a condition for resourceutilization. - 1 5 - C. Project Description Summary 1. Projectcomponents 1.1HowPSCAP's two componentswork The Bank's Support Project is fully aligned with the basic design of the Government's PSCAP. As such, it supports the scale-up of ongoing institutional transformation and capacity building activities through two components-one federal, andthe other regional. Activities plannedunder these two componentswill be drawn from a menuof eligible expenditures consistingof PSCAP's six subprograms and mandatory "program support" (Figure 2). Drawing on this menu, each component is (i)planned based on annualized five-year drawing rights; (ii)adjusted semi- annually and annually; and (iii)reflected in participation and performance agreements with . commitmentsto deliver on specific capacity buildingoutputs. Component 1-Federal PSCAP: This component supports federal level activities across each of the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component is requiredto includebasic programsupport activities to ensure . effective implementation. Component2-Regional PSCAP: This componentconstitutesthe bulk of the Programand is designedto empower regionsto adapt and implementnational reform and capacity building priorities envisaged under PSCAP's six subprograms in a manner that is efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms will be fully leveragedthrough this component. Regions will also shift resources year-to-year and in-year from poor performing to higher performing subprogramactivities. This component is also requiredto includebasicprogramsupportactivities to ensure effective implementation. During the preparation process, a 20%-80% vertical division of PSCAP resources (including Treasury and anticipated donor resources) was established between federal and regional components over the five-year life of the program. Resources assigned for the regional component were further divided horizontally across regional states on the basis of the equity- orientedregional subsidy formula. Financingprovided underthe Bank's Support Project shall be fully aligned with this approach to allocating PSCAP resources in order to ensure predictability and transparency of the drawing rights ceilings within which PSCAP component plans are articulated. It is envisagedthat refinement of this allocation methodology may be required-on the basis ofperiodic reviews-over the course ofprogramimplementation. 1.2 BuildingPSCAF'componentsfrom activitymenus The objectives and specific menus of activities that fall within each subprogram of PSCAP are explained below. Selected and planned on an annual basis, these activity menus of capacity building activities (comprising combinations of technical assistance and consultancy services, . goods and equipment, andtraining) are building blocks for the two componentsdescribedabove. Subprogram 1-Civil service reform. The objective of this subprogram is to promote the development of an efficieht, effective, transparent, accountable, ethical, and performance- oriented civil service. Support under the subprogram includes (i) the strengtheningof the Civil Service Reform Program coordinating structures; (ii)improving expenditure management and control through drafting of financial regulations and directives, roll-out of - 16- budgeting and accounts reforms, implementationof procurement reforms, development of medium-termplanning systems, strengthening of internal and external audit, modernization of cash management, and the roll-out of financial management information systems; (iii) improving the governance of human resource management including the development of prototypepolicieson humanresource development, time management, andremuneration,the implementation of the results-oriented appraisal system, the development of payroll and humanresource informationsystems, and support for subsidiary regulationssuch as the code of ethics; (iv) improvingperformance and public service delivery throughthe roll-out of the Performance and Service Delivery Improvement Program (PSIP) in ministries, agencies, and bureaus; (v) improving accountability and transparency through a parliamentary oversight, anti-corruption, the strengthening of systems and development of innovativetechniques for monitoring fiscal and output performance including expenditure tracking surveys, cost efficiency studies, service delivery report cards; (vi) strengthening of top management systems throughtraining o f senior managersand officials in strategic planning, performance measurement, top managementdevelopment, and value for money management; and finally (vii) building the policy and institutional capacities of emerging regions through the development of basic civil service structures and systems. Linkages with the district-level decentralization, urban management, ICT, and tax systems reform subprograms will be reflected infederal and regionalplans and coordinated during implementation. Subprogram 2-District-level decentralization.. The objective of the subprogram is to deepen the devolutionof power to the lower tiers of regionalgovernment, to institutionalize decision-makingprocesses at the grassroots levelwith a view to enhance localparticipation, to promote good governance, and to improve decentralized service delivery. Subprogram activities include support for (i)woreda manning and training including human resource policies, procedures, and plans as well as bulk training in areas critical to localgovernment; Figure 2. BuildingPSCAP Components from Activity Menus - 1 I - 1 7 - (ii)technical assistance and training for grassroots participation including the development of guidelinesand monitoring mechanisms, and the strengtheningof civil society involvement at the local level; (iii)woreda institutional and organization development including assessment of functional assignments and enabling legislation, assistance in establishing structures and restructuring existing arrangements including local level accountability relationships; (iv) capacity building for policy and program development including technical assistance for woreda decentralization strategy and policy development, benchmarkingand review o f plans; (v) development of woreda fiscal transfer mechanisms and revenue mobilization capacities through the review and design of various intergovernmental fiscal instruments; (vi) strengthening o f the planning system & financial management at the woreda level; and (vii) the development of minimum service standards in priority sectors. Linkages with the civil service reform, urban management, and tax systems reform subprograms will be reflected in .federal and regionalplans and coordinated during implementation. Subprogram 3-Justice system reform. This subprogram, currently a work-in-progress, is designed to promote the rule of law as well as the efficient and effective functions of the justice system as part o f Ethiopia's broader democratization and private sector development processes. Subprogram activities include (i)strengthening the Justice Systems Reform Program Office and regional equivalents; (ii) strengtheningthe courts by providing in-service training o fjudges and court clerks, court administration reform, development o f records and case load management systems, and identification of measures to enhance access to justice; (iii)support for law reform including the development of systems and procedures for declaring income and property, identification of new areas for law development, compiling and preparation of laws and regulations, and drafting o f stock exchange and other laws; and (iv) strengthening o f legislative process including training, technical advisory services, and acquisition of equipment for staff o f federal and regional standing committees on legislative drafting and analysis of legislative process and management, as well as training for members o f standing committees on principles of federal grant and intergovernmental fiscal framework, monitoring and impact assessment, HIV/AIDS and gender issues, accountability and participation. Linkages with the civil service reform, urban management, ICT, and tax systems reform subprograms will be reflected infederal and regional plans and coordinated during implementation. It should be noted that IDA will not finance activities outside the .remit of its Articles such as strengtheningofpolice, prosecutions, andprisons. Subprogram &Urban management capacity building. This subprogram aims to enhance the capacity of municipalities in the delivery of services and enable urban centers to play a more effective role in social and economic development. The major activities envisaged under this subprogram include (i) technical assistance for the development of federal and regionalpolicies related to urban development, housing, urban land, municipal structures, the formation o f municipal associations; (ii) technical assistance for the deepening o f municipal decentralization through the preparation of manuals governing resource management, review and organization o f training and human resource needs, establishment o f regional planning units, and development of fiscal transfer and revenue mobilization mechanisms; (iii) support for local government restructuring and capacity buildingincluding restructuring o f water and sanitation, urban land, and other services, development and roll-out o f financial, human resource, and land systems, and organizational and related reviews, as well as bulk training for municipal officials and staff. Linkages with the civil service reform, district-level decentralization, ICT, and tax systems reform subprograms will be reflected in federal and regionalplans and coordinated during implementation. - 1 8 - Subprogram %Tax systems reform. The subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency o f collection), and ensure equity and fairness in the tax system through a comprehensive overall of the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities: (i)continued development of tax policy and legislation including amending the current income tax legislation to reflect the current business and investment environment, implementing presumptive and value-added taxes, strengthening enforcement powers o f tax collection bodies, and sensitization of taxpayers inter alia through establishment of a Taxpayer office; (ii)roll-out ofthe computerized Tax Payers' Identification Number(TIN) system in74 regional centers, improving information sharing between the Federal Inland Revenue Authority (FIRA), Ethiopia Customs Authority (ECuA), as well as regional and city administrations; (iii)customs reform and modernization including the review o f legal framework, review and implementation o f customs procedures in line with COMESA, deepening of ongoing implementationof performance improvement in ECuA, establishment of a customs laboratory and training center, roll-out o f management and core staff training in areas such as human resource development, IT management, WTO valuation system, commodity classification, and application of international conventions on simplification of customs procedures. Linkages with the civil service reform for examples, performance activities in ECuA), justice, ICT, and tax systems reform subprograms will be reflected in federal and regional plans, and coordinated during implementation. Over time, the tax systems reform program will be coordinated with plans to develop sub-national taxes as . envisagedunder the district level decentralization and urban management subprograms. Subprogram &Information & communications technologies (ICTs). The objective of this subprogram is to harness ICTs for the development of human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seekingto use ICTs inthis manner. Successful implementationo f ICT-based solutions across government will require support for (i) resourcedevelopmentthroughthedevelopmentofanICThumanresourcestrategy, human ICT curricula for schools, vocational training centers, and universities, as well as the training of trainers, the establishment of distance learningcenters, and the financing of research on the use o f ICTs; (ii) use for public service and good governance through the development o f ICT information systems strategies, development of service delivery applications, establishment of data centers and government portals, W A N and LANs, as well as the procurement of required hardware and software; and (iii)ICT for sector development including the installation of applications in the social and infrastructure sectors; and (iv) community-based ICT systems and services through the development o f strategies, applications, and local content for community information centers to facilitate specific developmental activities. While the development of public sector applications such asfinancial, human resource, and land management systems will be procured under respective reform programs for example, CSRP, UMCBP, TSRP), sector-speciJc applicationsfor example, agriculture) will be financed under the ICT subprogram. Plans for these applications will be coordinated between subprograms, regions, and ICTDA. Mandatory activity-Program support. As a requiredactivity at boththe federal andregional level, program support is designed to ensure speedy implementation of the six subprograms in a holistic manner. It will finance incremental costs associated with operating requirements of Planning and Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, related subprogram offices that serve members of the federal and -19- regional Technical Teams, and relevant offices in the Ministry and Bureaus o f Finance and Economic Development. Specific support activities will include the costs o f progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, basic training, auditing, office supplies, equipment operation, transport, travel, and per diems. Program(andsuuuort project)comuonents Indicative Bank- Component Sector costs YOofTotal financing YOof Bank- (US%M) (US%M) financing 1. FederalPSCAP Multi-sectoral 80.0 20% 20.0 25% 2. RegionalPSCAP Multi-sectoral 317.8 80% 80.0 25% TotalProgramCost 397.8 100% 100.0 25% 2. Key policyand institutionalreformssupported by the program The Bank's Support Project will contribute-through the six public sector capacity building subprograms of PSCAP-to a wide range of policy and institutional reforms at federal, regional, . and local levels. These can be categorized as follows: Development of expenditure, revenue, and civil service management systems. A variety o f legal, institutional, and procedural changes related to expenditure, revenue, and human resource management envisaged under the CSRP and TSRP. These include proclamations, directives, regulations, and circulars governing the Government's financial calendar; medium-termforward planning; strategic planning and performance improvement; budget classification; double entry, modified cash accounting; cash or liquidity management; modern ' internal and external audit (and legislative oversight); and professional standards for public sector accounting and auditing cadres. Revenue sector reforms include directives and guidelines related to various federal, regional, and local taxes such as the VAT, the presumptive tax, as well as local land and user fees. Procedural improvements are envisaged for the Tax Payer's Identification Number as well as the administration o f the various new federal and regional taxes and customs. Similarly, the legal and institutional reforms governing the civil service will be sought including a new code of conduct for civil servants; the establishment of institutional charters for public bodies; a remuneration policy inclusive . of revisedjob grades; and a humanresource policy. Strengthening the intergovernmentalfiscal system and administrative structures. The DLDP and UMCBP subprograms will support the adoption of enabling legislation for woredas and municipalities within regions including the assignment o f revenue and expenditure responsibilities and the corresponding transfer o f functional responsibilities from regional bureaus (for example, of health and education) to local authorities. They will also support the development of new instruments for fiscal and administrative decentralization such as the design o f capital fundingmechanisms for localjurisdictions and the establishment o f new structures for woredas and municipalities. Guidelines for ensuring vertical accountability (for example, service delivery standards) and horizontal accountability (for example, procedures for participatory budgeting) will also be supported. In addition to the above-mentioned reforms envisaged under the program, the creation of PSCAP as a federal specific purpose transfer itselfrepresents an important step forward inthe evolution of Ethiopia's heretofore equity-oriented intergovernmental fiscal system. The - 20 - program's design-based on equity-oriented allocations, followed by performance-based disbursements and reallocations-accommodates other proposed fiscal transfers such as the proposed Local Investment Grant (LIG) Program to meet the investment needs of local service delivery. Role restructuring and performance improvement. Across all the subprograms, the Program will support restructuring of the role, functions, and work organizations of ministries, agencies, bureaus, local governments, courts, and other institutions. These organization-specific efforts are also intended to establish the accountability framework, standard operating procedures, review mechanisms, and esprit de corps appropriate to performance- or results-oriented management. Completion of law reform and revision. In addition to the legal framework for various aspects of woreda and municipal decentralization, urban land, and public administration, the Program will support a broad agendarelatedto law reform and revision including revisions o f the family, administrative, and commercialcodes. Strengthening of courts and parliamentaryoversight bodies: The JSRP will also support procedural reforms and new institutional arrangements design to improve the functioning of thejudiciary and legislative oversight bodies such as budget and public accounts committees. Development of information systems and IT architecture: The ICT elements of PSCAP will support the development of information systems strategies and applications roadmaps to guide the roll-out of Government systems in areas such as financial, human resource, land management, as well as service delivery. 3. Benefits and target population The benefits of PSCAP interms o f improving the overall quality o f federal, regional, and local institutions are expectedto be as follows: Improved delivery of rural, urban, social, and legal services: Ultimately, the Program will enhance the scale, efficiency, and quality of service delivery across priority sectors including agricultural extension, health, education, urban land supply and management, a range o f municipal services, business registrationand licensing, and legal services. Increased predictabilityof resourceflows: The roll out o f planning, budgeting, and related financial management reforms under the CSRP will not only encourage adherence to the financial calendar but also improve the quality of fiscal data and the predictability of resource flows. The establishment o f robust intergovernmental fiscal transfer systems within regions will also contribute to predictable and transparent flows o f financial resources to regions, their bureaus, and local governments. Improved inclusiveness of planning and budgeting: By promoting open and transparent systems of planning and budgeting, particularly at the woreda and municipal levels, the Program will improve the efficiency of allocative decisions. More inclusive budgetingand planning processes tend to produce more demand-responsive spending patterns, particularly at the local level. -21 - Enhancedmotivationand incentivesfor staff: The roll out of the human resource reforms under the CSRP will include streamlined and less hierarchical grading systems that promote initiative and career advancement. In addition, the development of medium-term, affordable wage policies and improve staff performance evaluation systems will motivate staff and provide better incentives for themto performat all levels of government. Increased fiscal autonomy of local governments: The assignment o f expenditure and revenueresponsibilities will enhance the fiscal autonomy o f woredas and municipalities, i.e., the inflow of unearmarked resources that can be allocated according to local priorities. Restructuring and capacity building for woredas and municipalities will also enhance their tax autonomy and revenueperformance. Enhanced operational and cost efficiency: Through restructuring and performance improvement activities across sectors, the Program will improve the operational efficiency of sectoral MABs, other regional institutions, woredas and municipalities, as well as the courts. Specifically, the cost efficiency and demand-responsiveness urban, rural, social, and legal services would improve, as well as associatedsectoral outcomes. Improvedtransparency of government institutions: Strengthening of evaluation capacity, anti-corruption bodies, statutory and legislative oversight institutions (such as the Human Rights Commission and the Public Accounts Committee) will increase the availability of information on the performance of state institutions to the public. Expanded opportunities for public sector in-service training: The Program will rapidly expand opportunities for civil servants at the federal, regional, and local levels to receive in- service training incritical areas such as planning, budgeting, tax administration, procurement, personnel management, monitoring and evaluation, economic management, the law, as well as computer literacy and IT maintenance. Public and private suppliers will in turn receive several opportunities to deliver training to a vast and diverse clientele. Utilization of new technologies: PSCAP will facilitate the transfer o f appropriate information technologies to public institutions involved in service delivery. From basic computerization o f manual processes to the implementation o f complex integrated financial management systems, ICT-related benefits under the Program are expected to include efficiency gains in Government procedures and processes, and improved the quality and availability o f information on government performance. Ultimately, the Programwill benefit citizens and their communities (particularly the poor) as well as economic agents such as farmers and the urban private sector through improved service delivery, empowerment, and greater transparency and accountability of government institutions. Intermediate beneficiaries will include civil servants at the federal, regional, and local levels; woreda and municipal officials; the judiciary and their staff; staff involved in basic legislative processes; revenue and tax authorities; public, private, and non-profit training institutions; the media; and service providers. 4. Institutionaland implementationarrangements As Ethiopia's multi-sectoral capacity building platform, PSCAP represents an important innovation and challenge in terms o f inter-ministerial and intergovernmental coordination. Overall, the Government i s adopting a "risk aware" approach by building on established -22- implementation modalities (for example, for planning and budgeting, funds flow and disbursement, as well as procurement) developed under the Education and Health Sector Development Programs. The following distinguishing features of PSCAP are worth noting in terms oftheir implications for its underlying institutional and implementationframework: PSCAP is inherently multi-sectoral, comprising six cross-cutting subprograms. Successful implementation of these subprograms necessarily requires the active participation of several lead institutions at the federal and regional levels (for example, the Urban Development Capacity Building Office in the Ministry of Federal Affairs and its lead role in carrying out federal activities of the Urban Management Capacity Building Program and supporting regions on sub-nationallevel activities). Unlike financing provided under the Education and Health Sector Development Programs, federal specific-purpose transfers under PSCAP are additional to the regional subsidy. Formula-driven "drawing rights" are not entitlements but commitments that may be reallocated-within parameters-if not properly and efficiently utilized. In other words, regions that access PSCAP are therefore subject to performance-oriented conditionality. Such an arrangement places a premium on timely financial and activity-based monitoring within year, and output-basedmonitoring acrossyears. Third, several multilateral and bilateral donors have respondedto the Government's desire to pool resources around a Sector-Wide Approach to PSCAP in order to ensure that all regions and subprograms under the Program have access to predictable and adequate financing. These SWAP arrangements necessitate a transparent process of joint review, appropriately alignedwith the overall SDPRP monitoring and annual budgetingcycles. In response to these new challenges, the Government has developed a governance and institutional framework that places a premium on four governance principles+) intensive coordination across tiers and branches of government, (ii) compliance with clearly definedrules of the game (for example, for allocation and reallocation); (iii)transparency and information sharing (for example, on matters of performance) within the public sector and with the public at large; and (iv) extensive support to implementing agencies in the design, execution, and quality assurance ofreform activities. These are describedbelow and depictedinfigure 3. 4.1 Governanceandcabinet levelaccountability A unique feature of Ethiopia's capacity building system is the role of the Minister of Capacity Building-as head of the "super-ministry"-within the framework of cabinet decision-making. Specifically, (s)he is accountable to the Council of Ministers for the overall achievement of agreed upon semi-annual and annual outputs and results for PSCAP. Inorder to deliver on these results, the Minister-in coordination with other cabinet ministers for lead PSCAP institutions including the Ministries of Federal Affairs, Finance and Economic Development, and Revenues-will approve regional and federal plans, allocate federal and regional budgets for PSCAP, and oversee program implementation. In addition, the Minister will ensure that the PSCAPsystem ofplanning, resourceallocation, execution, andre-allocation operates ina fair and transparent manner on the basis of clearly defined rules. In supportinghidher final proposals to cabinet (and eventually parliament) on resource (re)allocation within PSCAP, the Minister of Capacity Building will rely on the recommendations of federal and regional Technical Teams (see below) as well as technical experts inthe Ministry ofFinanceandEconomic Development. - 23 - Similarly, at the regional level, the heads of bureaus of capacity building will be responsible for endorsing PSCAP plans in coordination with bureau heads of other lead institutions; seeking appropriation of regional contributions for infrastructure and recurrent costs of PSCAP activities from regional parliaments; and achievingthe agreed upon outputs and results of regional PSCAP, as reflected inannualsummary performanceandparticipation agreements. It is important to notethat the JSRP is managed by a steeringcommittee comprisingawide array of stakeholders across branches of government at the federal and regional levels. At the federal level, the steeringcommittee consists of members from the Supreme Court andHouse of Peoples' Representativesalong with the Ministry of Justice and Ministry of Capacity Building. Similar steering committee arrangements for JSRP exist at the regional level. These bodies will continue to function, as established, within the overall governance framework for PSCAP. 4.2 Federallevelimplementationarrangements Ministry of Capacity Building. The Ministry of Capacity Building (MCB) is responsible for macro-level management of Ethiopia's national capacity building efforts such as PSCAP including establishing policies, designing national strategies, ensuring their integration with sectoral strategies, developingguidelinesfor programmingcapacity building, providing technical support to regions, and evaluating ongoing program implementation. The Ministry, and specifically, the State Minister of Capacity Building is responsiblefor the overall coordination of PSCAP; serves as co-chair of the Joint Government-Donor PSCAP Working Group; and coordinates Governmentparticipation inregular formal reviews of implementationprogress. For purposes of day-to-day management of PSCAP, the Ministry coordinates an inter-ministerial FederalTechnical Team (FTT), and houses a Planningand ProgramDirectorate (PPD) as well as . a Budget andFinance Directorate(BFD). Roles andresponsibilitiesof each are describedbelow. Federaltechnical team. The FTT comprises inter alia the director of MCB's Planning and Programming Directorate as well as PSCAP's six subprogram directors, as well as representativesfrom MOFED and MFA is a critical quality assurance and coordinationbody. As such, the FTT is responsible for reviewing, appraising, and recommending approval of annual plans submitted by federal lead institutions and regions in line with technical criteria delineated in the PIP (for example, completion of the "mandatory minimum'' capacity building activities, sequencingof reform activities, provision ofregional financing for upfront civil works and ongoing recurrent costs of IT investments). It is also responsible for reviewing in-year and annual performance and recommending re-allocations o f five-year drawing rights betweennon-performingand performing regions. During implementation, the FTT-with the support of the PPD and BFD-supports the development of content of reform programs, provides quality control and review of outputs produced by consultants prior to approving payment; defines equipment specification and undertake acceptance tests of equipment procured; develops communication and change management strategies; and ensures the quality and consistency ofreform efforts. Ifneeded, additional technicalexpertise will be recruitedon atemporary basisto assist FTT inappraisingapplications of a specialized nature(for example, those underthe ICT component). Planningand programmingdirectorate. A planning and programming directorate (PPD), housed in MCB, serves as the secretariat for the Program, and specifically for the State Ministerresponsiblefor PSCAP andthe federaltechnicalteam. The PPD issues andenforces operating guidelines; assists the FTT in the vetting of annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates - 24 - coordination between members o f the federal and regional technical teams; assists in consolidating, managing, and organizingthe supply o f training across six subprograms; helps the FTT provide detail follow-up and quality assurance during implementation; implements communication and change management strategies; and consolidates quarterly, semi-annual, and annual progress reports. The PPD also serves as the counterpart institution to the Joint Government-Donor PSCAP Working Group and shall therefore facilitate review and supervision missions, as well as information sharing such as disclosure o f annual and other relatedreports, survey data, and other occasional papers. Budget and finance directorate. The budget and finance directorate (BFD) o f the MCB is responsible for overall monitoring o f procurement under the Program. It is also tasked with procurement and financial management o f the three federal level subprograms that fall within the Ministry's mandate-namely CSRP (except "expenditure management and control" activities), DLDP, and JSRP (except "strengthening thejudiciary' activities). The directorate is also responsible for carrying out internationalcompetitive procurement of goods under the Program. Supported by a full complement of local procurement specialists and international advisers, the directorate will work closely with subprogram directors and staff in the CSRP, DLDP and JSRP Offices in the MCB to vet and finalize TORS, undertake equipment specification, technical evaluation, drafting and negotiation of contracts, and contract management. It will work with regions and other lead institutions for international competitive procurement o f goods. The directorate will commit to service standards interms of efficiency and timeliness of financial management and procurement activities. Ministry of Finance and Economic Development. The Ministry o f Finance and Economic Development (MOFED) is responsible for enforcing the rules of allocation and access for this flagship intergovernmental transfer program. The Ministry (and specifically, the Regional Affairs Department), in collaboration with the MCB, i s responsible for effecting vertical and horizontal divisions of PSCAP resources; issuing formula-based medium-term drawing rights or notional envelopes to govern medium-termplanning and annual budgeting; and recommending mid-year and annual reallocations of five-year drawing rights. Both the Central Accounts Department (CAD) and Counterpart Funds Unit (CFU) are responsible for the overall financial management under the Program including recording for budgetary support grants and loans. While the CFU manages the various special accounts (including requesting replenishments), the CAD will focus on closing o f local currency accounts and the consolidation of financial reports. Opening and closingthe special account, transfer of funds to the local currency accounts, andthe replenishmentoffunds arethe responsibility ofthe Treasury Department (TD). Subprogram offices in lead institutions. The mandate for supporting the implementation ofthe six subprograms of PSCAP rests with subprogram offices inlead institutions. Overall, the role of lead institutions responsible for subprograms at the federal level is to ensure that this large constituency of eligible institutions are informed and consulted in the preparation o f medium- term and annual plans. Specifically, the MCB housesthe subprogram offices responsible for the Civil Service Reform, District-Level Decentralization, and Justice Systems Reform Subprograms. The newly created ICT Development Authority holds the mandate for the ICT Subprogram. For purposes o f day-to-day management, the Expenditure Management and Control Program(EMCP) Coordinating Office within MOFED is responsible for "expenditure management and control" activities under the CSRP. The Ministryo f Revenuemanages the Tax Systems Reform Program, and the Ministry o f Federal Affairs has the responsibility for the Urban Management Capacity Building Program. The Supreme Court is responsible for day-to-day management o f federal PSCAP activities related to "strengthening the judiciary." As lead institutions, these ministries - 25 - and authorities with subprogramoffices are delegated the financial management and procurement autonomy to carry out activities relevant to their reform mandates. In addition, the Ministry of Federal Affairs has established a taskforce to provide additional technical support to emerging regions such as Afar, Benishangul-Gumuz, Gambella, and Somali to carry out PSCAP-related activities. Other eligible institutions at the federal level. Severalother federal institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and its six subprograms. These include sector ministries (for example, for health, education, and infrastructure), authorities and agencies (for example, the EnvironmentalProtectionAgency), and other offices within the executive branch; public sector training institutions such as the Ethiopian Civil Service College; thejudiciary or the courts; as well as supreme audit and oversight bodies such as the Office ofthe FederalAuditor Generalandthe public accounts committee. 4.3 Regionallevelarrangements Bureaus of Capacity Building. In each of Ethiopia's eleven regions (including Addis Ababa and Dire Dawa), the Bureaus of Capacity Building (BCBs) are responsible for program coordination. For purposes of day-to-day managementofPSCAP, the BCBs coordinate Regional Technical Teams (RTTs), and house Planning and Program Directorates (PPDs) or equivalents including ProcurementDesks. Roles andresponsibilitiesfor each are described below. Regional technical teams. Ineach region, an RTT comprising inter alia the director of the regional Planning and ProgrammingDirectorate as well as subprogram directors from lead institutions such as the Bureauof Finance and Economic Development, the Bureauof Trade, Industry, and Urban Development, the Bureau of Capacity Building, and the Bureau of Justice serves as the quality assurance and coordinationbody for PSCAP. As such, the RTTs are tasked with ensuring the consolidatedregional plans meet eligibility, appraisal, and other criteriaprior to their endorsement by regionalcabinetsand submissionto the FTT. Ifneeded, additional technical expertise will be recruited on a temporary basis to assist RTTs in appraisingapplications of a specializednature(for example, those under the ICT component). During implementation, regional technical teams-with the support of PPDs-support the development of content of reform programs, provide quality control and review of outputs produced by consultants prior to approving payment; define equipment specification and undertake acceptance tests of equipment procured; develop communication and change managementstrategies; andensure the quality and consistencyofreform efforts. Planning and programming directorates or equivalents. Planning and programming directorates (PPDs) or equivalents, housed in BCBs, serve as secretariats for PSCAP in regions and will maintain close links with the federal PPD. Each regional PPD enforces nation-wide PSCAP operating guidelines and relevant regional guidelines; assists the RTT in the vetting of annual plans for quality and completeness; ensures participatory planning processes are undertaken; facilitates coordination between members of the RTT; assists in consolidating, managing, and organizing the supply of training across six subprograms; supports regional PSCAP procurement activities (see below); helps the RTT provide detail follow-up and quality assurance during implementation; implementation of communication and change management strategies; consolidates quarterly, semi-annual, and annual progress reports; and facilitates regional involvementinsupervisionand review missions. Procurement desks. Procurement desks, established within regional BCBs, are tasked with carrying out all relevant regional procurementactivities for PSCAP. The desks are supported -26- by at least two local procurement specialists and work closely with the beneficiary institutions to vet and finalize TORS, undertake technical specification and evaluation, drafting and negotiation of contracts, and contract management. In addition, Desks are expected to commit to service standards to ensure the timeliness of procurement activities within respectiveregions. Bureaus of Finance and Economic Development. In each region, the Bureau of Finance and Economic Development (BOFED) is responsible for all relevant financial management activities required under the Program including managing funds flows through Channel 1, ensuring monthly consolidation of Statement of Expenses, ensuring the accuracy and timeliness of financial reporting, and effecting payments on local and foreign contracts in line with the recommendationsofthe regionalPPD. Other eligible institutions at regional and locallevels includingworedas and municipalities. Several regional institutions are eligible to receive support-in-kind including through asset transfer-under PSCAP and its six subprograms. These include sector bureaus (for example, for health, education, and infrastructure) as well as authorities and agencies within the executive branch; public sector training institutions such as Regional Management Institutes; the regional and localjudiciary or the courts; audit andoversight bodies; andworedas andmunicipalities. Eventhough the actual transfer of PSCAP resources from regions to woredas and municipalities is not currently envisagedat this stage, the bulk of PSCAP support i s expected to be delivered in- kind at the local level. In order to ensure a close match between regionally managed activities and woreda and municipal level needs, the PSCAP planning process is expected to incorporate a sample of woreda and municipal development plans. Woredas and municipalities are expectedto be informed about eligible expenditures under PSCAP so that capacity building activities (for example, accounts and budget reform roll out or bulk and hands-ontraining) are appropriately reflected in development plans. The introduction of PSCAP transfers from regions to woredas andmunicipalities will be consideredat amore advanced stage of programimplementation. 4.4 Joint Government-Donorinstitutionalreview processes A Joint Government-Donor PSCAP Working Group has been establishedto support information sharing on capacity building, as well as joint preparation, appraisal, and supervision activities. On the Government's side, the MCB and MOFED are primarily involved in supporting this harmonization agenda. From the donors' side, members to date include AfDB, CIDA, DCI, DBD, EC, Finland, France, Germany, IDA, Italy, Japan, KfW, Netherlands, SIDA, UNDP, and USAID. The active involvement ofthese members inregular, institutionalizedjoint Government- Donor review of implementationis critical to the success of a Sector-Wide Approach to PSCAP. Specifically, formal quarterly review meetings of the Addis-based Joint Government-Donor PSCAP Working Group are heldto review implementationprogressreports. Inaddition, a semi- annualmulti-donor supervisionmission and an Annual Joint Government-Donor Review Mission (ARM) are heldprior to and/or during the mid-year reallocation and annual allocation exercises. Both the supervisionmission and ARM contribute to the ongoing due diligence requirementsof IDA and other donors; findings feed into the various allocative decisions undertaken by Government, as well as the Annual Progress Report on the SDPRP. GeneralTerms of Reference for these arrangements are containedwithin the PSCAPHarmonization Agreement. Y 1 IA A - 28 - D. Project Rationale 1, Projectalternativesconsideredand reasonsfor rejection The Government, IDA, and other donor partners considered and rejected the following four project alternatives infavor of a fifth alternative,describedbelow. Alternative 1: Other bilateral donors take the lead. The first alternative consideredwas to encourage bilateral donors take the lead in financing the nation-wide, integrated program with marginal involvement from IDA. The Government considered this unviable since no other donors had the ability to help scale up PSCAP in terms of their ability ta commit the required financial resources or their ability to convene global knowledge resources across a variety of reform areas (for example, civil service reform, urban management). The Governmenttherefore sought IDA'Sleadrole amongPSCAPdonors. Alternative 2: Support providedthrough six separate, stove-piped IDA projects. A second alternative was to support six separate operations for each subprogram. Neither the Government nor the Bank considered this "stove-piped" approach robust in terms of exploiting the inter- linkages and synergies across the subprograms, or ensuring a flexible, bottom-up approach to planning and implementation. Furthermore, the administrative costs to the Bank of supporting numerous different capacity building operations was deemed excessive. Finally, the likely coordination problems for Government and donors that would result from a "stove-piped" approach were precisely what the creation of the National Capacity Building Program was designed to address. The scale and network economies that derive from integrating the six subprograms under the umbrella o f an omnibus national program were recognized early by the Government, IDA, and other donor partners. Alternative 3: Support leveraged purely through balance of payments support. A third alternative consideredby the Bank and donors such as DfID was to provide additional financial assistance to the Government's capacity building programs-financing primarily through Government's own treasury resources inFY2002 and FY2003 -through "direct budget supportyy or DBS operations such as the Poverty Reduction Support Credits (PRSC). The weaknesses of this alternative are three-fold. First, DBS commitments as a share of overall development assistance in Ethiopia-while considerable-would not be sufficient to cover the financing gap for the full range of SDPRP priorities such as food security, health, and education and capacity building. Second, the lack of clarity on and institutionalization of key aspects of PSCAP design such as rules of access, allocation, reallocation, and disbursement meant the DBS would constitute undue fiduciary and operational risks. Finally, the advisory support and peer review requiredfor avariety of capacitybuilding activities-for example, the design and implementation of financial management or land management systems, necessitate intensive day-to-day interactionand disbursementapprovals at the level of specific plans ratherthan annualbudgets. Alternative 4: Replicateand enlarge the CBDSD design. Another alternative was to design a larger version of the Capacity Building for DecentralizedService Delivery Project. This existing operation inter alia seeks to provide support on a first-come, first-served basis-through a series of demand-driven financing windows within the Urban Management Capacity Building Subprogram-to beneficiaries that successfully apply for capacity building support from a menu of eligible expenditures. It also provides a combination of flexible or demand-driven and projectized support for the Civil Service Reform. While this approach to design sought to - 2 9 - provide greater flexibility, the early experience with CBDSD revealed three weaknesses that contributed to less than satisfactory physical and financial performance. First, the project originally intended to provide short-term, opportunistic financing for certain advanced capacity building subprograms, and therefore was stove-pipedwith separate components for UMCBP and CSRP. This type of design was neither intendedto nor amenable to nation-wide scale up of the other four subprograms(DLDP, JSRP, TSRP, and ICT) ina flexible manner. Second, the project does not delegate financial and procurement responsibilities to regions, and only partially delegates these responsibilities to the MFA. Third, the project provided financing through Channel 2 (through sector ministries) rather than through Channel 1 (through the finance ministriesand bureaus), even though the latter is more amenable to larger scale implementation. The Borrower therefore sought an alternative design, which was aligned to Ethiopia's intergovernmentalsystemand amenable to a larger volume of disbursements to regions. Alternative 5. IDA leveraging donor assistance for Sector-Wide Approach for PSCAP. Having considered these alternative support modalities, the Bank has sought to support the Government's PSCAP with a five-year, US$lOO million Support Project, using a Sector InvestmentLoan or SIL. The Support Project aims to leverage considerable bilateral assistance, which will be provided under a Sector-Wide Approach through (i)pooling of funds through Channel 1, which is Government's preferred modality for leveraging assistance under PSCAP, and (ii)third party or Channel 3 arrangements. Transitional arrangements for donors with existing projectsare beingidentifiedto further encourage harmonizationaroundthe SWAP. Options for using various IDA lending instruments were reviewed at lengthwith the Borrower in order to ensure that the Support Project could be effectively aligned in terms of designwith the Government's program. The longer term time horizon of the APL with specific multi-year performance targets were considered insufficiently flexible for the Government's proposed system of generating semiannual and annual output commitments from beneficiaries, and re- allocating resources on a mid-year and annual basis. In addition, the transaction costs of processingmultiple phases of an APL would be ill-suitedto the significant short-term financing needs of PSCAP overall. The SECAL was deemed redundant to the ongoing serial balance of payment support operations(or the Poverty Reduction Support Credits) and also inappropriateto the requirementsofimplementationsupport. 2. Major relatedprojectfinanced by the Bank and/or other development agencies HIV/AIDS I Multi-SectoralHIV/AIDS Proiect-ESMAP I S I S I IPastoral Development I PastoralCommunityDevelopmentProject I S I S I - 3 0 - Sector Issue Donor Involvement DecentralizationSupportActivity for Expenditure Managementand Control (USAID, DCI); InternalandExternalAudit Subprogram(DCI); Auditor General Civil Service Reform Capacity Enhancement(CIDA); ExpenditureManagement, Supportfor Freedom of InformationAct, Top ManagementCapacityBuilding(DffD); OverallSupport (UNDP) District-Level District-LevelDecentralization(DfID);Various "Area-based Programs" including Decentralization for regionaladministration(CIDA, DCI, Netherlands, SIDA) ParliamentCapacity Building (CIDA, DCI); Court AdministrationReform Justice Sector Reform (CIDA); Justice Sector ReformProgram(CIDA. SIDA, UNDP) Tax SystemReform Tax System ReformProgram(DfID, EC, IMF, Netherlands, SIDA, UNDP) UrbanManagementand Municipal Managementand DevelopmentProgram(GTZ); Municipal Leadership Development Program(EC) Informationand Communication Support for ICT developmentand School-Net (UNDP) Technologies 3. Lessons learnedand reflected inthe projectdesign The design o f the Government's program, and therefore by the Bank's Support Project, builds directly on lessons learned from Ethiopia's recent experience with public sector capacity building as well as the international experience in discrete areas o f public sector reform including civil service and expenditure management reforms, decentralization, legal and judicial reform, tax administration, and ICT. The design also seeks to build on examples o f successful program design incountries undergoingrapid institutional transformation. 3.1 Lessonslearnedfrom Ethiopia Lesson 1. Projectized capacity building efforts supported by various donors in Ethiopia over the 1990s tended to be fragmented and poorly coordinated. They lacked the flexibility necessary to meet the fluid demands of institutional change. Multiple projects imposed significant transaction costs on beneficiaries through distinct financial management and reporting requirements. Scattered geographically based onthe interests o fvarious donors, these area-based or projectized initiatives didnot, inmost cases, provide nation-wide coverage. In deliberate attempt to break with the past, the Government has created a Ministry of Capacity Building to coordinate a Sector-Wide Approach that pools donors resources around a single design solution to PSCAP with common fiduciary requirements. The design allows the Government to more thoroughly exploit economies of scope across capacity building programs (for example, civil service reform and decentralization) by usingthe Government's own planning and budgeting system to encourage beneficiary institutions to prioritize across the full range of eligible PSCAP expenditures on a yearly basis. It would also follow a system o f performance- baseddisbursementand reallocationto rewardperformers. Lesson 2. Ethiopia's tried and tested implementation strategy for managing rapid institutionalchange relies on a combination of top-down prototyping,and to a lesser extent, bottom-up implementationplanning. This approach to rapid implementation was evident, for example, during the creation of the federation, the woreda and municipal decentralization process, and the re-launching of the CSRP. Increasingly, the Government has encouraged - 3 1 - learningby doing initiatives at the regional and local levels; these initiatives help identify "good practices" that are subsequentlythen scaled up (for example, municipal and urbanland reforms). The PSCAP planning and budgeting system enables regions and their local governments to prioritize the roll out of prototypes and other prescribedactivities within a resourceenvelope and in line with their sub-nationalpriorities. The traditional practice of federal authoritiesproviding informal guidance and direction, as well as the increasing tendency of regions to innovate approaches to public sector management (for example, strategic planning) have been formalized through the creation of a "matrix management" structure with subprogram directors providing quality assurance or technical advice, and regions determining implementationpriorities between subprograms inany given year. Lesson 3. The generally satisfactory record of other large scale operations such as the EducationSector Development Program (ESDP) can be attributed to their alignmentwith the intergovernmental fiscal system; delegation of financial management and implementationresponsibilities to regions; and a strong effort on donor coordination. Other successful operations such as ESRDF benefited from a nation-wide network of implementation hubs that support planning, project management, and supervision. By the same token, the CBDSD project faced significant implementation delays in part because the project did not sufficiently delegate financial and procurement management responsibility (for example, for locally procured goods and services) to regions. Nor did it explicitly align planning and prioritization of procurement activities with the Government's planning and budget cycle. Finally, the key executingagency was not sufficiently equippedto coordinateproject activities. Overall, PSCAP's institutional architecture will follow and build on arrangements employed under the SDPs and ESRDF. Specifically, the program will delegate financial and procurement responsibilities to lead ministries at the federal level and lead bureaus at the regional level. Planning of PSCAP activities will be undertaken in line with the established Government procedures and in accordance with the financial calendar. The funds flow from federal to regional levels will follow `Channel 1" (Le., from MOFED through the BOFEDs). A network of secretariats at the federal and regional levels will be used to ensure proper coordination of this nation-wide effort. Lesson 4. In Ethiopia's resource-scarce public sector, behavioralchange has resulted from extrinsic and intrinsic incentive measures. Anecdotal evidence suggests that civil servants in Ethiopia respond favorably to both formal extrinsic incentives such as increasedpay and formal performancetargets, as well as intrinsic motivational measures suchas participatory self-scrutiny, positive reinforcementby the leadership, and sensitization campaigns. These efforts to strengthen intrinsic motivational factors have resonatedwith actors within Ethiopia's prevailing bureaucratic and political culture. Such measures, employed in the Civil Service Reform Program, have resulted in tangible improvements in service delivery performance including greater client orientation on the part of public servants (for example, inthe Ministry of Trade and Industry and the Addis Ababa City Administration). The reliance on intrinsic incentive mechanisms such as self-scrutiny has two implications for PSCAP. First, inthe short term, such measures inconjunction with significant capacity building support are viewed as effective means of motivating performance and institutional change. In subsequent phases of capacity building, the Government is intending to rely more heavily extrinsic incentives. Second, intrinsic incentive measures including a nation-wide mobilization and planning process, which relied heavily on peer review, have also been employed by the - 32 - Government to communicate the objectives and expectedoutcomes of PSCAP, and elicit formal commitments from regionsand federal institutionsto performancetargetsunder the Program. 3.2 Lessonslearnedfrom internationalexperience Lesson 5. Sustaining rapid institutionalchange is often difficult, but feasible when political and technocratic ownership are closely aligned. In a few African countries such Uganda and South Africa where the learning by doing process has been (i)supported by high level political commitment and clearly defined strategic framework, (ii)enriched through the involvement of competent technocrats, and (ii)opened up to regular review by experts, stakeholders, and the public at large. In such settings, the roles of the legislature, media, public at large in regularly reviewing change processeshave been institutionalized as well. The program's matrix management structure-built around subprograms and regions-as well as regular joint reviews by donor teams is intended to provide timely technocratic support to the ongoingprocess of change. At the same time, the participatory planning and review processes as well as regular monitoring and evaluation including through client surveys are anticipated. In addition, reviews of public sector reform processes such as the multi-donor financedInstitutional Governance Review, CFAA and CPAR updates, and ultimately, the Government's Annual Progress Reports on the SDPRP should provide the basis for more intensive scrutiny of implementationprogress. Lesson6. Based on its extensive experience across a wide range of institutionalsettings, the Bank has identified several elements of good practice that should be incorporated in the design of public sector reform programs. The Bank's corporate strategy paper, "Reforming Public Institutions and StrengtheningGovernance," identifies the following corporate priorities which should inform the design of specific public sector reform operations-(i) a shift in focus from the content of public policy to the way policy is made and implemented, (ii)support for a broadrangeofmechanismsthat promotepublic sector reform; (iii) emphasis on goodfit over best practice; (iv) enhanced support for institutional development through multi-sectoral programmatic lending; and(v) a focus on organizingBank teams to do better institutional work. IDA support during PSCAP preparation and implementation reflects these broad corporate priorities in the following ways. Program beneficiaries use the Government's own planning, budgeting, and executionprocesses as a way of prioritizing and sequencingtheir implementation of capacity building activities across the six PSCAP subprograms, and ensuring "good fit" with the specific institutional transformation needs of individual regions. The six subprograms of PSCAP address a gamut of issues related to the fundamental reform o f the state including the creation of a local government sphere, establishment of formal checks and balances, and the introduction of performance oriented public management systems. PSCAP also is inherently multi-sectoral and seeks to avoid "stove-piping" through the involvement of sectoral institutions at each level of the planning and implementationprocess. Finally, PSCAP is supervised with the helpofa sizeable Addis-based, multi-donor team, organizedto leveragethe core competenciesof different members ofEthiopia's aid consortia insupportinginstitutional development. 4. Indicationsof borrowercommitment and ownership Since the mid-l990s, Ethiopia's leadershiphas demonstrateda unique level of commitment to the PSCAP agenda and its precursors. Described below are six indicators of borrower ownership of the Programand its likely sustainability. - 33 - Track-record of rapid institutional change. The Government's track-record in supporting rapid institutional change over the past decade is arguably one of the most compelling indicators of its ownership of PSCAP and the state transformation agenda. Watershed moments in the evolution of this agenda include the creation of the federal state system, the establishment of regionalsubsidies andworedablock grants, andthe re-launchofthe CSRP. Establishment of institutional framework. Following political reforms in 2001, the Government established a "super-ministry" for capacity building to coordinate and monitor institutional transformation processes. Capacity building focal points such as the CSRP liaison offices have also been designated within each of the key economic management and sectoral ministry. Capacity building bureaus were also established in the regions to ensure progress in rolling out key NCBP activities to the sub-national level. Put simply, capacity building was institutionalized as government-wide concern-a development that would profoundly affect public spending in Ethiopia. Using its new institutional framework for capacity building (including the numerous federal and regional officials newly redeployed to capacity building offices across the country), the Government re-launchedthe nation-wide roll-out of established subprograms such as Civil Service Reform, Tax Systems Reform, and to a lesser extent, Justice Systems Reform, and launchedfor the first time several new subprograms such as District-Level Decentralization, UrbanManagementCapacityBuilding, andICT. Allocation of Treasury resources. As a clear indication of high level political commitment to public sector transformation, the federal government committed and efficiently disbursed significant Treasury resources to PSCAP related subprograms over the FY2002-03 period (see table 2). Senior officials at the regional and city levels followed suit by increasing expenditure allocations to certainsubprograms such as civil service reform and urbanmanagement, as well as encouraging bottom-up innovations among public sector leaders (for example, the strategic planning initiatives of the Tigray health bureau and the far-reaching restructuring the Addis Ababa City Administration). Table 2. Expendituresof Treasury resourcesinPSCAP-related subprograms, FY2002-2003 (in millions of EthiopianBirr) Capitalexpenditures BudgetItems Budgeted I Actuals 1. Programmanagement 2.0 I 1.o 2. Justice svstemreformprogram 21.4 I 16.1 3. ICT 51.8 I 48.9 4. DLDP 6.7 I 5.2 5. csm 6.8 I 6.6 6. UMCBP 3.9 I 2.0 Total I 123.0 I 108.4 I Development of Government plans and strategies. In early 1999, the Government took the initiative to develop a National Capacity Building Strategy and Framework under the direct supervision of the Prime Minister and other senior Ethiopian leaders. By mid-2001, it had developed a National Capacity Building Program Document, a Capacity Building White Paper, and several subprogram documents with detailed strategies and plans. The PSCAP planning process itself has been unprecedentedwith the preparation of five-year mediumterm plans by all elevenregions andfederal subprograms. - 34 - In March 2003, the MCB prepared an initial program document proposingthe omnibus Public Sector Capacity Building Program or PSCAP and a held a series of consultationswithin regional and sectoral institutions starting in May 2003. These consultations revealed a broad and diverse nation-wide constituency determined (i)to help develop the proposed omnibus program comprising various reform initiatives; (ii) to play by explicit rules of the game for accessing much-needed capacity building resources; and (iii) to utilize PSCAP to achieve broader goals such as improved service delivery. Participatoryprogramidentificationat technical and politicallevels. Under the leadershipof the Ministry of Capacity Building, the Government initiated an unprecedented nation-wide mobilization and strategic planning campaign around PSCAP and specifically, the notion of "scaling up state transformation." Teams from all the regions of Ethiopia participated in a medium-term planning exercise that was carried out through a series of bi-weekly peer review meetings over the June-September 2003 period. Regions set up steering committees to oversee the preparationof consolidatedregionalPSCAPplans. Regionaltechnicalteamsjoined afederal technical team to define the eligible expenditures for the program (based on the content of each subprogram), prepared five-year plans that prioritized activities across subprograms, and developed a narrative around the transformation process. Consolidated PSCAP plans for each region were prepared and rigorously peer reviewed over this period of intensive preparation. A federal plan was also prepared. IEC activities sought to raise awareness at the grassroots level of the objectives of PSCAP throughvarious media including television, radio, newsletters, and oral or word of mouth traditions (for example, community-based Afari and Somali traditions). The already impressive preparation process helped confirm the leadership role for MOFED in ensuring transparent and fair resource allocation across regions and the lead role of other technical ministries inensuringquality inrelevant reform areas (for example, MOR intax reform or MFA inurbanmanagement). Over the 2003-2004 period, ownership of the objectives and priorities underlying PSCAP has been confirmed on numerousoccasions by senior members o f Ethiopia's leadership in the press, public meetings, and through other media. By mid-September 2003, a wide range of political leaders, bureaucrats, citizens, and training institutions at federal, regional, and local levels were mobilized and organized around PSCAP as the Government's primary instrument for state transformation. Engagement with internationaldonor community. Notwithstanding its own contributions, the Government acknowledgedthe considerable financial and technical assistance gap that remained inrolling out its various reform programs. As the immediate-post war period came to a close, it actively sought assistance and engagement from the international community. A high-level seminar involving the Council of Ministers andmembersofthe Bank's team was a heldinSodere in October 2001, followed by a range of CAS Workshops on capacity building, decentralized service delivery, and private sector development in 2002. A Consultative Group meeting later that year also provided an opportunity for Government to articulate the objectives and document the progress made across its public sector reform subprograms. Donors in turn committed and delivered short- to medium-term assistance to the Government. Notably, the Bank's CBDSD Project was approved and declared effective by early 2003. Short-term assistance from other donors such as the EC, CIDA, DCI, DfID, GTZ, Italy, Netherlands, and SIDA was also committed. - 35 - 5. Value added of Bank support in this project The substantial and complex requirementsof Ethiopia's state transformation agenda necessitates IDA's intensive involvement for three reasons-i) managing the demands of rapid nation-wide scale up, (ii)leveragingthe comparativeadvantage of IDA and other interested partners, and (iii) mitigating risk factors associatedwith serialdirect budget support. Managing the demands of rapid, nation-wide scale up. The scale and scope of the Government's public sector capacity building program are unique in Africa (with the notable exceptions ofUgandaand SouthAfrica), as is Ethiopia's political commitmentto overcomingthe fiscal and operational challenges to successfully implementing "state transformation." Of the various donor partners involved in capacity building, IDA is best positioned to help the Government bring to scale this nation-wide, multi-sectoral program of institutional overhaul within acceptable levels of risk. In addition, IDA financing in the context of Sector-Wide Approach to public sector capacity building also enables the Government to "smooth" out fluctuations in the provision of bilateral aid resources across regional states within the federal system, across subprograms of PSCAP, andacross time. Leveraging the Bank's comparative advantage and that of other partners around a "single design solution" to PSCAP. IDA brings to bear considerable cross-country experience in severalofthe reform areas under implementationas part of PSCAP including urbanmanagement, district-level decentralization, civil service reform, and ICT. It is also leveraging its experience as a lead or strategic partner in supporting large scale capacity building programs in the few African countries that embarked on complex and rapid transformation strategies (for example, IDA's provided critical programmatic support to Uganda's multi-pronged effort to deepen democratic decentralization, civil service reform, expenditure management, and legal-judicial reforms over the mid-late 1990s). Overall, inEthiopia,the Bank is also playing a catalytic role in encouragingdonors-particularly those with intensive experience at the sub-national level and in areas such as justice systems and tax reform-to pool their support and harmonize around the Government's "single design solution" for PSCAP. Mitigating risk factors associatedwith serial direct budget support. A final set of rationaleof Bank involvement relates to mitigating the fiduciary and implementation risks associated with IDA's as well as bilateral direct budget support programs designedto help Government achieve poverty reduction objectives in the SDPRP. Specifically, assistance to be provided under PSCAP-for example, for the modernization of expenditure management systems, or restructuringand skills development inworedas and municipalities-are expectedto significantly strengthen the confidence of Ethiopia's aid consortia that budgetary resources are being effectively utilized to deliver essentialserviceswith adecentralizedframework. E. SummaryProgramAnalysis 1. Economic For this "framework"-type project and the larger federal program that it seeks to support, the Governmentwill rely on its medium-planning and annual,budgetingsystems to generate federal and regional applications with time-bound capacity building proposals. These applications and proposals will be comprised of costed plans that are screened within indicative formula-driven resource envelopes or drawing rights. Eligibility criteria will include inter alia the establishment of agreed institutional arrangements (including regional planning and programming departments - 36 - or equivalent, responsible for PSCAP); completion of relevant capacity assessments or inclusion o f assessments in first year plans; submission of medium-term action plans and annual. procurement plans using standard unit costs within established resource envelopes; and submission of endorsed (either by regional cabinet or federal ministry head) participation and performance agreements. Generic appraisal criteria include inter alia the relevance of planned activities against assessed constraints; provision for completion o f "the minimum mandatory" capacity building (defined across subprograms); provision for program support (for example, financial and procurement management and M&E); and evidence o f participatory planning including sample plans for local jurisdictions. Subprogram-specific appraisal criteria are also envisaged and will include appropriateness o f sequencing strategies recommended by federal program director; sector-specific technical analysis; the previous year's performance; and submission of relevant TORS. Mid- and end-year reallocations o f drawing rights are intendedto provide an incentive and inthe process ensure the economic viability o f project activities. 2. Financial Three sets o f financial issues are relevant to the Support Project. First, it is important to note that fiscal additionality provided by PSCAP to regions will be explicitly reflected within the Government's Macroeconomic Fiscal Framework (MEFF), medium-term Public Investment Program (PIP), and the annual vertical division of revenues. While the additionality will likely be marginal to these macro-fiscal targets, the Program will be designedina manner that continues to securethe macroeconomic management fundamentals. Second, the ex ante civil works (facilities) and ex post recurrent expenditure implications o f capacity buildingactivities are not included in the list of eligible expenditures under PSCAP. Inthe case of regions, these costs will needto be identified as well as their fiscal sources prior to drawing down on PSCAP resources. Third, implementation of PSCAP activities are expected to result in improvements in expenditure and revenuemanagement, stronger cashor liquiditymanagement, streamlined government operations, and enhanced fiduciary accountability at all levels o f government. While the direct financial benefits of project activities may not be realized in the short term, increased receipts and better value for money at all levels are expectedover the medium-term. 3. Technical Several aspects o f the content o f various reform subprograms under PSCAP will requireongoing review and scrutiny. As a "framework"-type project, the nature and sequencing of this content will needto be developed and managedflexibly through the annual planningand implementation review processes within standards prescribedby subprogram directors. A central feature of the PSCAP system is the "matrix management structure" in which Technical Teams comprised of subprogram directors and supported by PPDs ensure the quality of regional plans, priorities, and implementationprocesses. 4. Institutional 4.1 Executing agencies At the federal level, responsibility for execution has been delegated across lead institutions that house each o f the six PSCAP subprograms or key elements o f these subprograms. Specifically, the executing agencies tasked with overseeing implementation of the federal PSCAP component are: (i) MCB, which houses offices for the Civil Service Reform, District-Level Decentralization and Justice Systems Reform Subprograms; (ii) MOFED, which is responsible for the overall funds flow to federal and regional institutions, and also undertakes day-to-day management o f - 3 7 - CSRP activities related to expenditure management and control; (iii) responsible for the MOR, Tax Systems Reform Subprogram; (iv) the ICTDA, which houses an implementation unit for execution of the ICT Subprogram; (v) MFA, which houses an office for the Urban Management Capacity Building Subprogram; and (vi) the Federal Supreme Court, which houses an office for day-to-day management of JSRP activities related to the strengthening of the courts. This approachto delegatingmanagement across lead ministries is appropriate to the Program's multi- sectoralfocus. It will also encourage accountability for subprogram implementationin exchange for greater autonomy for lead ministries to oversee and satisfactorily meet their day-to-day implementation responsibilities. As noted earlier, the MCB's Planning and Programming Directorate (PPD) will serve as the body responsible for overall coordination across the various executing agencies notedabove. Underthe Program, the BureausofFinanceandEconomicDevelopmentas well as the Bureausof Capacity Buildingare also designatedas executingagencies, responsible for the regional PSCAP component, upon approval of signedparticipation and performance agreements. Specifically, BCBs and their PPDs undertake day-to-day management (including planning and programming, procurement, and M&E) and BOFEDs carry out all financial management activities on behalf of lead regional institutions with technical mandates for each of the six PSCAP subprograms (for example, BCB for Civil Service Reform) or the Bureau of Trade, Industry, and Urban Development for UrbanManagementCapacity Building). 4.2 Programmanagement As reflected in its Program Implementation Plan (PIP), the Government has strengthened program management framework for the federal level implementation of PSCAP. Specifically, programmanagementwill be supportedby (i) the PlanningandProgrammingandthe Budgetand Finance Directorates (PPD and BFD) of MCB, both of which will be appropriately strengthened with internationaland local expertsto carry out the full range of program management activities; (ii) tosupportday-to-daymanagementofeachsubprogramor,wheredesignated,elements offices of subprograms at the federal level; and (iii) FederalTechnical Team, comprising subprogram a directors, taskedwith quality assurance during planning and implementationfor the Programas a whole. Similar arrangements in regions comprise (i)PPDs along with Procurement Desks, housed in BCBs, responsible for program management of the regional component; (ii)inter- bureau regional technical teams, who will fulfill the quality assurance function at the regional level; and(iii)BOFEDswill be responsible for paymentbasedonthe approvalof BCBs. In addition to the generally robust framework for program management described above, the Government is taking steps to rapidly embed necessary expertise in the PPD and BFD at the federal level, PPDs at the regional level, and relevant staff in MOFED and BOFEDs prior to effectiveness inter alia through the recruitment of experienced consultants with expertise in financial management, procurement, and program management. Where necessary, resident advisors are intendedto support subprogramdirectors as members of the FederalTechnical Team (andtheir counterpartsinregions). 4.3 Procurement In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD in the MCB shall serve as the lead agency responsible for monitoring all procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In - 3 8 - addition, the Ministry's BFD is responsible for handling all ICB procurement of goods. National procurementof goods andselectionof consultants would be handledas follows: Procurement for the three subprograms under MCB (CSRP, JSRP, and DLDP) will be handled by MCB procurementunit from preparation of bidding documents and RFPs, until award of contract. The contracts for procurement of goods would be signed by MCB. The contracts for the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specificationsand Terms ofReferences andtechnical evaluationof bidsandproposal. Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT, "expenditure management and control" activities under CSRP, and "strengthening of the judiciary" activities at federal level will be carried by the Ministry of Revenue, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), and the EMCP Coordinating Office in MOFED and a designated office in the FederalSupreme Court respectively. BCBs are responsible for handling all procurement activities, except ICB procurement of goods, for the respectiveregions and city administrations (Le., Addis Ababa andDireDawa). Relevant lead institutions in each region would participate in the preparationof procurement plans, specifications,terms of reference, technical evaluationof bids andproposals. MFA is tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-GumuzandGambella) inthe management ofprocurementas required. It is anticipated that procurement arrangements will evolve as capacity increases. Regional proposals for building up their procurement capability and for changes in procurement arrangements will be regularlyreviewed and assessed by the BFD, and semi-annually by IDA and donors. A morethorough analysis ofprocurementarrangements is provided inAnnex 6. 4.4 Financialmanagement (see ProgramImplementationPlanand Annex 6A) PSCAP is legally constitutedas a specific federal grant to be executedby multiple institutions at the federal level, as well as regional BOFEDs and BCBs at the regional level. Four features of PSCAP's institutional framework have been identified as pertinentto the overall fiduciary risk of the Government's program: (i)alignment of PSCAP's planning, budgeting, and execution arrangements with the public finance system, (ii) provisions for embeddingfinancial management capacity across executing agencies, (iii)the utilization of the "Channel 1" modality for funds flow, and (iv) the planned pooling of donor and Treasury funds. These are described in detail below includingthe rationaleand implications for managingfinancial management risks. 9 As prescribedunder a Sector-WideApproach, the program(and therefore the Bank's Support Project) will align resource allocation, planning, budgeting, and execution practices and procedures-where they are deemed to be robust-with those established under Ethiopia's public financial management regulations. Specifically, federal and regional institutions participating inthe Programshall use Government's chart of accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, prepare rolling medium-term and annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government's financial system is designed to ensure that the planning and execution of capacity building activities is undertaken in a flexible manner in line with - 3 9 - the changing demands on the ground. It is also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financedand implemented. The major financial management risks to PSCAP (and therefore the Bank's Support Project) involve coordination and capacity constraints across numerous planning and programming departments (PPDs), BOFEDs, and federal subprogram offices involved in implementation. In order to mitigate these risks, all PPDs will recruit additional staff to strengthen their capacities and MOFED will provide regional staff with extensive training in the financial management requirements of the Program. Inaddition, the preparationand issuance of short and concise guidelines, as part of the PIP, on recording and reporting of the financial transactions of the Program is a crucial step in accelerating the implementation of the Program. The guidelines will be used by the staff of the executing agencies such as federal subprogram institutions and regional BOFEDs after MOFED conductsthe necessary training. MCB will take the responsibility in the overall coordination of the Program's implementation. After receiving the required financial reports from MOFED, MCB will prepareand submit regular financial monitoringreportsto IDA. As described in the PIP, funds flow arrangements under PSCAP eventually involve the pooling of external resources (for example, from IDA and other bilateral donors) with Treasury resources. These pooled resources are then channeledfrom MOFED to designated federal and regional beneficiaries through "Channel 1" in line with assigned drawing rights and against monthly SOE-based disbursement procedures. Under the Channel 1 procedure, as practicedunder the Educationand Health Sector Development Programs, the specialized finance bodies at each administrative level control the release of funds and report upwards on their utilization. The same principles apply to both recurrent and capital budgets. Although MCB and Regional Bureaus of Capacity Building have a special role in approving and supervising the capital budget, the disbursement and accounting functions remain with Figure 5. FundsFlow andReportingArrangements under PSCAP r----------' 1 I r----------q I IDA CreditAccount I i Governmentof Ethiopia I I Washington,DC I Contribution I I ! II ! I IDA SpecialAccountinUSD at NBE(MOFED) f---- PSCAP PooledLocalCurrencyAccount at NBE/CB(MOFED) at NBE(MOFED) -+ LocalCurrencyAccounts LocalCurrentAccounts Reportingon expendituresI (RegionalBOFEDs) (Leadfederal institutions) +Flowoffunds - 40 - MOFED and the Regional BOFEDs. At the federal level, designated lead institutions will serve as executing agencies that receive funds directly from MOFED to carry out capacity building activities. Other federal bodies such as sector institutions implementing the CSRP or other subprograms do not receive funds; rather lead institutions procure goods, training, and services on their behalf. At the regional level, BOFEDs will receive funds through Channel 1 based on approved annual plans in the same way as they currently receive Treasury resources. As notedabove and depictedinFigure 5, PSCAP is intendedto pool resources from domestic and externalsources inthe context of a SWAP. Accordingly, for each donor, including IDA, MOFED intends to open a Special Account (SA) in US Dollars at the National Bank of Ethiopia. In addition, MOFED will open one Birr account-the "pooled account"-for which money from the SAs and the government contribution will be deposited. The Birr account will serve as a consolidatedfund for all donors and the government. MOFED will be responsible for the day-to-day management of the SAs and the pooled Birr account. Funds will be movedfrom the Foreign ExchangeSpecialAccounts inthe National Bank of Ethiopia to the Pooled PSCAP Account, and forwarded to the beneficiaries, based on the approved budget and agreed disbursementplan. Thus, released funds of one donor can be replenished from another donor on the basis of claims made. Although donor funds will be allowed to be kept in SAs in foreign currency, they will be transferred into Birr as soon as they are to be used and sent to the regions to cover anticipated expenditures. Part of the donor funds, however, will be kept in foreign exchange to be disbursed at the request o f MCB and the regional capacity building bureaus through their regional finance bureaus. These funds will be drawn from the particular region's allocation and be used to cover the costs of imported goods. The SAs established inthe National Bank of Ethiopia by MOFED to receive donor contributions(including those from the Bank)are revolving funds. Once funds are transferred to the pooled account, or direct expenditures against approved contracts are undertaken for earmarked funds, replenishments can only be made when the necessary expenditure reports are received from the federal and regional beneficiaries (through their BOFEDs). It is absolutely crucial that these reports and other necessary documents are submitted monthly to the CAD. Otherwise, partofthe programmay be stalleddueto lack ofdonor funds. A single financial reporting format is to be prepared by executing agencies, that is, federal lead institutions and regional BOFEDs. These forms will deal with both Government and donor funds used in the implementation of PSCAP. In addition donors such as IDA will need to receiveat leastmonthly replenishment requests. The overall conclusion from the financial management assessment is that the existing Government system-where deemed sufficiently robust-can be used for the implementation of PSCAP (and therefore the Bank's SupportProject), provided that additional staff are recruited at all levels and the required trainings are provided by MOFED on recording and reporting of the financial transactions. A more detailed analysis of financial management arrangements and associated risks is providedAnnex 5A. 5. Environmental Not applicable. -41 - 6. Social As noted earlier, it is anticipated that PSCAP will affect a wide range o f stakeholders with myriad-at times competing-interests. Primary participants in public sector reform activities that will be affected by PSCAP include federal, regional, and local level public servants (both general administrators and frontline workers in sectors); officials and interest groups involved in the managementofcontrol and sectoral agenciesat the regional and local level; officials and staff within supreme audit institutions; the judiciary and legislative oversight institutions such as the public accounts committee; as well as the indigenous suppliers o f training, equipment, and knowledge services requiredfor PSCAP including public and private training institutions, various local firms, and NGOs or not for profit institutions. Indirect clients of public sector capacity buildinginclude ordinary citizens inurban and rural areas, who could potentially take advantage o f the greater opportunities for democratic decision-making under woreda or municipal decentralization. Citizens and local communities are also expected to benefit from service delivery improvements resulting from various PSCAP subprograms. The private sector is also poised to benefit from anticipated improvements in public sector governance (for example, greater improvements in commercial justice or reduction in the processing time for business licensingor customs clearance). Overall, the social development impact of PSCAP will depend on the degree to which institutional reform and capacity building efforts improve three critical aspects o f state-society relations-inclusion, accountability, and cohesion. These are discussed below along with the prospects that specific subprograms in PSCAP would provide key "entry points'' for deepening social development impact. Inclusion. Under PSCAP subprograms, public officials are expected to undergo the attitudinal and behavioral changes necessary to foster the participation, free expression, and genuine inclusion of citizens, communities, and marginalized groups in public processes, such as planning and budgeting. Particularly worth o f note are the CSRP, UMCP, and DLDP programs, which support the development of more predictable and participatory planning and prioritization processes. Efforts to foster grassroots participation both in woredas and municipalities are also envisaged. Risks that such consultation "prototypes" and capacity methodologies will be excessively top-down and formulaic should be noted and monitored in the future.Greater focus on improvingandmonitoringthe quality-not simply the quantity- o f local representation inpublic decision-making shouldbe maintained. Accountability. The Program intends to support performance management and other related efforts to improve the accountability of public servants for efficient, effective, and client- oriented service delivery. In addition, capacity building activities are intended to result in unbiased and judicious exercise of regulatory authority (for example, in case of business licensing or customs clearance) in order to improve governance. Several subprograms including CSRP, JSRP, TSRP, and ICT (as well as those subprograms focusing on local government) serve as "entry points" through which service delivery operations, as well as citizen monitoring of frontline delivery performance can be strengthened. Key success factors are the Government's continued commitment to involving citizens and the private sector inthe monitoring o f public sector performance (for example, through client score cards and surveys), and also its track-record indisseminating the findings of such efforts. Cohesion. The Program seeks to improve the capacity of public officials to carry out resource allocation, service delivery, regulatory, and related activities in a fair, transparent, and non- arbitrary manner-that is, increasingly in compliance with explicit and established rules o f - 42 - game. Scope for speedy recourse and redress will also be critical for economic agents in commercial and other disputes. Such an approach to public management i s critical to balancingthe diverseinterests of stakeholders and encouraging cohesion (or the accumulation o f social capital) across diverse stakeholder groups such as regions, local communities, and other such groupings. The JSRP, CSRP, TSRP, and ICT all support strengthening of executive, judicial, and legislative oversight functions that delineate and enforce the legal and regulatory framework within which public officials and economic agents such as farmers as well as private sector firms function. The credible commitment o f both state and non-state actors to new rules and regulations is an important indicator o f success. To further encourage cohesion across a diverse stakeholder group under PSCAP, it will also be important to monitor the success of the federal government in encouraging emerging regions to join the mainstream o f Ethiopian public administration practice, while meetingtheir specific cultural and institutional needs. Similarly, regions will need to rapidly build capacity in poorer and more remote woredas, and ensure appropriate targeting o f capacity building efforts towards historically marginalizedgroups such as women. Finally, the performance-based features o f the PSCAP system itself-that is, the proposed mid-year and annual reallocation o f drawing rights based on performance-poses an important resource management challenge for the Government. Ifmanagedtransparently and fairly, the system could helpdeepenthe implementationo f fiscal federalism including healthy competition for federal resourceswithin and across regional states. However, arbitrariness in the application of PSCAP's rules or poor dissemination of the rationale for (re)allocative decisions could undermine credibility o fthe system. Overall, the Government is well-positioned to leverage the social development impact of the Program provided that (i)increasingly bottom-up approaches to consultation and local level capacity building are employed; (ii)citizens, firms, and public officials are involved in the monitoring and publicly reviewing service delivery performance; and (iii)state institutions (including those involved in allocating and managing PSCAP resources) operate in a fair and transparent manner to balance the interests o f diverse stakeholders, specifically the poor and historically marginalized groups. These and related issues are further detailed in a social appraisal report, archived inthe project files. The report recommends that future review missions focus on the above-mentioned social development and related risks over the course of implementation. Suggestionson specific monitoring indicators are also included. 7. SafeguardPolicies - 43 - F. SustainabilityandRisks 1. Sustainability The sustainability of institutional reforms and capacity building activities under PSCAP depend on the following six factors, which have beenaddressed inthe context for programdesign. As a "framework" rather than "blueprint" -type operation, the Bank's Support Project will depend on the Government's system of programformulation and execution, and specifically, how effectively it articulatesand enforcesthe rules of game governing access, allocation, and re-allocation. Of particular importance in institutionalizing PSCAP is the degree to which these rules are formally locked into the intergovernmentalfiscal system (for example, through PSCAP's designation as a specific purpose federal program additional to the regional subsidy, or the use offormula-baseddrawing rights andperformance-baseddisbursements) as well as Government's reliance on establishedplanning and budget proceduresto guide year- to-year prioritization processes. Alignment with the fiscal system is a key design principle underlying PSCAP; this bodes well for the program's viability. The reform content of plans and the quality of implementationwithin this "framework"-type project will be a second factor affecting value for money and sustainability. Given the complexity of capacity building and institutional reform activities, the credibility of PSCAP as a whole will depend heavily on the review and quality assurance mechanismsthe support planning, appraisal, and implementation at the federal and regional levels. Particularly noteworthy are the benefits that will likely derive from institutionalizing regular coordinated feedback from donor partners on the implementationof various subprogram activities within the overall federal andregionalPSCAPcomponents. Third, the program's multi-sectoral scope places a premium on effective coordination within and across tiers of government. The Government's network of capacity building offices and liaison .units at the federal, regional, and local levels provides the basic institutional framework for this type of coordination. However, the efficacy o f these arrangements will depend in large part on the clarity of roles and responsibilities between capacity building, finance, and sectoral offices at each tier of government. The role of institutions outside the executive including the legislatures and courts will also need to be appropriately defined. Recent efforts by the Government to clarify the roles and responsibilities as well as the accountability framework for the Program overall are highly encouraging. Specifically, delegation of program management responsibilities to federal subprogram offices and regions, as well as delineationof financial management andprocurementarrangements across tiers of governmentbode well for coordinationefforts during programimplementation. Coordination among donors is a fourth factor necessary to ensure the continuity of Government's institutional reform efforts. Organized in the form of a Sector-Wide Approach, the multi-donor support for PSCAP will reduce transaction costs and maximize consolidatedexternalfunding arounda "single designsolution." The establishment of a Joint Government-Donor Working Group to support quarterly reviews, semi-annual supervision missions, and Joint Annual Review Missions will likely enhance transparency and credibility of Governmentefforts under PSCAP. Fifth, the credibility and viability of the PSCAP system will require that Government showcase tangible improvements inservice delivery performanceearly on. Notable successes -44- such as dramatic reductions in processingtime for business licensing, increasedconvenience and client orientation of one-stop shops in Addis Ababa, or rapid improvements in land management incities such as Mekele and Bahir Dar are all indications that capacity building makes a difference for the "bottom-line" ofensuringvalue for the taxpayer's money. A sixth and final concern is the need to ensure a regular participatory review (preferably involving Government, private sector, civil society, and external actors) of change processes to encourage learning-by-doing as well as effective demand for institutional change. The Government's plans to use a variety of monitoring and feedback mechanisms such as surveys, client report cards, and workshops, as well as its commitment to require disclosure or public reporting of the findings of M&E activities under the program is highly encouraging. Equally important is the MCB's commitment to regular disclosure of the findings of these various assessments as well as two-way IEC activities at the federal, regional, and local levels. Over time, it will be critical to foster a safe, yet accountable environment within which public servants andtheir clients can experiment with and develop more effective ways of undertakingplanning, service delivery, andregulatory activities. 2. Criticalrisks Implementation of this ambitious and complex program poses an array of technical, managerial, and coordination-related challenges for Ethiopia's federal, regional, and local governments. . Three risks inparticular (and associatedriskmitigation measures) are worth highlighting. First and foremost, weak institutional capacity at all levels-and especially in emerging regions-poses significant financial, procurement, and program management risks to this ambitious project. Timely and accurate reporting on financial flows and physical implementation performance will be critical if the results-oriented reallocations envisaged under the Program is to function effectively. The major financial management risk for the Program is that MOFED may not receive timely reports to process replenishments of the special account and closing of the annual accounts of the Program due to limitedinstitutional capacity across tiers of government, and specifically within BOFEDs and BCBs. Also, PSCAPwill stretch the alreadyweak capacity of federal andregional institutionsto undertake procurement and contract management activities. In light of the implementation challenge that PSCAP poses, the Government's plans to strengthen federal and regional PPDs, the BFD, and subprogram offices inter alia through the recruitment of skilled local and international consultants, intensive training in the operational guidelines, and early preparationand approval of Terms of Reference and procurementdocuments is encouraging. The role of MFA in providing technical support for plan preparationand implementation in emerging regions is also noteworthy. The adequacy of such efforts should be monitored, particularly inthe first year of implementation, andremedialactions identifiedearly. Second, while the PSCAP design places a premium on flexibility, the Governmentwill likely face difficulties in adjusting the program semi-annually and annually, and reallocating drawing rights to meet changing circumstances and needs. At this stage, notwithstanding progressmade on aligning PSCAP process with the new financial calendar and overall public finance system, the capacity currently available to make such rapid allocative adjustments, remains weak and probably inadequate. Strengtheningof PPDs, as noted above, should help mitigate this risk, although major efforts to improve financial and physical reporting across tiers of government should continue inthe runup to implementation. Also worthy of note is the Government's commitment to joint quarterly, semi-annual, and annual reviews with all -45 - stakeholders including donors. These reviews are to be aligned with the planning and budgetingcycleto ensure that adjustmentsare reflected inthe annualbudget (Annex 9). Third, in-service training on a massive scale is envisaged under PSCAP requires. The importance of moving beyond a purely public sector supply response to in-service training demand-given its limitations in terms of scale, cost, innovation, and efficiency-is widely acknowledged by Government and other key stakeholders. Recently, the Government has taken noteworthy steps towards clarifying a three-pronged approach for deepening the involvement of public, private sector, NGO, and university sectors inthe delivery of training under PSCAP. First, the Government has confirmed the critical role of public sector suppliers such as the Civil Service College and Regional Management Institutes in the provision of "in-house" skills development (for example, related to implementation with Government procedures) as well as sensitization with Government policies. These types of activities are to be financed under the IDA program on a unit cost basis, i.e., covering the actual cost of the training sessions rather than the overhead or salaries of personnel inthese public institutions. Second, the role of local and international private providers was acknowledgedas key for highly specialized forms of training (for example, development of skills for the maintenanceof IS/IT networks or best practice land management systems) and would be financed on the basis of competitive tendering under the IDA program. Third, for bulk "generic" training in areas such as generalmanagement, strategic management, finance, leadership development, public speaking, and computing, the Government intends to pre- qualify public autonomous, private, university, and non-profit suppliers to compete on a financial or cost basis for bulk training contracts bundled under the Program. As a basis for pre-qualifying suppliers, the Government intends to move forward with an assessment of the supply-sideofthe training sector. Figure6. A three-prongedapproach to deepeningthe indigenoussupply response In-house Generic Specialized The above-mentionedrisk factors and others are describedand rated inthe table on the following page. Despite severalrisk mitigation measures undertakenby the Government inthe preparation for program launch, the overall risk rating for the operation is consideredhigh. Over the course of implementation, further analysis and assessment will be required to assess the overall risk- rewardratio (inclusive o f fiduciary, institutional, and social development factors) by subprogram, region, andthe programas a whole. -46- Risk Risk RiskMitigationMeasure Rating FromOutputs to Objective Insufficient expresseddemand on the part of :ECcampaignsprior to implementation will citizens, civil society, and the private sector for :ontinue; systematic disclosureof findings of improved public sector performanceinterms H ;ervice delivery and relatedassessment; regular o f service delivery, empowerment, and good workshops with clients governedby institutional governance :harters across civil service institutions Absence of or delay inworedas' and Bothbudget and capital investment support will municipalities' access to fiscal support for N xovide fiscal additionality to capacitatedlocal investmentand recurrent service delivery iurisdictions to meet recurrentand investment needs, after receiving capacity building support service delivery needs Overemphasison process rather than the PSCAP outcomes are defined interms of service bottom-line of service delivery and ielivery impact rather than simply triggers; over empowerment S :ime, outcomesratherthan outputsprovide basis for allocation and reallocation decisions Lack of coordination betweensubprograms and The designempowersregions to prioritize their outputs, or lack of consistencypublic between subprograms, exploiting synergies sector reformprograms across regions S between them, and at the same time, leveraging the expertiseof federal subprogramdirectorsto ensure complies with nationalpolicy directors and standards for content and implementation Politicalcommitment to institutional Highlevelpolitical involvement inconsensus transformation wavers, or Governmentis building around PSCAP across ministries, among unableto sustainfocus on PSCAP becauseits regional leaders; establishment of a nation-wide ambitious development agenda (including food M structureof capacity building bureausand offices security, humandevelopment, rural with budgetaryresponsibilities development, and private sector development) From Componentsto Outputs Vested interests at regional and federal levels At the regional level, allow for prioritizationand hamper various reforms including reallocation from subprogramsthat are stalled restructuring, accountability, and systems S towardsthose proceedingrapidly modernization efforts Lack ofcoordination amongdonors supporting Establishmento f aJoint Government-Donor the Sector Wide Approach PSCAPWorking Group to facilitatejoint quarterly review meetings, semi-annual M supervision, and annualreview missions; increasedsupervision intensity for Bank and donor team includingmeasures to better meet due diligence requirementsinregions, woredas, and municipalities Constraintson the cost, innovation, quality, Assessment ofthe supply-side oftraining and timeliness, and efficiency ofthe supply capacity building across Ethiopia's public, response of purely public sector supply of private, and non-profit sectors; pre-qualification training and capacity building inEthiopia H oftraining suppliers for "generic training" activities; and strengtheningofpublic sector training institutions to carry out "in house" training activities - 47 - Risk Risk RiskMitigation Measure Rating Severe constraintson absorptive capacity in Strong program supportprior to project emerging regions effectivenesswith the assistance ofthe Ministry ofFederalAffairs; offering premia on fees for H consulting assignments inremote regions; establishment of"minimum mandatory" amount of capacity building and a floor on reallocation of drawing rights from any given region Weak institutional capacityat the regional and Establishmentofwell-staffed Planning and federal levels to carry out core financial, Programming Directorates(PPDs) and procurement, program management, and M&E subprogramoffices or equivalents; contracting in activities, particularly inemergingregions skills through of local consultantsto support various aspects of program management; H preparationof sample Terms ofReferenceand procurementmaterials; intensivetraining of Government officials; preparationofM&E Action Plan as part of PIP/OM; incorporation of semi-annual and annualoutput commitment into participation andperformance agreements Arbitrariness inresourceallocation across Formula-driven drawing rights with clear federal institutions and to regions, and weak S decision rules for performance-based capacityto effect mid-year and annual reallocation; strengtheningofthe network of reallocation ofdrawing rights againstulans PPDsto suuaort alanning and M&E Overall RiskRating H Risk Rating H(High Risk); S (Substantial Risk 3. Possible controversial aspects There are no controversial aspects o f this project. G. Main CreditConditions 1.Effectiveness conditions a. the Borrower has finalized and adopted the Program Implementation Plan, including a Procurement Plan, monitoring and evaluation action plan, financial reporting guidelines, and information, education and communication strategy, in form and substance satisfactory to the Association; b. the Borrower has recruited to: (i)the executing agencies: (A) at the federal level, Director, four team leaders and four team experts in the Planning and Programming Directorate, and (B) at the regional level, equivalent o f the Director o f Planning and Programming Directorate; and (ii) MCB, two local procurement consultants, and an the international procurement consultant, all in accordance with the provisions o f Section I1 o f Schedule 3 to the Development Credit Agreement; C. the Borrower has budgeted and approved implementation plans to be carried out by regional and federal institutions during the first year o f PSCAP, and reflected the said - 4 8 - plans under the appropriate item inthe federal budget, in form and substance acceptable to the Association; d. the Borrower has openedthe Project Account and has deposited thereinthe initialdeposit in an amount equivalent to Birr 9,000,000 to finance the counterpart contribution to the Project; and e. the Borrower has initiated pre-qualification of in-service training suppliers for "generic training" activities. 2. Financial and other covenants a. The Borrower (and specifically MOFED) shall submit the audited project accounts to IDA nine months after the end of each fiscal year. The audited financial statement will include all sources o f pooled funds in the Program, including those from IDA, other pooling donors, and the Treasury. b. The Borrower (and specifically MCB) shall, after receiving compiled financial reports from MOFED, submit semi-annual consolidated Financial Management Reports (FMRs) to IDA forty-five days after the endof the FMRperiod. c. The Borrower and the pooling donors shall execute a Memorandum of Understandingas a condition for disbursementof funds from the pooled funds category. d. The Borrower shall comply with the following dated covenants, which serve as annual progress actions duringimplementation. 1. No later than the end of the first program year, the Borrower shall (i)submit annual procurement plan, including sample development plans for up to 5% o f the woredas and municipalities; (ii)launch the second woreda-municipal benchmarking survey; (iii)completeminimummandatory requirementsinat leastfour regions; and(iv) publishthe PSCAP annual progress report, all ina form and substance satisfactory to the Association. 2. No later than the end o f the second program year, the Borrower shall (i)submit annual procurement plan, including sample development plans for up to 15% of woreda and municipalities; (ii) third woreda-municipal benchmarking survey; launch (iii)complete the prequalification of suppliers for generic training; (iv) review allocation and reallocation procedures and mechanisms, including reviewing alternatives for high performing executing agencies who have fully utilized their allocations; (v) complete minimum mandatory in seven regions; and (vi) publish Program annual progress report, all in a form and substance satisfactory to the Association. 3. No later than the end o f the third program year, the Borrower shall (i) annual submit procurement plan, including development plans for up to 25% of woredas and municipalities; (ii)launch the fourth woreda-municipal benchmarking survey; (iii) review feasibility o f capacity building transfers to woredas and municipalities; (iv) completion o f minimum mandatory in all regions; and (v) publish the Program annual progress report, all ina form and substancesatisfactory to the Association. -49 - H. Readiness ofImplementation [ 3 1. a) The engineeringdesign documents for the first year's activities are complete and ready for the start of project implementation. [XI 1.b) Not applicable. [XI 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation. [XI 3. The Project ImplementationPlanhas been appraised and found to be realistic and of satisfactory quality. [ ] 4. The following items are lackingand are discussedunder loanconditions (Section G). I.CompliancewithBankPolicies [XI 1. The project complies with all applicable Bank procedures. [ ] 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Acting SeetorManager Country Director I 0 In I - rc m 0 8 8 W W I N m I -c'lr? 4 N N N f 'c! (v I m In L c) m I E I 00 .e E c .Y 3 8fi 8 38 B s L e 0 * a2 M U s3 Y .. v1 a 1 3 fi I I - 55 - ANNEX2: DETAILED PROJECT DESCRIPTION ETHIOPIA: Public Sector Capacity BuildingProgramSupportProject 1.1How PSCAP's two componentswork The Bank's Support Project is fully aligned with the basic design of the Government's PSCAP. As such, it supports the scale-up of ongoing institutional transformation and capacity building activities through two components-one federal, andthe other regional. Activities plannedunder these two components will be drawn from a menuof eligible expendituresconsisting of PSCAP's six subprograms and a mandatory program support activity. Drawing on this menu, each component is (i)planned based on annualized five-year drawing rights; (ii)adjusted semi- annually and annually; and (iii)reflected in participation and performance agreements with . commitmentsto deliver onspecific capacity building outputs. Component 1-Federal PSCAP: This component supports federal level activities across each of the six subprograms including those capacity building activities for which there are scale and network economies including those activities that require national level prototyping. The component is required to include basic program support activities to ensure effective implementation. Component2-Regional PSCAP: This component constitutesthe bulk of the Programand is designedto empower regionsto adapt and implementnationalreform and capacity building priorities envisaged under PSCAP's six subprograms in a manner that is efficient, accountable, and sustainable. Synergies and trade-offs between key subprograms will be fully leveraged through this component. Regions will also shift resources year-to-year and in-year from poor performing to higher performing subprogram activities. This component is also requiredto includebasicprogramsupportactivities to ensure effective implementation. 1.2 Drawingdownon activitymenuswithin PSCAPSubprograms The objectives and specific menu of activities that fall within each subprogram of PSCAP are explained below. Selected and planned on a annual basis, these activities provide the building blocks for the components describedabove. Subprogram 1-Civil service reform. The overall objective of the Civil Service Reform Subprogram is to promote the development of an efficient, effective, transparent, accountable, ethical and performance-orientedcivil service at thefederal, regional, and local levels. Under this subprogram, beneficiariesdraw downon support acrossthe following sevenareas: Strengtheningthe capacity of Civil ServiceReform (CSR) Coordinating structures is designed to enable CSR coordinating structures at federal, regional and local levels to more effectively support target institutions in implementing reforms and performing at levels that citizens require of them. Specifically, the following activities are envisaged: (1) review and redesign of the organizational structures as well as roles and responsibilities of CSR coordinating structures; (2) assessment and implementation of jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation of training requirements including preparation of materials, training of trainers, packaging of generic training activities, and coordination of external training or study tours; (4) design, development, and adoption of appropriate CSR change management - 5 6 - (including M&E) and coordination systems; and (5) strengtheningo f Information, Education, .and Communicationactivities includingthe provision of equipment and technical know-how. Improving expenditure management and control activities seek to deepen implementation of the Country Financial Accountability Assessment Report and Country Procurement Assessment Report Action Plans, strengthen Ethiopia's public sector fiduciary framework, and in the process, improve the efficiency and effectiveness of public expenditure management through the following capacity building activities: (1) development of a comprehensive legal framework for public sector financial administration; (2) nation-wide adoption o f the new budget classification systems and related budget reforms; (3) roll-out of the double entry accounting system; (4) development of medium-term planning systems including the transition from the existing Public Investment Program into a Public Expenditure Program or PEP system and its integration with strategic planning and management initiatives; (5) implementationof procurement reforms; (6) strengthening of the internal audit function including the introduction of systems audits; (7) modernization of cash and asset management; and (8) roll-out of financial management information systems. Improving governance of human resources management and control aims to instill ethical, merit- and performance-based personnel management practices inthe Ethiopian civil service through the following capacity buildingactivities: (1) development and implementationof the prototype rules, regulations, and policies for human resource development, time management, promotion and transfer, as well as job grading and remuneration; (2) rollout of the results- oriented performance evaluation system and related incentivemeasures; (3) development and installation of payroll management as well as more comprehensive human resource management information systems; (4) strengthening o f human resources through improved in-service training andsensitization o f civil servants of key Government policies. Improvingperformance andpublic service delivery is a spearheado fthe overall Civil Service Reform Program and aims to install a performance management system across ministries, agencies, and bureaus (MABs) in a phased manner. Specifically, the following activities are envisaged: (1) assessment of performance barriers through client surveys, business process and functional reviews, and training assessments; (2) preparation o f targeted performance improvement plans and more comprehensive strategic plans; (3) retooling, training, implementation support, and related technical assistance for implementation of performance .improvement initiatives. Improving accountability and transparency activities include: (1) strengthening o f external audit and parliamentary oversight for economic governance; (2) technical assistance for promotion of performance monitoring techniques including expenditure or input tracking surveys, cost efficiency studies, and service delivery report cards; (3) development and implementation of ethics management and anti-corruption policies; and (4) continuing support for the development o f accounting and auditing professions. Strengthening top management systems through: (1) the development o f new and improved strategic planning and management systems, performance measurement techniques, and decision-making methods to aid civil service management; (2) training o f top managers in strategic planning, performance measurement, top management decision-making, and value for money management; (3) development and implementation o f top management development systems inter alia through leadership training and preparation o f handbooks. - 57 - Building the policy and institutional capacities of emerging regions such as Afar, Somalia, Benishangul-Gumuz and Gambella, through: (1) assessment of existing civil service institutions including identification of capacity and infrastructure constraints as well as performance barriers; (2) development, on a learningby doing basis, of alternative techniques for implementing modern civil service management practices and reforms in emerging regions; (3) development and implementation o f basic or "hybrid" legislation, structures, and systems to support basic governance improvements inemergingregions. Subprogram 2-District-level decentralization. The District-Level Decentralization Subprogram (DLDP) seeks to deepen the devolution o f power to the lower tiers of regional government, to institutionalize decision-making processes at the grassroots level with a view to enhancing democratic participation, to promote good governance, and to improve decentralization service delivery. Capacity building support under the subprogram covers the following seven areas: Capacity building for manning and training activities support the following technical assistanceactivities: (1) preparation of human resource plans for woredas including aggregate projections o f staffing requirements; (2) assessment of short-term training needs for woredas; (3) development of modules for short-term in-service training for electorates, administrators and civil servants in areas such as decentralization policy and strategy, local governance and capacity building, democratization, grassrootsparticipation, general management, monitoring and evaluation, and local level planning; (4) development o f systems for provision and evaluation o f in-service training; and (5) training of trainers in facilitation techniques to support training of woreda level personnel. Grassroots participation support activities for woredas includes technical assistance and training activities for (1) further development of local grassroots participation framework manual and related monitoring and reporting mechanisms; (2) promotion of participatory techniques in woredas including the involvement o f NGOs, civil society institutions, and other donor agencies in the development process at the local level; (3) measurement of the impact o f participatory techniques and processes. Capacity buildingfor woreda institutions and organizations involves: (1) technicalassistance for gap analysis o f functional assignments and remedial actions; (2) preparation o f restructuring guidelines based on the legal framework o f the regional governments and sample woredas; (3) implementationsupport for restructuringand performance improvement. Capacity Buildingfor Program Development includes technical assistance for the following: (1) assessment and refinement of decentralization strategies and linkages among programs & sectors; (2) assessment o f the impact o f decentralization policy; (3) conduct of policy analysis on capacity building and decentralization; (4) development of benchmarks and monitoring and evaluation system for implementation of DLDP and strengthen the capacity of DLDP office; and (5) evaluation o f PSCAP plans of woredas for nine regional governments and evaluation ofthe overall performance o f woredas for nine regional governments. Capacity building for woreda fiscal transfer and own revenue enhancement comprise the following technical assistance activities: (1) studies, development, and adoption of model formula and budget allocation system for region-woreda block grant; (2) studies on options for capital investment and sector priority setting at woreda level; (3) identification o f - 58 - institutional constraints on and remedialmeasures for own revenue collection, utilization, and revenuesharing at the woreda level. Capacity buildingfor woredaplanning andJinancial control aims to strengthen expenditure management and related fiduciary aspects of woreda decentralization through: (1) the development and implementation of a local (Woreda) multi-yearplanningsystem and fiscal framework; (2) training and technical assistance for improving reporting and supervision practices; and (3) the development and roll out of budget consultation systems to ensure participatory woreda planning and budgeting. It is important to note that capacity building activities related to financial management such as the roll-out of budgets and accounts reforms will be undertaken at the woreda level under the "governance of financial resource management" activities envisaged underthe CSW. Minimum service standardsfor woredas will help establish minimumbasic service levels in priority sectors inter alia through: (1) technical assistance for refinement o f minimum standard service indicators; (2) the development of general guidelines for rural woredas; and (3) assessment o f the implementation of minimum service levels including through performance benchmarking at the woreda level. Subprogram 3-Justice system reform. The Justice System Reform Subprogram aims to promote the rule of law as well as the efficient and effective functions o f the justice system as part o f Ethiopia's democratization and private sector development processes. This subprogram, currently a work-in-progress, will receive Bank assistancefor the following activities: Strengthening of the Justice Systems Reform OfJice will involve (1) review of the organizational structures as well as roles andresponsibilities o f Justice System Reform Office structures; (2) assessment and implementation o f jobs and staffing requirements for change management and results-oriented performance; (3) assessment, management, and implementation of training requirements including preparation of materials, training o f trainers, packaging o f generic training activities, and coordination of external training or study tours; (4) design, development, and adoption of appropriate change management (including M&E) and coordination systems; and (5) strengthening o f Information, Education, and Communication activities includingthe provision of equipment andtechnical know-how. Strengthening thejudiciary comprises the following capacity building activities: (1) training and professional development ofjudges and court clerks (with a special focus on the training o f female judges); (2) establishment o f training institutes for the judiciary; (3) court administrationreform; (4) implementation o f modern case load management systems within federal and regional courts; and (5) identification of measuresto enhance access tojustice. Law Revision and law reform initiatives include consultancy services for: (1) technical analyses and studies on the establishment o f systems and procedures for declaring income and property; (2) reviews and analyses innew areas o f law; (3) publication and distribution o f legal research materials; (4) compilation, consolidation and distribution o f legislation and regulations; (5) studies on procedural, commercial, and stock exchange draft laws. Strengthening legislative processes will be achieved through (1) training, technical advisory services, and acquisition of equipment for staff o f federal and regional standing committees on legislative drafting and analysis o f legislative process and management; and (2) training for members of standing committees on principles o f federal grant and intergovernmental - 59 - fiscal framework, monitoring and impact assessment, HIVIAIDS and gender issues, accountability and participation. Subprogram "Urban management capacity building. The objective of the Urban Management Reform Subprogram is to enhance the capacity o f municipalities inthe delivery of services and enable urban centers to play a more effective role in social and economic development. Three sets of activities, financed under PSCAP, are envisaged. Federal and regional urban managementpolicy involves technical assistanceand support for (1) preparation o f a National Urban Development Policy; (2) preparation o f a National Urban Land and Housing Policy and Strategy; (3) preparation of a Model Municipality Act; (4) establishment of the Urban Development Fund(UDF); and (5) establishment o f the National Association o f Municipalities. Deepening the process of decentralization covers support for (1) preparation of model operating manuals and prototypes on financial management, procurement and contract administration, solid waste management system, operations and maintenance o f infrastructure services, archive management, organizational structure and staffing plan, personnel policies and incentive mechanisms, land information systems, model municipality acts, model city court systems, municipality revenue and inter-governmental fiscal transfer systems (including service charges), and urban planning systems; (2) strengthening o f relevant federal and regional institutions to provide technical support; (3) development of efficient revenue mobilization and fiscal transfer mechanisms including analyses o f revenue potential of various urban centers; and (4) establishment of regional and town planningunits. Local government restructuring and capacity building involves technical assistance and implementation support for the following municipal level activities: (1) the delivery of sanitation services; (2) the supply of serviced of urban land; (3) restructuringof the municipal financial system; (4) restructuring and preparation o f staffing plans; (5) introduction o f land information systems; (6) restructuring o f services delivery systems in the areas of procurement and contract administration, operation and management o f infrastructure services, overall municipality service delivery system, revenue mobilization and fiscal transfer; and (7) provision of "bulk" generic training to regional and municipality staff. Subprogram %Tax systems reform. The Tax SystemsReform Subprogram aims to encourage capital investment and development, increase tax revenues (through improved compliance and efficiency of collection), and ensure equity and fairness in the tax system through a comprehensive overall o f the current legislation and tax administration system. These objectives are to be achieved through the following subprogram activities: Taxpolicy and legislation activities include technical assistancefor (1) the amendment of the current income tax legislation by reflecting the current tax business and investment environment; (2) strengthening of the enforcement powers of the tax collection institutions; (3) simplification o f tax administrationproceduresand practices; (4) issuance and adoption of proclamations, regulations & operational directives; (5) development and implementation of regional revenueenhancementprograms; (6) development of agricultural income tax and land use fee proclamations and directives; (7) research and review of various proclamations that needto be amended; and (8) analyses of revenue potential across regions. Taxpayer Identijkation Number (TIN) system rollout activities aim to information sharing between FIRA, ECuA, as well as regional and city administrations in order to control tax -60- evasion, create a dependable database on taxpayers, and forge efficient and effective tax collection through inter alia: (1) installation of equipment at operational TIN sites; (2) deployment o f the TIN system at the national and regional levels; (3) training in the TIN system o f relevant staff and other users; (4) enhancement of MIS capacity including procurement of hardware and software; (5) development, printing and publication of certificates, forms and manuals; (6) public awareness campaigns for tax payer registration; (7) monitoring and evaluation o f the implementation activities; (8) establishment o f links between TIN system of customs and financial institutions; and (9) TIN implementation for new tax payers. Presumptive taxation implementation aims broaden the tax base through sensitization o f the hard-to-tax group, particularly the large informal sector and taxpayers who understate their income, through: (1) review of the profitability rate; (2) surveys of annual turnover of businesses; (3) IEC and other consultations with stakeholders prior to making amendments; (4) development and implementation o f profitability rate directive(s); (6) development of relevant operating manuals and training for staff and taxpayers; (7) implementation of standard assessments based on review o f the profitability rate; (8) development and implementation of accounting systems for revenue transfer payments refund; and (9) review and implementationofthe revisedstandardassessment scheme. Value-Added Tax PAT) implementation aims to ensure the appropriate balance between income taxes and commodity/consumption taxes, enhance the competitiveness of the Ethiopian business community internationally, and promote capital investment and development through technical assistanceand capacity buildingfor: (1) migration from VAT system to the main VAT system; (2) development and implementation of coherent operational programs and procedures; (3) development and implementationof comprehensive audit and enforcement programs; (4) organization o f sustained staff training, taxpayers education campaigns, registration and revenue collection activities; and (5) regular monitoring andevaluation of the implementationprogress. Strengtheningof organizational structures, operational programs, systems andprocedures is expected to foster voluntary compliance by taxpayers and ensure fairness and equity in tax administration through support for: (1) the development and implementation o f comprehensive and accurate computerized accounting systems and operations; (2) training o f federal, regional and city administrationtax officers on the usage o f manuals and adoption of various systems and procedures (3) review and evaluation of other relevant strategies, systems and procedures; (4) identification o ftraining needs and organizing training and study tours; (5) customization & implementation o f the integrated tax system; and (6) adoption o f an effective organizational structure with competent and skilledstaff. 4 Reforming and modernizing customs aims to improve the efficiency, efficacy, and transparency o f customs services through (1) supporting the migration to an enhanced IT system; (2) improving the management o f the tariff classification through inter alia establishment o f a customs laboratory; (3) establishing a customs training school to develop the knowledge and skills required by ECuA personnel to successfully implement new programs and procedures; (4) strengthening enforcement to combat contraband trade and international criminal activities; and (5) implementing all procedures consistent with sub- regional, regional, and internationalagreements. -61 - Subprogram /:Information and communications technologies. The objective of the Information & Communications Technologies (ICT) Subprogram is to harness ICTs for the development of human resources, democratization, service delivery, and good governance. Several programs under PSCAP including CSRP, DLDP, Urban Management, and Tax Sector Reform are seeking to use o f ICTs in this manner. Successful implementation o f ICT-based solutions across government will require support for the procurement of hardware and software, establishment of enabling legislation and regulations on the procurement and utilization of ICTs, development of human resources, content, and applications relevant to service delivery; and promotion of community-based information systems/services. The following areas will be addressedunderthis subprogram: ICT human resourcedevelopmentfor e-government initiative seeks to generate a critical mass of ICT literate worker in government through the following activities: (1) provision of ICT training for civil servants at all levels o f profession; (2) establishment o f ICT training centers, where relevant and affordable; (3) development o f ICT training materials in working and local languages; and (4) provision of technical assistance to review human resource requirementsofrollingout Government systems and applications. ICT for public service delivery and good governance through technical assistance and capacity building for: (1) development o f information systems strategies, system design studies, and related analyses; (2) establishment of regional information centers, where feasible and affordable; (3) implementation of WAN, LAN and other information systems at the federal and regional levels; (4) procurement of appropriate hardware and software for public service delivery systems; and(5) IEC andother awarenessbuildingactivities. ICT applicationsfor sector development in health, education, agriculture, e-government, e- commerce, and other priority sectors through technical assistance, procurement o f equipment, and training to support (1) customization o f common administrative applications to regional context; (2) development and implementation of sectoral information systems at federal and regional levels; (3) coordination of different sector-specific information systems. Community-basedinformation systems and services that allow access to government data and information and enable communities to become centers o f indigenous knowledge and contents. The latter is an important dimension of ICTs for development and a strong effort must therefore be madeto enable ICTs to operate at grass roots level and inall walks of life. The empowerment of communities with information is essential to its pursuit o f specific developmental activities. These goals are expected to be achieved through: (1) development o f local language content; (2) repackaging of globally available information to local community needs; (3) establishment o f multipurpose community centers; (4) broadcasting of information through the local media; (5) procurement and distribution o f appropriate technology for information sharing; and(6) training of communities inICT use. Mandatoryactivity-Program support. A mandatory activity, program support is designedto ensure speedy implementation o f the six subprograms under both the federal and regional components. Itfinances incrementalcosts associatedwith operating requirements o f Planningand Programming Departments or equivalents in regions, the Budget and Finance Directorate in the MCB, and related subprogram offices that serve members of the federal and regional Technical Teams. Support activities also include the costs o f progradproject coordination and planning, training management, IEC activities, monitoring and evaluation, training o f staff in program management, auditing, office supplies, equipment operation, transport, travel, and per diems. - 62 - ANNEX3: ESTIMATED PROJECTCOSTS ETHIOPIA: PublicSector Capacity BuildingProgramSupportProject Program Component Local Foreign Total 1.FederalPSCAP 59.6 16.4 76.0 2. RegionalPSCAP 236.5 65.4 301.9 Total BaselineCost 296.1 81.8 377.9 Contingencies 15.6 4.3 19.9 Total Project Cost 311.7 86.1 397.8 Disbursement Categories Local Foreign Total Goods & Equipment 41.3 30.7 72.0 ConsultantServices 116.7 29.1 145.8 Training 133.8 26.3 160.0 OperatingCosts 20.0 20.0 Total 311.7 86.1 397.8 - 63 - ANNEX4: COSTBENEFIT ANALYSISSUMMARY (Cost-EffectivenessAnalysis Summary) ETHIOPIA: PublicSector CapacityBuildingProgramSupport Project Not applicable. - 64 - ANNEX5: FINANCIALSUMMARY ETHIOPIA: PublicSector CapacityBuildingProgramSupportProject FY04 FY05 FY06 FY07 FY08 Total Program Costs InvestmentCosts 22.3 80.5 113.3 109.2 52.4 377.8 RecurrentCosts 1.2 4.3 6.0 5.8 2.8 20.0 Total 23.5 84.8 119.3 114.9 55.2 397.8 Financing Sources (YOof Total) IDA 42% 26% 25% 19% 30% 25% Government 58% 36% 35% 26% 41% 35% CIDA 0% 9% 10% 13% 7% 10% SIDA 0% 2% 2% 3% 2% 2% Other Donors 0% 27% 28% 39% 20% 28% Total 100% 100% 100% 100% 100% 100% - 65 - ANNEX5A: FINANCIAL MANAGEMENT ASSESSMENT TECHNICAL ANNEX' ETHIOPIA: PublicSector CapacityBuildingProgramSupport Project Introduction The financial management assessment was undertaken in line with the guidelines issued by the FM Board on June 30, 2001 and revisedon October 1, 2003. The assessment sought to determine whether the Executing Agencies (EAs) identified under PSCAP have acceptable financial management arrangements in order to ensure that (1) Support Project funds are used only for the intended purposes in an efficient and economical way, (2) the preparation of accurate, reliable and timely periodic financial reports and (3) safeguard the entities' assets. The FMassessment of the Ministries of Finance and Economic Development (MOFED), Capacity Building (MCB), Federal Affairs (MFA), and Revenue (MOR), as well as sample of regional Bureaus of Finance and Economic Development (BOFEDs) and Capacity Building (BCB) was undertaken in December 2003. The Ethiopia Country Financial Accountability Assessment (CFAA) was carried out jointly by the Government, Bank anddonors, issuedon June 17,2003. CountryIssues According to the 2003 CFAA, considerable progress has been made in the budgeting process, yet several aspects of ongoing expenditure management reforms including medium-term planning, budgeting, accounting, reporting, and auditing remain works-in-progress. A CFAA action plan identified key commitments as well as sequencedcapacity building activities necessary to adequately address fiduciary risks within Ethiopia's public finance system. Most of the activities in the action plan will be covered under the existing public financial management reform agenda currently under implementationwith the assistance from donors. The Bank is currently providing significant financial assistance to the Education and Health Sector Development Programs (SDPs) through SWAP modalities (without pooling). PSCAP replicates certain key design features of these SDPs including formula-basedallocations, flow of funds through the Channel 1modality, and similar reporting arrangements betweenthe federal and regional levels. PSCAP also involves additional features such as delegation of financial management and procurementresponsibilitiesacross several federal institutions as well as pooling for donor funds. A noteworthy lesson from the SDP experience is the need for MOFED to address early on possible delays in obtaining regular reports from the regions in order to ensure timely replenishment of the SA. Inaddition, MOFED should anticipate potential delays insubmissionof audit reports as a result ofdelay infinancial reporting from the regions. RiskAnalysis PSCAP will be implemented by several EAs with varying degree of implementation capacity. The major financial management risk to the Program is the likelihood that MOFED would not receive timely reports inorder to process replenishmentsof the SA and close the annual accounts. Inorder to address this risk, MOFED, MCB, the various federal EAs, as well as regional BOFEDs and BCBs involved in execution of Program will recruit and appropriately assign additional civil service staff, and where necessary consultants. In addition, MOFED will prepare short and concise guidelines on A detailed Financial ManagementAssessment Report that was preparedby financial management specialists from the WorldBank (February 4,2004). - 66 - recording and reporting as part of the PIP, provide extensive training on the guidelines, and take the necessary remedialactionsto address potentialreportingdelays early inthe implementationcycle. SUMMARY RISKASSESSMENT Project: Public Sector Capacitv BuildingProgramSupport Project Date: Februarv4.2004 c Assessment RiskMitigatingMeasures Inthe short-run, contract inskilled personnelin accounting andauditing these priority areas. Inthe long-run,the CSRP intendsto develop incentivemeasuresin line with the ResultsOrientedPerformance EvaluationSystem. Strengtheningof standards andthe professionis one areaof focus of CSRP. The Governmenthas designatedMOFED with not clearly defined, especially the the financialmanagementresponsibilitiesfor relationshipbetweenMOFED and MCB PSCAP andhaveestablisheda"super ministry" coordinationstructure aroundMCB to ensure closecoordinationofother key cabinet ministries. The PPDs, BFD, andfinance institutionssuch as and federal line ministries MOFED andBOFEDs at all levelswill recruit adequateandtrainedstaff ControlRisk I Governmenthas designatedthe overall financial PSCAP executing agencies are many andin managementresponsibility to MOFED andthe some cases the roles andresponsibilitiesof overallcoordinationto PPDs inMCB and Fundsflow up to the regionallevels 3. Staffing Lack oftrainedmanpowerandlow salary marketrates. scale 4. Accounting Policiesand Procedures The guidelinesto be designedwill be concise The financial managementguidelineshas not andclear to accommodatethe needsofthe yet beenfinalized Program 5. Internal Audit The governmentshouldtake initiativesto There is aduplicationof work betweenthe consolidatethe work of internalaudit and internalauditdepartmentof eachexecuting inspection agency andthe inspectiondepartment of MOFED andBOFEDs 6. External Audit Governmenthas designatedthe overall financial Low capacity inthe auditingprofession managementresponsibility to MOFED andthe overall coordinationto PPDs inMCB and BCBs.This is reflectedinthe PIP. 7. Reporting and Monitoring Regular field visits bv MOFED. MCB and Non-regularreportingfrom lower levels, W&d Bank mission: I which are not complete andrelevant OverallControlRisk H=High, S =Substantial,M=Moderate,N=Neglil )leor Low - 67 - Strengths and Weaknesses The country's discipline in executing budget and compliance with the existing government regulationsis the major strength inexecutingthis Program. MOFED and BOFEDs have good internal control system, including regular post audit by the inspection departments at both MOFED and BOFEDs. All the executing agencies at the federal level and five larger regions are using the new chart of accountsbased on modified cash basis of accounting. All the executing agencies involved in processing most of the Program's financial transactions are strictly following-up the budgetary discipline and regular government reporting mechanism. Despite all the strengths, there are some weaknesses inimplementingthe Program.These are as follows: SignificantWeaknesses Resolutions Lack oftrained manpower inthe areao ffinancial Address incentiveframework and career pathsfor management andhighturnover ofstaff financialmanagementpersonnelinthe civil service, and strengthenthe accountingandauditing professions,both of which are supportedunder the CSRP The Programis implementedby various agencies Strengthenthe monitoringcapacity at the federal and regionallevelandregular supervisionbythe Bank Auditingthe Programfinancialstatements may take Agree withthe selectedauditors onthe timetable to time to completeas the executingagencies are completethe auditwell inadvance andthe MOFED various and dispersedall over the country shouldclose the accountsimmediatelyafter the end of the fiscal year. Regular financialreportsmay not be receivedon Designa systemofmonitoringto ensure that transfer of time fromregions hnds is basedonthe receiptof regularfinancialreports Executing Agencies PSCAP will follow a Sector-Wide Approach and will be implemented by various sector ministries and regional bureaus. The sector ministries include MOFED, MCB, MFA, Ministry of Revenue, ICTAD, Federal Supreme Court and all the eleven regional BOFEDs and Bureaus of Capacity Building. MOFED will be responsible for the transfer of money and compiling all the financial reports, including annual financial statements and the external audit requirements. MCB, through its Planning and Programming Department, is responsible for overall co-ordination, monitoring all the activities of the Program and report compilations. The Ministry's BFD will be responsible for the overall procurementmonitoringas well as procurementofICB. At MOFED, the Counterpart Funds Unit (CFU) will be responsiblefor the managementof the SAs in U S Dollars and the pooled Birr account. Basedon the approvedwork plan, CFU will transfer money to BOFEDs and line ministries. The CFU will collect all the statements of expenditures from all regional BOFEDs and line ministries and submit requests for each donor for the replenishmentof the SAs. The Central Accounts Department (CAD) at MOFED will be responsible for regular financial reports and the annual audit of the Program accounts. Each BOFED will establish one Birr account for the implementationof PSCAP activities under the "Regional Program" and makepaymentsas per the instruction of BCBs. BOFEDs will be responsiblefor the recording andreporting of the financial transactions ofthe Programto MOFED monthly. Funds flow For each donor, including IDA, MOFED will open one special account inU S Dollars at the National Bank of Ethiopia. Inaddition, MOFED will open one Birr account for which money from the SAs - 68 - andthe governmentcontribution will be deposited.The Birr accountwill serve as a consolidatedfund for all donors andthe government.MOFED will be responsiblefor the day-to-daymanagement ofthe SAs andthe pooledBirr account. The first installment from IDA will be deposited inthe Special U S Dollar Account opened at NBE. MOFED manages the flow of funds between the SA in U S Dollars and the pooled Birr account, based on projections for payments of goods and services expected to be procured locally or internationally. MOFED can draw from the U S Dollar SA to the pooledBirr account as required. Federal EAs and regions, through the BOFEDs, are required to formally submit requests for budget transfers, financial reports, and Statements of Expenditures (SOEs) justifying the use of funds previously received from MOFED. Budget transfers requests and SOEs are sent to the CFU and financial reports to CAD in MOFED. SOEs record amounts and purposes of expenditures incurred from the advanced funds. On receipt ofthe SOEs from EAs, CFUsends an applicationfor withdrawal to IDA and other donors for the replenishment of the SA. The SA is replenished by an amount equivalentto the total of SOE. Staffing The staffing level at each of the executing agencies varies in number and quality. For example, the CAD has 29 staff, out of which 7 are degree holders and the others have diploma from various colleges. The CFU at MOFED has 2 staff, of which 1is a degree holder. The Addis Ababa BOFED has 17 staff, out of which 5 are degree holders and the others are diploma holders from various colleges. The SNNPR BCB has 10 staff (3 degree holder and 7 diploma holders) serving in a pool. The pool serves the BCB andregionalhealth bureau. BCBs receive accounting services from an administrative pool, which supports more than two institutions. Some ofthe BCB is intendingto recruit contractual staff to look after the accountingtask of the Program. MOFED and BOFEDs also need additional staff to discharge their responsibilities properly. In general, MOFED, BOFEDs and BCBs do not have sufficient staff in place to handle both the government and donor financial transactions. As agreed during appraisal and subsequent negotiations of the Program, required recruitment of key staff has been initiated and will be incorporatedinto the first year procurementplans. Budgetingand planning According to the Government of Ethiopia's Chart of Accounts, PSCAP will be proclaimed annually as aProgram under the MCB, which is designatedas apublic body. Allocations to federal executing agencies (for example, Urban Management Capacity Building Program, or ICT) and regions (for example, Tigray National Regional State or Oromiya National Regional State) will be classified and proclaimed as "subprograms under PSCAP inthe federal budget inorder to allow for mid-year and " annualreallocations. As such, resources leveragedby regions from PSCAP will be fully additional to their subsidy andtherefore, not offset ingeneralpurposetransfers. Eachfederal andregional EA will prepare a consolidated PSCAP annual plan for each budget year and following various technical reviews (discussed in annex 9), MCB shall propose the approved elements of the plan as part of the annual budget proposal. Following Cabinet approval and the subsequent appropriations process, MOFED will transfer the resourcesto the federal EAs (designatedabove) andBOFEDs. - 69 - Accountingpoliciesand procedures Starting from July 2002, the Government has introduced a double entry modified cash basis of accounting. The new accounting reform has been introduced at the federal level and to five regions, namely, Amhara, Oromiya, Addis Ababa, Tigray and SNNPR. These regions and federal line ministriesare using a computerized Budget Disbursement and Accounting System (BDA) to some extent. The other regions are using a manualsystemofaccountingbasedon single entry. The mainelements ofthe accountingreformare the adoptionof (i)revisedand comprehensivechart a of accounts consistent with the reformed budget classification, (ii)a system of ledgers accommodating all types of accounts (including transfers, current assets and liabilities, and fund balance in addition to revenues and expenditures), (iii)double entry book-keeping (thus, self- balancing set of accounts), (iv) a system of control of budgetary commitments (recording commitments as well as actual payments), (v) modified cash basis transaction accounting and (vi) revisedmonthly report formats to accommodate double-entry book-keepingand commitment control andpermit better cash control. The computerizedBDA system enables public bodiesto produce financial reports much more easily. In the meantime, accounting and financial reporting are performed manually in most jurisdictions. Massive capacity building would be required in order to accelerate the rollout of the BDA system. This would need to include support to clearing accounts backlog, equipment and customization of software, training of staff, etc. The new chart of accounts is capable of recording the financial transactions and producing the required regular reports for PSCAP. However, MOFED needs to prepare concise guidelines on how to recordtransactions and report the results because (1) all regions are currently not using the same chart of accounts and accounting system, (2) the chart of accounts do not include account nos. for PSCAP activities, and (3) the specific reporting formats for the program (therefore, the Bank's SupportProject)needto be clearly mentioned. All the source documents will be kept at the regional BCBsA3OFEDs and federal EAs where the transactionstook place. BCBs/BOFEDs and all federal EAs will report to MOFED on regular basis. MOFEDwill develop the reportingformats beforeeffectiveness ofthe Program. Internal audit MOFED and BOFEDs have an inspection department performing post audit activities on assessing whether the budget utilization is in line with the intended purposes. The staff of the inspection department varies from region to region. Each of the EAs has an internal audit department, which performs post audit activities on all the financial transactions of the entity. The recent CFAA report for the Ethiopia recommendedthat the government should consolidate the organizational structure, redefine the role and responsibilities of the internal audit function to better address the need of the government. The Expenditure Management and Control activities (EMCP) under the Civil Service Reform Program is currently working in improving the internal audit function. It is envisagedthat the InspectionDepartmentsat MOFED and BOFEDs and the Internal Audit Section of each EA will perform post-audit activities on the financial transactionsofPSCAP. Externalaudit According to the Ethiopian Constitution, the Office of Federal Auditor General (OFAG) is responsible to carry out the audit of all the financial transactions of the federal government and - 70 - subsidies to the regions. Each o f the regions has regional Auditor General responsible for auditing financial transactions in the region. The OFAG usually delegates its responsibility mostly to the Audit Services Corporations, the government owned audit firm, and in some cases to private audit firms to carry out the audit of donor-financed projects. For the Bank's PSCAP Support Project, OFAGwill assign an external auditor acceptable to IDA. MOFED is currently the main body responsible for closing the accounts and getting the audit reports for two sector programs, ESDP and HSDP. MOFED's experience-to-date with these programs suggests that periodic delays in the submission of audit reports were caused primarily by accounts backlogs within regions. In order to improve the reporting system for PSCAP, the capacity at all levels should be strengthened by adding additional staff and providing regular training by MOFED on recording and reporting. According to the new audit policy of IDA, MOFED will prepare a consolidated Program accounts, which include all the sources from pooled donors and the government and related Program expenditure and the auditors will express a single opinion on the consolidate Program accounts. Considering the nature of the Program, the audit reports should be submitted to IDA nine months after the end of eachfiscal year, which ends on July 7 o f eachyear. Reporting and monitoring Federal and regional EAs are responsible for reporting the uses of hnds transferred from MOFED. MOFEDrequires monthly reports from all EAs participating inthe implementation of the Program, but from the practical point o fview quarterly reports are highly recommended. MOFEDwill develop short guidelines on reporting. The Bank requires quarterly Financial Monitoring Reports (FMRs) to be submitted 45 days after the end of each quarter. The FMRs includes financial, procurement and physical reports. Considering the nature o f the Program, IDA agreed to receive FMRs on a semi-annual basis, to be received 45 days after the end o f each six months. MOFED will be responsible for the financial sections and MCB for the other two sections of the FMR. MCB after receiving the financial reports from MOFED will submitthe whole FMRto IDA. A format for the FMRwas agreedduringthe negotiation. Action plan Action to be taken Expectedcompletiondate IResponsible body 1 IIPreparationof ashort guidelineon recording II I I andreportingof financialtransactions as part Beforeeffectiveness 1 IBorrower I ofthe PIP. 2 Organizeworkshop(s) for finance staffat all levels to familiarizethem with the flow o f funds, recordingandreportingrequirements Before effectiveness Borrower - . of PSCAP 3 Incorporationof initiatives to strengthenthe financial managementcapabilitieso fEAs Beforeeffectiveness Borrower intothe final procurementplan I Openingo fbank accounts at the nationaland 14 Borrower regional levels Before effectiveness - 71 - Supervision plan Implementation of PSCAP is highly decentralized, involving all the regions and five federal ministries/authority, and envisages the utilization of IDA support equivalent of US$lOO million over a five-year period. The supervisionrequirements of the SupportProject will be intensive and should include at least two supervision missions per year, along with the agreed quarterly meetings of the Donor PSCAP Working Group with the Governmenton progress. Each supervision mission should includevisits to the regionsto verify that funds are beingusedfor their intendedpurposes. - 72 - ANNEX 6: PROCUREMENT ANDDISBURSEMENTARRANGEMENTS ETHIOPIA: Public Sector CapacityBuildingProgramSupport Project General Procurement at the federal level is regulated by (a) the Financial Proclamation No. 57/1996 which constitutes the ProcurementLaw, (b) the Financial RegulationsNo. 17/1997 issued by the Council of Ministers, and (c) the Ministry of FinanceDirectives -procurementand contracts, issued in 1997 and revised in 1999. Two Country Procurement Assessment Reviews (CPARs) were carried out in 1998 and 2002. The reviews include detailed diagnosis of the current procurement system, its strengths, weaknesses and an action plan to address the weaknesses. The main weakness identified were (i) lack of anoversight body for policy and monitoring, (ii)weak procurementprocedures, (iii) of a legal lack and regulatoryframework, and (iv) lack of adequate procurementcapacity. The mainrecommendationsand actionplan ofthe CPAR include(i) enactment of aprocurementlaw, (ii)establishmentof a regulatory body, (iii) development of procurement directives, (iv) preparation of standard bidding documents, manuals and guidelines, and (v) implementation of a comprehensive capacity building (including training) strategy. The Government has accepted the recommendations of the CPAR and has established a taskforce to lead the procurement reform process. As part of the procurementreform programthe Governmenthas drafteda new procurementcode that is expectedto be enacted by July 2004. The code provides for the establishment of an independent regulatory body and the Government plans to fully decentralize procurementfunctions to civil service institutions at the federal levelstaringfrom the middle of2004. The directives issued by the MOFED have been adopted by regions without major changes and are applicable for procurements done at the regional level. The directives provide waivers for procurement financed by donors or lending institution, and the procurement follows the guidelines and procedures of the donor or lending institution, if indicated in the financing agreement and the financier wants to exercise its right. Use of BankGuidelinesand StandardBiddingDocuments All goods financed under the Support Project would be procuredin accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits of January 1995, lastly revised in January 1999. Bank Standard Bidding Documents for Goods, the Standard Pre-Qualification Document (if applicable) andthe Standard Evaluation Forms shall be used. Consultants will be selected in accordance with the Guidelines: Selection and Employment of Consultants by World Bank Borrower of January 1997 lastly revised in May 2002. IDA'S Standard Request for Proposals (SRFP), the Forms of Contracts as needed (lump sum, time based, and/or simplified contracts for short-term assignments and individual consultants) as well as the Sample Form ofEvaluation Report for Selectionof Consultantsshallbe usedfor all consulting assignments. The Government is planning to develop new standard bidding documents for the procurement of goods, works and services. The National Bidding documents, when developed, can be used for national competitivebidding after verification by the Bank that the countries laws and procedures are acceptable. In order to be acceptable the national procedures should ensure that (i)bids will be advertisedin national newspaper(s) with wide circulation; (ii) bid documentsclearly explains the the bid evaluation and award criteria; (iii)bidders are given adequate response time (minimum four - 73 - weeks) to prepare and submit bids; (iv) bids are awardedto the lowest evaluated bidder; (v) foreign bidders are not to be precludedfrom participation inNCB; and (vi) no domestic preferencemargins are applicableto domestic manufacturersandsuppliers. Advertising. The GPN was issued on March 6, 2004 in the United Nations Development Business (UNDB) and Development Gateway, listing the Program Components and goods, training, and consulting services for which specific contractswill be advertised. The Borrower will keep aroster of the responses receivedfrom potentialbidders interestedinparticipatinginbidding for contracts. It is not anticipatedthat there would be any contract with estimatedvalue exceedingUS$10 million. Specific Procurement Notices (SPN) will be published in at least one national newspaper of wide circulation for contracts to be procured under ICB and NCB procedures and for consultant contracts with an estimated cost of US$lOO,OOO or more to obtain expressions of interest (EOI) prior to the preparation of the shortlist. The Borrower is encouraged, in addition to national advertising, to advertise also in UNDB and DG-Market, in order to get the broadestinterest possible from potential bidders. The Borrower may, advertise on the online version of the UNDB and the Development Gateway to save time. The date of advertisement of a specific contract should coincide with the date that the bidding documents are available for purchase by interestedbidders. Sufficient time would be allowed (not less than 30 days) for NCB andnot less than45 days for ICB contracts. Consultant contracts estimatedto cost US$200,000 or more would be advertisedon the online version of DevelopmentBusiness or DG-Market and in an International or TechnicalNewspaper, inorder to seek "Expressions of Interest". The Borrower will send a copy of this advertisement to those firms that have responded to the expressions of interest for consulting contracts listed in the GPN. The Borrower will wait at least two weeks after the advertisement has appeared requestingexpressionsof interest, before preparingthe short list. Procurementcapacity The Country Procurement Assessment Report (CPAR) done in 1998 and updated in 2002 has identified procurement capacity as one of the major weaknesses in public sector procurement. The procurement capacity assessments undertaken for the Program also confirm these findings. The assessmentsalso concludedthat the procurementriskwas high at the regional and federal levels. The Ministry of Capacity Building (MCB) has a procurement unit under the BFD that was establishedrecently during the implementationof the CBDSD Project. This unit would play a major role of coordinating procurementactivities of the Program. However, the unit's performance has not been very satisfactory. The regional BCBs generally use a pool service for conducting procurement that is comprised of members from different bureaus. The procurement handled by the regional procurementpool services is mostly limitedto small value procurementfor internal use ofthe offices and no international procurement has so far been done by the regions. Some regions have however members from the regional health and education bureaus that have some experience in international and World Bank procurementprocedures. The following six constraints were identified during the capacity assessment done of the EAs. First, the number of procurement staff in each EA is not adequate and a majority of the staff have not participated in procurement training programs. Second, there is lack or very limited experience at regional level especially in selection of consultants and international procurement. Third, the procurementunitat MCB and the pool system organizationalsetup ofthe regional ProcurementUnits is not adequate for handling the large volume of procurement anticipated under the PSCAP. Fourth, - 74 - the procurement records management systems are not adequately organized. Fifth, there is no national and standard documents available for procurement of goods, and consulting services. Finally, some national procedures, especially on the procurementof works are not acceptable. In order to build capacity, one international consultant and two additional national procurement specialists with adequate qualification and experiencewould be recruitedto the BFD to assist inthe management ofthe procurementfunctions andbuilding procurementcapacity. The advertisementsfor these consulting posts were issued prior to negotiation. The international consultant and two local procurement consultants shall be employed prior to effectiveness. The former shall be responsible for providing technical assistance and training inthe management of procurementactivities at federal level andregionalbureaus, and for mentoringnationalprocurementstaff. A comprehensive and intensive procurement training program would be conductedfor procurement staff ineach of the EAs for all staffthat have not alreadyparticipatedinsuch type oftraining. At least two staff from each EA that i s involved in the preparationof bidding documents, and evaluation of bids would participate inthe training program. The training should cover all aspects of procurement and focus on the identified weak areas such as: procurement planning and monitoring, selection of consultants, preparation of tender documents, and evaluation of bids. The training program could include specialized training for selected staff at management training institutes in Africa such as ESAMI, GIMPA etc. The first round of training would be conducted prior to effectiveness. An orientation workshops would be conducted to staff in the EAs that are involved in the procurement decision-making process including tender committee members, department heads, bureauheads with the assistance ofthe internationalconsultantduring Programlaunch. The number and qualification of the procurementstaff in each EA shall be reviewed and additional staff shall be employed or assigned where shortages are identified. Each EA shall have a separate desk for procurement with at least two qualified staff with adequate training inprocurement.Prior to the commencement of any procurement function, relevant EAs including the BFD in MCB should submit participation agreements that confirm satisfactory compliance with eligibility criteria including establishment of prescribed institutional arrangements; delineation of service standards for procurement and financial management; confirmation that staff involved in procurement have received necessary training, and national and international consultants involved in procurement are both qualified and appropriatelytaskedto carry out PSCAPrelated activities. Procurementplanning Five-year drawing rights have beenassigned to each EA and annualizedinorder to establishthe first year's budget envelope. Five-year PSCAP Action Plans prepared by federal EAs and regions are being revised within the medium-term resource envelopes. Furthermore, a draft consolidated procurement plan including all budgeted items for twelve months has been prepared prior to negotiations. The draft is being further revisedto reflect the period for the implementation of the full procurementcycle for all the items including those that may last eighteen months or more, and will be further refined and finalized well in advance of effectiveness. It is noted that this rolling procurementplan andthe five-year Action Planare to be regularly revisedin linewith the in-year and annual reallocation arrangements envisaged under this performance-oriented program. A draft ProgramImplementationPlan (PIP) incorporating operational guidelines has been prepared, and will be finalized as a condition for effectiveness. - 75 - Procurementimplementationarrangements In its PIP, the Government has taken steps to clarify the overall roles and responsibilities for procurement management at the federal and regional level. Specifically, the BFD at MCB shall be responsible for monitoring all procurement activities, and also reviewing and consolidating procurement plans received from other executing agencies. In addition, the BFD is responsible for handling all ICB procurement of goods under the Program. National procurement of goods and selectionof consultantswould be handledas follows: Procurement for the three programs under MCB (CSRP except expenditure management and control activities, JSRP except strengthening of the judiciary, and DLDP) will be handled by MCB procurement unit from preparation of bidding documents and RFPs, until award of contract. The contracts for procurement of goods would be signed by MCB. The contractsfor the selection of consultants may be signed by MCB or the respective program directors as required. The program offices would actively participate in the preparation of specifications and terms of referencesand technicalevaluationofbids andproposal. Responsibility for procurement (expect for ICB of goods) for the TSRP, UMCBP, ICT, expenditure management and control activities under the CSRP, and strengthening of the judiciary activities under the JSRP activities at federal level will be carried by the Ministry of Revenues, UDCBO within MFA, Information and Communication Technology Development Authority (ICTDA), a designated office inMOFED, and the FederalSupreme Court respectively. BCBs are responsiblefor handling all procurementactivities, except ICB procurementof goods, within the respective regions and city administrations (i.e,, Addis Ababa and Dire Dawa). Relevant lead institutions in each region would participate in the preparation of procurement plans, specifications, Terms of Reference, andtechnical evaluationsof bids andproposals. MFA is tasked with providing additional support for emerging regions (Afar, Somalia, Benishangul-Gumuzand Gambella) inthe management ofprocurementas required. It is anticipatedthat procurementarrangementswill evolve as capacity increases. Regionalproposals for building up their procurement capability and for changes in procurement arrangements will be regularly reviewed semi-annually by IDA and donors. Procurementmethods(Table A) Goods The program will finance office and field equipment, and supplies. To the extent possible and practicable, goods and equipment to be purchased under the program would be combined into packages worth at least US$150,000. Packages estimated to cost the equivalent of US$150,000 or more would be procuredunder ICB procedures using Bank's Standard Bidding Documents. Goods that can not be packagedand procuredefficiently using ICB procedures will as much as possible be packagedin sizable contracts to be awardedon the bases of NCB procedures. Contracts estimatedto cost less than US$150,000 equivalent would be procured using NCB. Procurement for readily available off-the-shelf goods that cannot be groupedtogether estimated to cost less than US$50,000 equivalent would be procured on the basis of Shopping Procedures. Solicitations for National and International Shopping will (a) be issued in writing to at least three reputable suppliers (it may be better to approach five or six suppliers because not all three suppliers may respond, so that at least three competitive quotations are received.), (b) include specifications, and if goods are not - 76 - immediately available, the delivery time, (c) give the estimated cost, including cost of inland transportation and insurance, (d) be opened at the same time for evaluation (to avoid abuse), and (e) inthe case of International Shopping quotations, be solicited from at least three suppliers from two differentcountries. Alternatively such goods may also be procuredfrom UNAgencies (Inter-Agency Procurement Services Office or IAPSO) provided each individual contract does not exceed us$loo,ooo. Services Consulting services shall include development of legal frameworks and policies; training needs assessments for strengthening human resource and financial management skills; studies in organizational structures and functional assignments in rural districts and municipalities; development o f guidelines and manuals for new systems for improved service delivery, law reform; development o f WAN/LAN and other management information systems. As a general rule, consultant services will be selectedthrough the Quality and Cost Based Selection (QCBS) method. For contracts estimated to cost less than the equivalent o f US$200,000 per contract, the shortlist may be made up entirely of national consultants in accordance with section 2.7 of the guidelines, provided that foreign consultants who wish to participate are not excluded from consideration. Indefinite Delivery Contract (IDC) procured by using QCBS method may be used for large contracts involving technical assistance taking into consideration the capacity limitation o f regional offices. Consultant for complex and highly specialized assignments with high downstream impact and assignments that can be carried out insubstantially different ways may be procuredunder contracts awarded using Quality Based Selection in accordance with the provisions o f clause 3.2 o f the Consultant Guidelines. Services for audit andother similar services estimated to cost less than US 100,000 equivalent per contract may be procured under contracts awarded using least-cost selection method in accordance with the provisions of clauses 3.1 and 3.6 of the Consultant Guidelines. Consulting assignments costing less than US$lOO,OOO may be procuredby using Selection Based on Consultants Qualifications (SBCQ) by comparing the qualification of consultants who have expressed an interest inthejob or who have beenidentified. Individual consultants will be selected in accordance with Section V o f the Guidelines. Services for tasks that meet the requirements o f paragraphs 3.8 to 3.1 1 of the Consultant Guidelines may be awarded using the Single Source Selection method. Services for which a team o f Consultants are not required and meet all the requirements set forth in paragraph 5.01 of the Consultant Guidelines shall be procured under contracts awarded to individual consultant in accordance with the provisions o f paragraphs 5.1 through 5.3 of the Consultant Guidelines. Training shall include human resource development in the areas o f financial and human resources management; justice system, tax system; information and communication technology; and urban management. Selection of training institutes for workshopshraining for which the quality o f training is of critical importance and the training can be carried out in substantially different ways, the selection may be based on a competitive process using Quality Based Selection (QBS) method. For standard programs for which detailed course contents can be adequately defined in advance Quality and Cost Based Selection (QCBS) may be used. Prior review thresholds(Table B) All goods contracts estimated to cost US$l50,000 or more and the first contract under NCB will be subject to IDA review o f biddingdocuments prior to invitingfor bids and bid evaluation reports prior to contract award. - 77 - Single source selection irrespective of value will be subject to IDA prior review. Consultancy contracts with firms with estimated value of US$lOO,OOO or more, and consultancy contracts with individuals estimated to cost US$50,000 or more and the first contract will be subject to prior review by the Bank inaccordancewith the procedures inAppendix Iof the ConsultantsGuidelines. Contracts not subject to prior review will be selectively reviewed by the Bank during program implementationand will be governedby the procedures set forth inparagraph4 of Appendix Ito the relevant Guidelines. ProcurementMethods (Table A) Table A: ProgramCostsby ProcurementArrangement (US$ millionequivalentl2 ExpenditureCategory Procurem it Method ICB NCB NSAS Others3 Total 30.7 28.0 13.3 0 72.0 Goods& Equipment (11.7) (3.6) (2.7) 0 (18.0) Consultant Services 0 0 0 145.8 145.8 0 0 0 (37.0) (37.0) 160.0 Training 0 0 0 160.0 0 0 0 (40.0) (40.0) Operating Costs 0 0 0 20.0 20.0 0 0 0 (5 .o> (5.0) Total Program Cost 30.7 28.0 13.3 325.8 397.8 Funded by IDA'SSupport Project (11.7) (3 4 (2.7) (82.0) (100.0) * Figures inparenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies Includes goods to be procured through national shopping, consulting services, services o f contracted staffo fthe project management office, training, technical assistance services, and incremental operating costs related to managingthe project. - 78 - Annex 6, Table A2: Consultants SelectionArrangements (US$ million equivalent) CQ QCBS QBS IC Grand Total A. Firms 20.0 88.8 10.4 119.2 (5.6) (22.2) (2.6) (30.3) B.Individuals 26.6 26.6 (6.7) (6.7) Total 20.0 88.8 10.4 26.6 145.8 (5.6) (22.2) (2.6) (6.7) (37.0) Table B: Thresholds for ProcurementMethods and Prior Review (US$) ExpenditureCategory ContractValue Procurement Contractssubject to Prior Threshold Method Review Goods Greater than 150,000 ICB All Less than 150,000 NCB First contract for each Note: ICB-InternationalCompetitivebidding; NCB-National Competitivebidding; NS/IS -National Shopping/ InternationalShopping; QBS-QualityBasedSelection; LCS -LeastCost Selection OverallProcurementRiskAssessment: High Frequencyof procurement supervision Once every six months missionsproposed: (includes special procurement supervision for post-review/audits) - 79 - Table C: Allocationof Credit Proceeds ExpenditureCategory Amount in US$ millionFinancingPercentage ExpenditureCategory Amount (US%million) FinancingPercentage 1. PooledFunds Expenditure financedunder Subprogram activities, including goods, consultant SuchpercentageofPooledFund services, training and operatingcosts, for: expendituresas the Association may determine for eachFiscal Year (a) FederalProgram 13.22 (b) RegionalProgram 54.91 Z. Non-PooledFunds Expenditure financedunder Subprogram activities, including goods, consultant services, training and operatingcosts, for: 100%of foreign expendituresand 85% of local expenditures (a) FederalProgram 6.48 (b) RegionalProgram 25.09 3. Refundingof the PPF 0.30 Amounts due pursuantto Section2.02 (c) of the DCA Total 100.0 (1) Goods - the amounts shown here include all I 1 procurement across P S C M (Federal & Regional); (2) Consultants the amount shown includes the estimated cost o fprocurement o f international consultants (Federal - & RegionalPrograms) (3) Training the amount represents federal training activities. - (4) Programs the amount represents estimated costs of goods & consultants to be procured locally and all training - activities at the regional level. (5) Operating Cost the amount represents the recurrent cost estimate. - (6) Unallocated the amount represents the 12% contingency across all categories to meet any unforeseen price and - physical variations & exchange rate fluctuations duringthe implementationo fthe program. DISBURSEMENTARRANGEMENTS The closing date o f the proposed Credit will be July 7, 2009 The proposed IDA credit would be disbursed against the categories shown in Table C in Annex 6. Disbursements will be made in accordance with procedures and policies outlined inthe Bank's Disbursement Handbook. The Support Project will utilize the traditional disbursement method for disbursing IDA funds from the Non-Pooled Funds category, that is, based on SA, SOE procedures and direct payment procedures (see Uses of Statement o f Expenditures below). As a basis for disbursingIDA funds from the Pooled Funds category, the Borrower, the Bank, and relevant pooled donors (or cooperating partners) will - 80 - need to (i)execute an MOU as well as annual Side Agreements governing the proportion of expenditures to be replenished by respective cooperating partners, and (ii)agree on a satisfactory SOE format-with sufficient detail-for pooled fundexpenditures to be replenished from the SA. To ensure that parallel and differing SOE and disbursement procedures are not introduced under the Program, the Borrower and the Bank will ensure that disbursement from the Non-Pooled Funds category will cease, and remaining funds reallocated to the PooledFunds category once utilization of the poolingarrangementsis initiated. At this stage, the capacities at all levels seem very low interms of producing the regular financial and other reports requiredto sustain report-based disbursementsby project launch. The Government and the Bank have therefore agreed that disbursement from IDA will follow a traditional disbursement method at the outset. Over time, it is anticipated that the Government would transition first, to the more detailed SOE format describe above, and eventually, to a report-based method-comprising regular Financial Monitoring Reports (FMRs) plus additional statements-to facilitate disbursement from the PooledFunds category. Uses of Statementof Expenditures(SOEs) Disbursementsmade on the basis of SOEs, as described above, will be as follows: (a) for goods and grants on all contracts less than US$150,000; (b) for individual consultants on all contracts less than US$50,000; (c) for consulting firms on all contracts less than US$lOO,OOO and (d) for training and workshops, and operating costs on all contracts regardless o fthe amount. The Borrower will retain all the supporting documentation for SOEs, including completion reports and certificates, at the point of transaction. The supporting documents will be made available to IDA during Program supervision and will be audited annually by independent auditors acceptable to the Association. Disbursements for expenditures above these thresholds will be made against presentation of full documentation relating to those expenditures. Duringthe launch workshop, a session on preparation o f withdrawal applications, including the preparation and submission of requiredsupportingdocuments is required. SpecialAccount To facilitate disbursements against eligible expenditures under the Credit, the Treasury Department of MOFED will establish an SA in the National Bank o f Ethiopia. The authorized allocation for the Special Account will be US$15,000,000. Upon effectiveness, IDA shall make an initial deposit up to US$8,000,000 into the Special Account. Once the total disbursements from the Credit account, including commitments, have reached an aggregate amount of SDR 15,000,000, the initial allocation may be increased up to the authorized allocation. The CFU will submit replenishment applications at least once amonth. Counterpartfunds The Government shall open a local currency account at the NBEand shall deposit Birr 9,000,000 for the first program year and subsequent deposits by February 15 and July 15 of each fiscal year. - 81 - ANNEX7: PROJECTPROCESSING SCHEDULE ETHIOPIA: PublicSector CapacityBuildingProgramSupportProject Project Schedule Planned Actual Time takento preparethe project(months) 11months 21 months First Bank mission(identification) July 2002 July 2002 Appraisal missiondeparture March2003 January 2004 Negotiations April 2003 March2004 PlannedDate of Effectiveness July 2004 Bank staffwho worked on the project included: Task Team Leader, overall design Review o foverall design, operational support Education sector Review ofprogram design, operational support ent assessment and related issues Bankfunds expended to date on project preparation: 1. Bank resources: $158,684.38 inFY2003; $169,459.13 inFY2004 2. Trust funds: Not Applicable 3. Total: US$328,143.51 - 82 - EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: US$lO,OOO 2. Estimatedannualsupervisioncost: US$170,000 Donor members of PSCAPWorking Group who worked on the project included: Multi-donor team members DfID S. Lister, Consultant,ExpenditureManagement K.Brown, Consultant,Civil ServiceReform R. Mellors, Consultant,Decentralization M.Frazer,Consultant, ExpenditureManagement K.Gebreselassie, ExpenditureManagement C. Fumo, SocialDevelopment R. Blandon, Tax SystemsReform CIDA C. Piggott J. Rivard S. Racine,Justice SystemsReform DCLlIreland S. Assefa GTZ/Germanv H.Matthaeus,GTZ, UrbanManagement IMF A. Kyei, IMF, Tax SystemsReform M.Netsere,IMF,Tax SystemsReform Italian Cooperationfltaly A. Cecci, UrbanManagement Netherlands A. DeBoer P. DeKeizer M.Vogels SIDA E. Korsgren P. Sevastik, Consultant,Justice Systems - 83 - ANNEX8: DOCUMENTSTHE PROJECTFILE IN ETHIOPIA: PublicSector Capacity BuildingProgramSupportProject A. CorrespondencesDuringPreparation . Letters to Ministry of Capacity (MCB) Building regardingPSCAP o World Bank, Comment on PSCAP Action Plan Guidelinesto Director of MCB External RelationsandResourceMobilization, June 6,2003 o World Bank, Feedback on PSCAP Action Plan Preparation Process to the Minister of Capacity Building, August 6,2003 o PSCAP Donor Group, Donor Follow up on Pre-appraisal to the State Minister of .. CapacityBuilding, November 24,2003 o World Bank, ManagementVisit to Ministerof Capacity Building, November 17,2003 Letter to MOFED o World Bank, Follow Up on World Bank ManagementVisit, November 24,2003 Letters from Government o MOFED letter on specific purposegrant o MCB letter on institutional arrangements B. World BankandJoint MissionAide-MemoiresDuringPreparation .. . Capacity Building Mission, July 2001 PSCAPIdentification Mission, Aide Memoire, July 8 -August 29,2002 PSCAPPreparationMission, Aide Memoire, February 12-28,2003 PSCAPPre-AppraisalMission, Aide Memoire, September 15-26, 2003 PSCAPAppraisal Mission, Aide Memoire, January 26-February 10,2004 .. C. Government Documents,Action Plans,and RelatedMaterials NationalProgramDocumentVol IandII,2003/04 -2007/08 PSCAPConceptDocument, May 2002 FederalPSCAPPlans o ExpenditureManagementandControl Program- StrategicPlan o FederalPSCAPPlan-Civil ServiceReform Program(CSRP) o FederalPSCAPPlan-District Level DecentralizationProgram(DLDP) o FederalPSCAPPlan-ICT o FederalPSCAPPlan-Justice Sector ReformProgram(JSRP) o FederalPSCAPPlan-Tax SystemReformProgram(TSRP) o FederalPSCAPPlan-UrbanManagementCapacityBuildingProgram(UMCBP) RegionalPSCAPPlans o Addis Ababa City GovernmentPSCAPAction Plan o Afar National Regional State GovernmentPSCAPAction Plan o Amhara NationalRegional State GovernmentPSCAPAction Plan o Benishangul-GumuzNationalRegional State GovernmentPSCAPAction Plan o DireDawa City GovernmentPSCAPAction Plan o GambellaNational Regional State GovernmentPSCAPAction Plan o Harari PeoplesNational Regional State Government PSCAPAction Plan o Oromiya NationalRegional State GovernmentPSCAPAction Plan o SNNPRGovernmentPSCAPAction Plan o SomaliNational Regional State GovernmentPSCAPAction Plan o Tigray National Regional State GovernmentPSCAPAction Plan - 84 - FirstPSCAPDesignWorkshop, May 9-10,2003 0 Joint Government- IDA Communique,May 9-10,2003 0 Welcoming Note - World Bank, May 9-10,2003 0 Group Questionsfor Breakout Session, May 9-10,2003 0 SummaryofBreakout Session, May 9-10,2003 0 Civil Service Reform Program- Presentation,May 9-10,2003 0 Information, CommunicationandTechnology - Presentation, May 9-10,2003 0 UrbanManagementCapacity BuildingProgram- Presentation,May 9-10,2003 0 Tax System Reform Program, May 9-10,2003 0 Justice System ReformProgram, May 9-10,2003 0 RegionalPerspective:Amhara, May 9-10,2003 0 RegionalPerspective:Benishangul-Gumuz,May 9-10,2003 0 RegionalPerspective: Oromiya, May 9-10,2003 0 RegionalPerspective:World Bank, May 9-10,2003 0 SectoralPerspective:Health, Tigray, May 9-10,2003 0 SectoralPerspective:Primary Education, Amhara, May 9-10,2003 . 0 SectoralPerspective:PerformanceManagement, DfID, May 9-10,2003 0 SectoralPerspective:Urban Services, Addis Ababa, May 9-10,2003 Agenda, Thematic NotesandMinutesofthe PSCAPAction PlanPreparationWorkshops o Addis Ababa with Emerging Regions, June 18-19,2003 o Awassa, June 21-22,2003 o Bahir Dar, July 5-6,2003 o Adama, July 19-20,2003 . ' o Makale, August 1-3, 2003 Ethiopia: Progress inImplementation ofTax Reform, November 18-22,2003 ' ImplementingCapacity Building Strategy and Program, UnofficialTranslation, February 2002 Oromiya Bureau of Finance & Economic Development, Decentralization Process in Oromiya, October 2002 . Oromiya Bureau of Finance & Economic Development, Learning Decentralization by Doing- FinancialDecentralizationinOromiya, October 2002 Tigray Bureau of Finance & Economic Development, Highlight on the Framework of the FinancialManagement,October 2002 Tigray Bureau of Finance & Economic Development, Summary Notes on the Exercised Endeavorsto StrengthenDecentralization,October, 2002 D. CommuniquCs,PressReleases,andNewsletters ' World Bank, Oromiya Regional State Joint Communique,November 4-7, 2002 ' World Bank, Amhara Regional State Joint Communique, February 24-26,2003 ' World Bank, Tigray Regional State Joint CommuniquB, October 28-November 1,2002 World Bank, CAS Workshop on DecentralizedService Delivery, Joint Communique World Bank, CAS Workshop on CapacityBuilding, InformationNote Frontline httu://www,worldbank,ordafr/et/uscap,htm PSCAPWebsite: http://www.worldbank.orcr/afr/et/pscap,hm Background Notes,Papers, and Assessments ByWorld Bank, and Multi-Donor Teams . AFRITAC, Reporton Cash Management World Bank, Concept Note on Federal Legislative Framework for Urban Land Management in Ethiopia, March2,2003 ' World Bank, Committing to & Monitoring Capacity Building Outputs through PSCAP Action Planning, July 19,2003 ' World Bank, Output OrientedAction Plansfor PSCAP, Presentation, July 19,2003. - 85 - World Bank, Political andAdministrative Accountability Review, BackgroundNote to IGR World Bank, Design Options: PSCAPGrant andDrawing Rights Approach, BackgroundNote World Bank, PSCAP: Informatics, Presentation World Bank, PSCAP: Platform for State Transformation, Presentation World Bank, PSCAPRegional TechnicalNotes on Decentralization,MunicipalDevelopmentand Civil Service Reform o Tigray, October 28-November 1,2002 o Oromiya, November 4-7,2002 o Amhara, February26-28,2003 World Bank, Cost ofDecentralization,BackgroundNote, April 2003 World Bank, Financial ManagementAssessment Report, February2004 World Bank, ProcurementAssessment Report, February 2004 World Bank, SocialAppraisal Report, April 2004 DfID,Review ofCapacityBuildingApproaches for Local Government,July 2003 ........... Inputsfrom World BankSector Teams World Bank, Minutesof Community Empowerment World Bank, Brainstorming Minutes on DecentralizedFiscal Support for Infrastructure World Bank, Programmatic Designof Community Empowerment, BackgroundNote World Bank, EducationTeamNote on PSCAP World Bank, EducationTeamNote on PSCAP-PrototypeCapacityDevelopmentMatrix World Bank, Environment TeamNote on PSCAP World Bank, Environment TeamNote on PSCAP andEnvironment ManagementinEthiopia WorldBank, Environment TeamNote on PSCAP andEnvironment ManagementinEthiopia-2 World Bank, Note from Infrastructure Team World Bank, InfrastructureNote on PSCAP-Responsibility Matrix -Road World Bank, InfrastructureNote on PSCAP-Responsibility Matrix-Energy World Bank, InfrastructureNote on PSCAP-Responsibility Matrix -Water World Bank, InfrastructureNote on PSCAP-Responsibility Matrix -UrbanDevelopment Economicand Sector Works .. Multi-Donor/GOE, Country FinancialAccountability Assessment, March 31,2003 World BanWGOE, Country ProcurementAssessment Report, March 2003 .. World Bank, Woreda Studies-Volume I, January 2002 World Bank, Woreda Studies-Volume 11,January 2002 World Bank, Municipal DecentralizationinEthiopia, July 2001 World Bank, Issues in State Transformation: Decentralization, Delivery and Democracy. An Institutional GovernanceReview ConceptNote Donor Coordinationand Harmonization ...... PSCAPDonor Working Group Members MinutesofPSCAPDonor WorkingGroupMeetings, March 14and 19,2003 MinutesofPSCAPDonor WorkingGroupMeetings, July 16,2003 MinutesofPSCAPDonor WorkingGroupMeetings, August 13,2003 MinutesofPSCAPDonor Working GroupMeetings, August 27,2003 MinutesofPSCAPDonor Working GroupMeetings, November 11-18,2003 BilateralDonors, HarmonizationIssuesNote, February 10,2004 - 86 - ANNEX9: KEY FEATURESRESOURCEALLOCATIONAND MANAGEMENT: OF EXCERPT FROM PROGRAMIMPLEMENTATIONPLAN THE ETHIOPIA: PublicSector CapacityBuildingProgramSupport Project This chapter describes resource allocation and resource management arrangements under PSCAP. This includes an explanation of the Program's rules of access and allocation for drawing rights; its appraisal criteria for plans from federal and regional institutions; its planning, budget, and execution system with the Government's public financial management (including the chart of accounts and financial calendar); and finally, PSCAP's performance-orientedexecutionandreallocationfeatures. Specific-purposefederalprogram As a specific-purpose federal program, PSCAP serves as a pillar of Ethiopia's evolving intergovernmentalfiscal system. The Programallocates five-year drawing rights to additional federal resources across federal and regional beneficiary institutions. Failure to utilize these time-bound rights results intheir reallocationfrom poor performers to high performers within a given fiscal year and across fiscal years. These performance oriented features of PSCAP represent an important innovation interms ofthe designof fiscal transfers within the Ethiopian public finance system. At the same time, the basic planning, budgeting, and execution system of Program is fully with the requirements of the Government's public financial management as well as its SDPRP monitoring systems. Federal and regional institutions participating in PSCAP use the Government's chart of accounts for financial reporting, comply the financial calendar for issuance of resource ceilings, preparerolling medium-termand annual plans in line with established procedures, disburse funds on a reimbursable basis against SOE submissions, and finally, submit financial and physical progress reports. Alignment with the Government's system is designed to ensure that the planning and execution of capacity building activities is undertakenin a flexible manner in line with the changing demands on the ground. It is also intended to improve the accountability framework within which public sector capacity building activities at the federal, regional and local government levels are financed and implementedinGOE's state transformationprocess (Table 3). Budgetclassification ofPSCAPexpenditures The Government of Ethiopia's Chart of Accounts will be utilized to plan, budget, and report on PSCAP expenditures. Specifically, PSCAP will be proclaimed annually by Cabinet in the GOE budget as aprogram under the MCB, which is designated as apublic body. Allocations to the 6 eligible federal institutions and the 11 regions will be proclaimed under PSCAP subject to mid-year reallocations basedon performance. Coding and Classijication of the Federal Component. PSCAP budget coding and classification for the federal level allocation will be structured as follows: (a) Public Body codes will be designatedas "Ministry of Capacity Building"; (b) Program code will be designated as "Public Sector Capacity Building"; (c) Sub-Agency codes will only be designatedfor the CSRP, DLDP and JSRP as "Planning and ProgrammingDepartment; (d) Subprogram codes will be designated as Ministry of Revenue; Ministry of Federal Affairs; Ministry of Finance and Economic Development; Information, and communication Technology Development Authority; and (e) Project code will be designated for each subprogram (i.e. Urban Management and Reform Project, Tax Systems Reform Project, Information & Communications Technology Reform - 87 - Project, Civil Service Reform Project, District Level Decentralization Reform Project, Justice Systems ReformProject, and ProgramSupportProject). Coding and Class$cation of the Regional Component. PSCAP budget coding and classification for the regional level allocation will be structured as follows: (a) Public Body code will be designated as "Ministry of Capacity Building"; (b) Program code will be designated as "Public Sector Capacity Building"; (c) Sub-Agency code will be designated; (d) Subprogram code will designated for each region (Le. Tigray Public Sector Capacity Building, Afar Public Sector Capacity Building, Amhara Public Sector Capacity Building, etc.); and (e) Project Code will be designated for each regional subprogram (Le. Civil Service Reform Project, Justice System Reform Project, Tax Systems Reform Project, Urban Management Reform Project, Information & CommunicationsTechnology Reform Project, DistrictLevel DecentralizationReform Project, andProgramSupportProject). Rulesof access or eligibility criteria PSCAP is envisaged as a nation-wide program, designed to help remedy the severe public sector capacity constraints at the federal, regional, and local levels. To ensure the consistency of PSCAP activities undertaken by a wide array of beneficiaries with national policies and priorities, the Government has established clear rules of access. These access rules or eligibility criteria are detailed below and should be met by federal lead institutions as well as regions before their annual implementationplans can be consideredfor financing under the Program: 1. Signed "Participation and Performance Agreement" by the relevant minister responsible for federal subprogram or relevant cabinet member in the case of regions (sample participation andperformanceagreements are includedinSection4 of this PIP). 2. Establishmento f appropriategovernanceand implementationarrangements; 3. Completion of relevant capacity assessments across all participating sectors and levels of participating institutions, especially inthe case of woreda andmunicipal strengthening; 4. Timely submission of endorsed costed medium-term rolling plans, as well as technically sound, feasible annual implementatiodprocurementplans inline with financial calendar; 5. Explicit provision for evaluationof annual performance including disseminationto the public of such evaluations, satisfactionscore cards, etc, as part of the consultativeplanning process. Inputs from various nation-wide reviews As key inputs to the PSCAP planning, budgeting, and execution process, several review processes should be underway at the close of any given fiscal year. Specifically, the Government is responsible for consolidationof PSCAP outturn data (based on Statements of Expenditures) for the previous year by subprogram and region. These data are compiled in the form of a consolidate physical and financial report by the Planning and ProgrammingDepartmentand submitted as an input to the Joint Annual PerformanceReview Mission (ARM) no later than September 30. The ARM for PSCAP is heldnot later than October 1eachyear and its findings-widely distributed-should serve as inputs to the SDPRP Annual ProgressReport (to be issued in late October each year) as well as the annual multi-year planningexercise for PSCAP (see below). - 88 - Fiscalframework-medium-term projectionand divisionof PSCAPresources Each year, during the Government's multi-year planning exercise, the Ministry of Finance and Economic Development (M0FED)-in close consultation with the Ministry of Capacity Building (MCB)-will ensure the medium-termprojections of available PSCAP resources from external and Government resources-stimated in Year 0, February 2004, to be approximately Birr 3.3 billion over the 5 year planning period-are appropriately reflected in the Macro-Economic and Fiscal Framework(MEFF), which is preparedno laterthan October 26. Once the overall available pool of resources available over the medium-term has been established, both Ministries will initiate a formal dialogue with relevant PSCAP stakeholders such as lead institutions and regional governments on the vertical and horizontal division of resources and issue revised medium-term indicative planning figures for federal subprogram and regions no later than November 10. Guidelines for the vertical and horizontal split are described below and should providethe basis forjoint Government-donorreview: Vertical Division of PSCAP Resources in the First Year and Subsequent Years. During program preparation, an original 80-20 percent vertical division of PSCAP resources (drawn from domestic and donor sources) over five years was effected between regional and federal levels of government respectively. Each year, the actual allocations for federal and regional components of PSCAP should be revised on changes in resource projections. Changes in the proportions between federal and regional allocations (Le., the 80-20 split) should be undertaken in a transparent manner, in dialogue with federal and regional authorities, no more frequently than once ayear, and on the basis of clear criteria such as the previous year's performanceas well as existing multi-year commitmentsat the federal and regional levels. Horizontal Split of the Regional PSCAP Component in the First Year and Subsequent Years. Once the vertical split has been reviewed each year, a horizontal split of the regional component is undertaken on the basis of the established formula for the federal-regional subsidy as well as re-pooleddrawing rights which high performers could draw down. The formula consists of three factors-the region's population, its level of development gap, and its previous years' own revenue performance-weighted at 65%, 25%, and 10% respectively. During program preparation, the above-mentioned formula was applied and five-year drawing rights were assignedto eachregion. Eachyear, up to 50% of the five-year drawing rights of individual regions will be subject annual reallocation from poor performers to high performers. Reallocation recommendations by the PSCAP Federal Technical Team will comply with the following rules and be clearly communicatedto all regions andfederal institutions: 1. A cut-off point of fund utilization (as evidenced by SOE replenishment requests) and activity-based performance, 75% in both cases, will be established. Regions performing above this cut-off point are not subjectto reallocation. 2. A minimum entitlement equivalentto 25% ofthe approvedannual plan inany given year will be establishedfor all regionsto ensure that under-performerscontinue to have incentives and resources to establishathe minimumstatutory level ofcapacity. 3. At end-year, poor performers or those with 25% or less of fund utilization and activity-based performance will have 50% of their remaining five-year drawing rights re-pooled and reallocatedto highperformerspurely on the basis of performanceranking. - 89 - 4. All such reallocationswill be reflected inreadjustmentsto their overall five-year envelopes. Infuture years, the formula as well as rules for annualreallocationwill be reviewed and revised as necessary and any changes or modifications, will be made on the basis of extensive consultations, and widely publicizedto all regions andrelatedbeneficiaries. Planning-aligning with Public Investment Program(PIP) preparation As one of the FederalGovernment's major capital spending initiatives, PSCAP is reflected within the Government's Public InvestmentProgram. PSCAP planning is therefore integratedand alignedwith the PIPpreparationtimetable, as laid out inthe financial calendar. Accordingly, following the issuance of revised indicative medium-termplanning figures, federal lead institutions and regions (under the guidance of their Regional Technical Teams) undertake and submit to the PSCAP Federal PPD their revised and appropriately costed rolling five-year PSCAP Action Plans no later than December 25. As noted in the eligibility criteria, the revisions of these plans should be undertaken in a participatory manner involving consultations with various regional and local stakeholders. Revisions of the PSCAP Action Plans should reflect the public sector capacity buildingpriorities identified inworedaandmunicipal developmentplans. The Federal Technical Team (FTT), MCB, and MOFED review and finalize revised medium-term consolidated PSCAP Action Plans (by federal and regional components) no later than February 8. As part ofthis exercise, onthe recommendationof the FTT, bothministries finalize the AnnualFiscal Planfor PSCAPpart ofthe Government's overall fiscal plan) no later thanJanuary24. Budgeting-Preparation, AppraisalAdoption, Execution, and Re-allocation Basedon the Annual FiscalPlan(Le., the annualizeddrawing rights), federal lead institutions prepare their PSCAP budgets along with annual procurement plans no later than March 1. These are submitted to the FTT via the Planning and Program Directorate (PPD) for appraisal and review. Similarly, regions submit their annual budgets and procurement plans to the Federal PPD no later than February 22 so that their Regional Technical Teams can pre-appraise, review, endorse, and submit their plans to the FTT no later than March 1. Regional TechnicalTeams, under the guidance of respectiveBCBs, are expectedto have preparedtheir matching budgets for PSCAP activities (for example, for civil works andongoingrecurrentor O&M) at the same time. The FTT then reviews and appraises annual implementationand procurementplans under the federal and regional components against the following appraisal criteria established within and across subprograms: 1. The relevance of planned activities given existing assessments is established, as well as provisions for additional assessmentwhere requiredare included; 2. Prioritization of the "minimum mandatory" capacity building--especially with regard to financial management, procurement, and relatedprogram support activities-is establishedas a necessary precursorto any more advanced activities; 3. Demonstrationthat civil works requiredto house any goods (e.g. especially ICT) are inplace, and that budgetaryprovisions have beenmade for additional upfront civil works and ongoing recurrent as well as operations and maintenancerequirementsof goods procurement; - 90 - 4. Evidence that annual plans are based on consultation with key stakeholders including local governments, regional bureaus, communities, and other stake holders, and that this consultative planning process becomes increasingly "bottom up'' in each successive year as evidenced by steadily increasing numbers of woreda and municipal action plans, formal publicconsultations, participation ofreferenceand focus groups inthe planning process; 5. Sector-specific criteria such as sequencing, the previous year's performance, and the submissionof relevantTORS. 6. Explicit focus on issues relatedto gender and HIV/AIDS mitigation. It is anticipated that the FTT will need to provide comments and suggest revisions in federal and regional plans as a basis for finalizing annual implementationand procurementplans. Once revised, the plans should be submitted to IDA for no objection no later than March 15. The FTT finalizes these plans for the federal and regional components no later than March 22 and submit them for cabinet approval. PSCAP's annual plan for the Year Y+l will be submitted alongwit the overall budget to the Council of Ministers no later than May 22. Matching requirements in regional budgets (for civil works and recurrent costs) will be submitted to regional cabinets at the same time. The Cabinets should recommend the federal and regional budgets inclusive of PSCAP budgets no later than June 2. Approval and adoptionby federal and regional legislatureswill be undertakenroughly betweenJune 8 and July 2, inanticipation ofthe coming fiscal year. Executionand Mid-year Reallocation Once proclaimedand allocated, executionof PSCAP budgetsbegin at the start of the fiscal years on July 8. Following an initial release to cover implementationfinancing requirementsfor up to the first quarter, funds are released to federal lead institutions and regions for monthly reimbursementagainst consolidatedSOEs. Mid-year Reallocation Rules. PSCAP also envisages mid-year reallocation of annualized drawing rights, Le., a re-appropriationbetweenregions within a federal budget line. Key performancecriteria used as a basis for these in-year adjustments are SOE submissions and activity-based progress reports. Accordingly, federal lead institutions and regions submit their consolidated reports on year- to-date SOE submissions and activity-based performance, as well as projected budget utilization through the end ofyear Y to the FederalTechnical Team (FTT) no later thanJanuary22. The FTT will recommend in-year reallocations across regions on the basis of the following rules (similar to those applicable for annual reallocation), which are to be clearly reiteratedto all regions and federal institutions at the start ofeachyear: 1. A cut-off point of fund utilization and activity-based performance, 75% of projected cash flows inboth cases, will be established. Regionsperforming above this cut-off point are not subjectto reallocation; 2. A minimum entitlement equivalentto 25% ofthe approvedannualplan inany given year will be establishedfor all regionsto ensure that under-performerscontinue to have incentives and resourcesto establish athe minimum statutory level of capacity; -91 - 3. At mid-year, poor performersor those with 25% or less of fund utilization and activity-based performance will have 50% of their remaining annual drawing rights re-pooled and reallocatedto high performers; 4. In-year reallocationswill be reflectedinreadjustmentsto the annualand five-year envelopes; 5. Access rules for high performers seeking to draw down on re-pooleddrawing rights are the submission of revised plans (with revised projections for utilization through end-year), compliance with financial and physical reporting requirements, and satisfactory achievement ofthe in-year cut-off point. The FTT will hold discussions with regions on its review and recommendations for in-year reallocation between regions within annualizedbudgets no later than February 8. Following these discussions, the reallocationproposalwill be submitted for no objection by IDA on February 15, and then MCB and MOFED issue in-year reallocations betweenregions and federal institutions no later than February22. The Role of the Supplemental Budget. In the case in-year reallocations prove insufficient for high performers, MCB may seek to draw down on future years' annualized drawing rights or allocations. In such cases, high performers should demonstrate nearly full (over 85%) utilization of annual drawing rights and realistic projections for utilization that exceed available resources from in-year reallocation. Once reviewed by the Federal Technical Team, the proposed use of future annualized drawing rights (financed in part of fully through IDA support) through the Government's supplemental budget mechanism should be submitted to IDA for no objection. Following IDA'S no objection and finalization by the MCB, allocations within the supplemental budget for high performers will be finalized and communicatedthe EAs inquestions as well as all other stakeholders involved inPSCAP. I I tI I6 I m a I I z i .t 7 C : 7 c 4 N E fa 3 w " I R E c 3 U - 94 - ANNEX10: HARMONIZATION FORBILATERALDONORS-PREPARED BILATERAL ISSUES BY MEMBERS OF PSCAPJOINTGOVERNMENT-DONORSWORKINGGROUP4 ETHIOPIA: PublicSector CapacityBuildingProgramSupport Project Introduction This note is intended to encourage strong bilateral support for the PSCAP and to clarify joint thought amongst all donors about how and under what conditions, commitments shouldbe madeto PSCAP, and the implicationsarising therefrom. Donors acknowledge that an enormous amount o f effort has gone into planning and developing the Programme so far, mainly by the GoE and the World Bank. It must also be acknowledged that the GoE is already implementingsome ofthe PSCAPprogrammeswith its ownresources. Bilateraldonors are muchencouragedby: . 9 Government's expresseddetermination and commitment to address the capacity buildingneeds o f the country; Government's desire to establish a comprehensive, holistic and integrated approach to capacity buildingunder one umbrellaprogramme; 9 . Highlevel ofownership ofPSCAPplans bythe regionalgovernments ofthe country; The overall intergovernmental design and drawingrightsapproach; and 9 The general content ofthe subprogrammes ofPSCAP. There are, however, some design and programming issues which need to be considered for PSCAP implementation, over which the donors (and IDA) have serious and valid concerns: inter alia the quality o f the various plans, the approach in some components, gender and HIV/AIDS analysis and mainstreaming, the sustainability of the heavy ICT investment, monitoring and evaluation arrangements and the planningand resource allocation timetable. However, it is felt that further efforts at this time to resolve all of these issues are more likely to hinder the process of project formulation and approval. Rather, the emphasis should now be on how to best optimise bilateral and IDA contributions and facilitate a learning process in the programme as it proceeds. It is considered likely that much of the programme will get offto a slow start giventhe lack o f capacity for procurement and the giant step that still has to be made in most o f the programmes from the present plans to actually doing something. It is also likely that the enormous challenges the programme is posing in terms of content, approach and implementation management will necessitate continued revision of plans, especially over the first 2 or 3 years. As already indicated at the Pre-Appraisal stage, the Promamme should therefore be seen vew much as a learning bv doing process. .. Three critical issues stand out which require resolution before implementation. These are: 9 Ifandhowthebilateraldonors shouldengage; Confirmation of the approach to capacity building; and Harmonisationprocedures Bilateraldonor engagement The GoE objective is to design and implement a single, multi-donor solution to the public sector capacity building challenge, and their desire is for all bilaterals to join with IDA to support this programme. To Specificdonor agencies representedinthe draftingofthe note duringthe appraisal ofthe program includedDffD, CIDA, DCI, GTZ, Netherlands, and SIDA. - 95 - become committed, bilateral donors intendingto participate should endorse the overall programmedesign . and implementationarrangements. There are 3 basic options opento them: Stay on the outside if they have strong reservations or incompatible agreements with their current programmes, leavingPSCAPlargely to the Bank andthe GoE. Make minor contributionson the margins. Get fully involved as either a pooling or non-pooling donor, and seek to influence the course of the Programmefrom the inside. It can be clearly argued that Ethiopia deserves a chance to implement PSCAP even iftheir plans couldbe further improved. Options 1 and 2 leave one on the outside of one of the `biggest development efforts town' and could be interpreted as a reluctance to respond to GoE plans and priorities. Also, the opportunity costs of trying to undertake and negotiate parallel programmes to PSCAP would likely be higher given that the space will be restricted. There are strongarguments, ifone is to be involved at all, to fully embrace PSCAPand seek tojoin a learningprocess through option 3. Confirmationof the approachto capacity building There are a variety of approaches evident in the PIP covering the range from demand to supply driven, but in some of the subprogrammes there is an inappropriate emphasis on deficit analysis followed by `prototype design', top down delivery and bulk training. PSCAP will, however, inevitably become a learning process, with some aspects succeeding and others requiring modification as implementation proceeds. Since PSCAP is intendedto be transformational, it must give strong emphasis to planning and implementationapproaches which are highly participative and which promote ownership of development plans and capacity building by citizens and officials at all levels. As both bilateral donors and IDA can bringconsiderable lessons learnedfrom their current programming, there should be a strong commitment by all donors to incorporating those lessons learned from their current programming into the PSCAP process. MCB has demonstrated considerable openness to the views of various stakeholders regarding design, but it would be desirable for itto confirm its positionregardingtheir capacity building approach. Similarly, the monitoring and evaluation system should be a driver of a participative learning process rather than a formalisedrecording system for centralgovernment and donor consumption. The GOE has shown a commitment inthe PIP to biannual (and quarterly) review mechanisms, therefore, it behoves all donorsto be fully engaged inthe review process. The implications of a more demand driven learning approach are significant in terms of the nature and scale of the review process. This should not be a `business as usual' presentationof routine data. Rather, it requires a more collaborative and elaboratemechanismfor review of experiences, analysis of problems and development of new solutions through an action-reflection process. Woreda, Regional and Federal level review meetings thus become fundamental learning fora. There is an obvious need to develop a clear TOR for a joint GovernmentDonor Review process. This platform will enable problems to be jointly owned and resolved by both the actors themselves and the donors. Now is an appropriate time, particularly for the Bilateral donors, to make firm commitments of time and the sharing of resources necessary to participate fully in ALL Regional and Federal Reviews, if donors are to have any hope of being adequately informed on the issues from all 6 subprogrammes inall 11administrative regions. It is obvious a careful sharing of resources and responsibilities will be required to ensure effective coordinationacross all subprogrammes at boththe federalandregional levels. - 9 6 - Donor harmonisation It is important for non-IDA donors, who now wish to become fully involved and strengthenthis learning process, to iron out and harmonise their respective positions. It is also no longer acceptable to simply leavethe key donor role to the World Bank, as has happened during the preparationphase. The GOE and World Bank have taken steps to encourage full bilateral participation through a number o f harmonization approaches inEthiopia, such as the PRSC, SDPRP and PSCAP. All participating donors shouldtherefore take up responsibilitiesfor supervision and involve themselves fully, if they want their perspectivesto be taken into account. It i s also important that GoE and all donors maintain dialogue on harmonisation throughout implementation.Harmonisationshould promote policy dialogue alignedto the SDPRP cycle, taking into account the concerns of pooled and non-pooled partners to PSCAP. The following issues represent the consensusviews of bilateral donors interms of harmonisation: Pooling offers the most straightforward and coherent arrangement and simplifies the implementation management for what is a wide-ranging and complex programme. It should be encouraged. Budgetary off-set and the full additionality of PSCAP resources are compelling reasons to support PSCAPthrough the pooling arrangement. For various reasons, however, some donors may be unable to join this arrangement, although they wish to be fully involved in PSCAP and to integrate their activities as closely as possible.This should also be accommodated. On-going bilateral programmes: Several bilateral donors are presently engaged in on-going programmes which closely relate to the scope of PSCAP. Wherever possible, donors and the GoE agencies which they are supporting should endeavour to harmonisethe planning and implementation arrangements for their programmeswith those beingestablishedfor PSCAP. Donor HarmonisatiodParticipationAgreement: The MOUwill be the legal binding document for all donors involved inthe pooling arrangements for PSCAP. It is important however, that non-pooling donors also be encouraged to sign on to an overall participation agreement that confirms their commitment to a code of practise covering mechanisms for non-pooled contributions, co-ordination and participation injoint review procedures etc. Such a HarmonisationParticipationAgreement will take into account the OECD-DAC principles on harmonisation, as well as local requirements for PSCAP. Procurement: Procurement arrangements should ideally be designed to strengthen the GoE system. At the same time, donors are concernedabout capacity constraints that may slow the momentum of PSCAP. Donors emphasize the need and support GOE efforts to establish strong capacity for procurement planning and management within the framework of IDA procurement methods for pooled funds. Lessons from a variety of donor experiences (CBDSD, ESDRF, ERA) and the CPAR recommendationsshould be integratedinto PSCAP procurement. Donors agree to work as a team to appraise GOE procurement TORSto ensure quality control in a timely manner. They will also take active interest in the annual GOE procurement plans to stimulate dialogue on capacity development methodologies.Options allowing responsivebilateral procurementoftechnicalassistance via Channel 3 should be maintained. Donors also endorse efforts to ensure a diverse source of supply from the public, private andNGO sectors for PSCAPtraining and other requirements. Fiduciary requirements: Bilateral donors should also work closely with the World Bank and MCB to plan and harmonize fiduciary and other assessments, in order to maximize harmonization of individual donor planning, approvalandreview processes. - 97 - AdditionalIssues Loans versus rrrants: PSCAP is a human resource and public service development project which, because of its size and enormous complexity will inevitably become a learning by doing programme. The likelihood of the Programmegeneratingsignificant financial returns inthe short or mediumterm is low. The risk analysis in the PAD also shows almost all output risks to be high, substantial or moderate. It would therefore be appropriateto maximise the use of grant funds and for the Bank to maximise use of its own grant facilities in the IDA contribution. Creative bilateral financing of PSCAP, such as the interest buy-down option, urging of bilateral Executive Director's at the Boardto consider increasing Ethiopia's grant facility from IDA, and the sympathetic review of Ethiopia's HIPC completionpoint andurgentneed for topping up, should be encouraged. Gender and HIV/AIDS: Donors are concernedthat these important issues should receive more focus through PSCAPespecially inthe programmeobjectives, activities and indicators. Monitoring and evaluation: Whilst the reasons for the delay in formulating a comprehensive M&E strategy are understood, donors are concerned that this dimension of the programme is not fully available to be appraisedduring the present mission. An effective monitoring and evaluationsystem will be an essential tool inPSCAPto ensure learning at all levels andto keep abreast ofthe numerous sub programmes and activities. Serious attention should be given to revisiting sub programme log frames andto developingclear linkages with the overall PSCAP log frame. Due diligence and learning-by-doing at the sub-national level: The need for all donors to be able to participate fully in a learning programme and conduct satisfactory due diligence requires a commitment from donors to engage fully at the regional and woreda levels. Therefore, the World Bank and bilateral donors will engage with MCB and MOFED to harmonize donor and GOE input into joint review processes, through both formal M&E mechanisms, such as the Annual Review Mission (ARM), and informal M&E mechanisms, that can facilitate the review processes, provide additional donor input to the periodic reviews, and facilitate inter-regional learning. Modalities for strengtheningthis commitment will be discussed betweendonors, MCB and MOFED inthe runup to implementation and reflected in the Harmonization Agreement. This is not a parallel monitoring system or mechanism for TA, but will complement and strengthen existing joint Monitoring and Evaluation arrangements, as has been established inthe SDPs. It does, however, imply that bilateral donors will increasetheir presence and gain more knowledgeand insight into PSCAP implementation inthe regions. - 9 8 - ANNEX11: STATEMENTOFLOANS CREDITS AND ETHIOPIA: PublicSector CapacityBuildingProgramSupportProject Differenceexpected Original Amount in US$ Millions and actual disbursementsa Project ID FY Purpose IBRD IDA GEF Cancel. Undlsb. Orig Frm Rev'd PO49395 2003 ETHIOPIA-ENERGY ACCESS 0.00 132.70 0.00 0.00 147.29 29.08 0.00 PO50938 2003 Capauty Buildingfor Dec Sew Del 0.00 26.20 0.00 0.00 27.90 11.55 0.00 PO44613 2003 ET Road Sector Development Program II 0.00 0.00 0.00 0.00 134.39 2.00 0.00 PO75915 2003 ET Pastoral Community Development 0.00 0.00 0.00 0.00 29.57 -0.34 0.00 PO81773 2003 EMERGENCYDROUGHT RECOVERY PROJECT 0.00 0.00 0.00 0.00 16.23 -12.18 0.00 P050383 2002 EthiopiaFOOD SECURITY PROJECT 0.00 85.00 0.00 0.00 97.85 -3.05 0.00 PO57770 2002 ET CULTURAL HERITAGE 0.00 5.00 0.00 0.00 5.22 1.06 0.00 PO69886 2001 Multisectoral HIWAIDS 0.00 59.70 0.00 0.00 35.32 35.65 0.00 PO73196 2001 ET Daqobilizationand Reintegration Pro] 0.00 170.80 0.00 0.00 36.02 29.29 0.00 PO52315 2001 ET CONSERVATIONOF MEDICINAL PLANTS 0.00 2.60 0.00 0.00 2.03 -0.88 0.00 PO67084 2001 EMERGENCYRECOVERYANDREHAB PROJECT 0.00 230.00 0.00 0.00 107.79 86.31 0.00 PO50342 2001 Women Dev Initiatives 0.00 5.00 0.00 0.00 4.17 1.82 0.80 PO35147 2001 ET CONSERV a SUSTAIN USE MEDIC PLAN 0.00 0.00 1.80 0.02 1.88 1.03 0.00 P069083 2001 AFTKL ET GLOBAL DISTANCE LEARNING 0.00 4.90 0.00 0.00 5.25 4.74 0.00 PO00756 1999 Health Sector Dev 0.00 100.00 0.00 0.00 31.05 28.13 0.00 PO00738 1998 ET ENERGY II 0.00 200.00 0.00 0.00 36.49 39.30 0.00 PO00733 1998 ET AG RESEARCH ~ T ~ I N I N G 0.00 80.00 0.00 0.00 21.42 17.86 0.00 P000755 1998 ETHIOPIA ROAD SEC DEV PROG 0.00 309.20 0.00 0.00 87.35 88.18 67.54 PO00732 1998 Educ Sect Dev 0.00 100.00 0.00 0.00 11.52 12.39 0.00 PO00771 1996 Social Rehab (ESRDF I) 0.00 120.00 0.00 11.48 33.11 24.65 21.56 Total 0.00 1610.90 1.60 11.50 871.85 396.82 89.90 - 99 - ETHIOPIA STATEMENT OF IFC's Held and DisbursedPortfolio 30 June, 2003 In MillionsUS Dollars Committed Disbursed -IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic Total PendingCommitment: 0.00 0.00 0.00 0.00 - 100 - ANNEX12: COUNTRYAT A GLANCE ETHIOPIA: PublicSector CapacityBuildingProgramSupportProject Ethiooia at a dance 8MOi03 Sub- POVERTY and SOCIAL Saharan iow- Ethbpia Afrlca Inwme Welopment diamond' 2002 PopuJation mid-year (mf/#onsf 67.3 688 2.495 GNI per capna(Atlssmralhod, US$) Lifeexpeciancy 100 450 430 GNI (Aftasmtw,US$billions) 6.7 306 1072 Averageannualgrowth, 1898-02 Po~lairon(%j 2.4 2 4 I 9 Laborforce m) 2.2 2 5 2 3 GNJ Gross per primary Mostrecentestimate(latestyear available. 1996-02) cepita rolimeni Povedy(35 ofpcpulafrw,belownationalpoveriyline) 44 Urban popul&on f% OFtotalpopulatron) 16 33 30 bkexpedancyat birth(years) 42 1 46 59 infantmortality(per T,000livebjrths) 116 105 81 Child malnutnlion(56 ofchridmnunder5) 47 Accessto improvedwaef source -.- Accessto an improvedwater source(% ofppulahon) 24 58 76 IiJrtpracy(% ofpopulationage 15+) 58 37 37 Gross pnmaryenrollment (% of schookagepopulation) 64 86 9s Ethropta Male 76 92 103 -Low-incomegroup Female 52 80 87 KEY ECONOMIC RATIOSand LONG-TERFd TRENDS t982 1992 2001 2002 GDP /US$ billions) 5 4 10.0 6 2 6 0 Economicratios' GrossdomesticInvesimentIGDP 13 4 9.2 18 0 20 2 Exports d goods and services!GDP 9 5 4.5 15 4 15 2 Trade GrossdomesticSavtngslGDP 5 6 3.0 2 2 1 9 GrossnatmnalsavingslGDP 6 8 7.2 138 T Current accountbalandGDP -6 8 -3.3 -4 2 Interestwytnents/GDP 0 4 0.4 1 0 0 7 Total deWGDP 60 2 93.0 91 3 108 9 Total debt servtce/expOrts 13 8 23.1 18 5 116 Pmsent value of debYGDP 46 7 Presentvalue of debtlexpons 295 5 Indebtedness 1982-02 1992-02 2001 2002 2002-06 (averageannualgrowth) GDP 0 7 5 5 7.7 5 0 -Ethiopra GDP per capita -2 4 3 0 5.2 2 7 -Low-incomegroup Exportsof goodsand semces -3.2 $26 -1.6 7 7 STRUCTURE ofthe ECONOMY 4% II 1982 $992 2001 of investmentandGDP(X) ofGOP) Agncunure 542 629 52 3 Industry 12 3 8 2 11 1 11 1 Manufacturing 7 6 4 8 7 0 Services 334 28.9 36 5 Privatewnsumphon 794 869 Generalgovernmentconsumption 150 10.1 17 5 21 0 importsof goods and Services 174 107 31 2 335 W G M -DP I I 1982-92 1992.02 200.1 2002 I (average annualgrowth) Growthof exportsand imports(XI I Agriculture 1 3 2.8 11 5 4 5 40 industry -2 9 6.1 5 8 5 4 30 Manufacturing 4 4 6.6 7 9 20 SSMceS 1 8 8.3 4 6 5 5 10 0 Pnvate consumption 1 5 2.5 11 4 -4 0 -10 Generalgovernmentconsumption -1 0 16.4 -185 268 Grossdomesticinvestment -1 8 10.3 27 4 17 4 importsof qoodsand services 0 0 8 0 -1 8 5 5 Note 2002 deta are preliminaryestimates Thts table was producedfrom the DevelopmentEconomicscentra! database " The dramondsshow four key indrcatotsInthe country irn bold)comparedmth~ tincome-groupavetaqe. Ifdata are missinq.the diamondwiJ1 s beincomplete - 101- I PRICESand GOVERNMENTFINANCE 1982 1992 2001 2002 Domestic prices (% change) 1s Consumerprices 5 9 21 0 -7 2 -7.2 10 ImplicitGDP deflator 4 2 11 3 -7 0 -6.3 3 Governrnenrfhance 0 (56 of GDP includescirfrent grants) 5 Current revenue 16 6 106 19 6 22.1 -10 Current budget balance -1 7 -5 0 -0 3 -0.1 I DPdefiabr -CPl I Overall surplusfdeficit -8 0 -9 6 -10 0 TRADE 1982 1992 2001 2002 (US$ mllionsl Exportand import b e l s (US$ mill.) Total exports (fob) 376 154 441 467 Coffee 81 175 166 Leatherand leather products 28 38 44 1 , w Manufactures Total imports(cM 848 675 1,558 1,598 1,wo Food 131 241 177 300 Fuelandenemy 120 265 244 Capital W s 320 589 624 0 Export pnce index (1995=fM) 84 63 59 import pnceindex 11995=1OOJ 110 96 118 Terms of trade (1995=100) 77 86 50 BALANCEof PAYMENTS I 1982 1992 2001 2002 {US$mrl/ions) Currentaccountbalanceto GDP("A) Exportsof goods andsefv~#s 512 453 957 909 lmp~ttsof goods and services 946 1,074 1.945 2,004 'T Resource balance -435 -621 -987 -1,095 0 Net income -9 -86 -59 -50 Net current transfers 73 372 774 5 Current account balance -371 -335 -264 -10 FinancingItems(net) 431 381 257 Changesin net reserves BO -46 13 -136 I Memo: Reservestndudinggold (US$ mt(lrons) 277 172 Conversionrate(DEC,local#S$f 2 1 2 1 8 3 8.5 EXTERNALDEBTand RESOURCEFLOWS 1982 1992 2001 2002 {US$mrlllons) Compositionof 2002debt(US$ mill.) Tdai debt outstanding and drsbursed 3 280 9 341 5,697 6,523 1BRD 48 12 0 0 FBB G:BB IDA 302 964 2.151 2.756 Total debt service 76 109 182 108 IBRD 8 8 0 0 IDA 3 13 36 17 Compositionof net reswraflows Gffiaaf grants 107 886 413 Gffiaaf creditors 1345 184 434 548 Pnvaiecreditors 98 80 -10 4 Foreigndirea investment 2 0 20 POrtfOtfO equity 0 0 0 World Bank program Commitments 30 150 202 343 A . IBRD E Bilateral I Disbursements 28 112 455 465 B .IDA D. Cnher mltilaierai F Rivate Pnnwpal repayments 5 13 22 5 C .!Mi= G Short-Ienn .. Netflows 23 99 433 460 interest payments 6 8 14 12 Nettransfers 17 92 419 447 The World Bank Group http:ihfw.worfdbank orgldatal 8120103 - 102- ANNEX13: LETTER SECTORALPOLICY OF ETHIOPIA: PublicSector CapacityBuildingProgramSupport Project nh.+t%y ~k&.rt'f! %~P.'hi-h~? &~~-'-nhh P7'tH-W Ph.bC"S. nor-). @7.%h+f: The Federd Democratic Republic of Ethiopia Ministry of Finance and EconomicDevelopment Dear Mr. Madavo, R13: LETTER OF SECTOR PC>I,ICY 1. Iamwriting to request,on hehalfof the FedcrdDeinocratic Kcpoblic of Ethiopia, for thc approval of the five-year Pubi'ic Secror Captrciiy LZicilrfirig Progrwrrtw Siqqmri PrrJjkr:t (PSCAP) of LiS$IOO million. The proposed credit will reinforce our ongoing rl'forts to reduce poveiiy. promote growth. and ripidly implement the wide range of dcvclopriiciit policies and progranis in tlic cuntr;?xt of our Sirsrainnblc Qtwrfupnrerii trrrd Poverry R e d i d o i l Prc7~rcxn1(SDPKP), Spccitically. the credit will deepen through nation-wide capacity building and institutional transfortnation efforts in order to improve the scalc. efficiency, and nsponsi\{eness of public service deliwry :it thc federal, regional. and Iacal level; eriipowel- citizens to particip:ue Iiiorc cffecrivcly in shaping their own developineni; arid prorrrotc good govcrnnnce arid accouiitahility UACKGHOUNL)AND HICCEK'I' l)EVEI,OPhIENTS 2. Since its daiiiocratic transition in tlic curly 1990s. thc Ciovcrnnicnt has pursued a long- tcrm smtegy of iesti[utionitl tratisformaiion across tiers (federal, regional arid local) and branches (oxccutivc, judiciriry. and legislature) of govemmcnt. This proccss of' "state transt'ormation" has involved the Jcvelopnrerit of niulriplc insritutionni refom] initiatives in parallel (for examplc, iivil servicc and jtistice systems refoniis. wcrcda Jecentrrilizntioii aid irrbnn mariugcmcnt), the estiiblishmznt of u natioii-widc capacity buildicig systeiri designcd to finance, iiiiplemenr. and iiwiiiroj' iirstirirtiorial change; and thc imssive scale-up o i capacity building across sectors. Spanning nearly a decade. Ethiopia's transfornution :igciidii Iins cvotvcd over three phases in response to growing aw;wriess ittat pervastvc dcf'icits in cap;tcity have Iiampcrcd the nbikity of public institutions to sccurc the ftinduiiitmtals of poverty reduction aiid deinoci-aticdcvelopnient such as thc efficient and rcsponsive service dclivcry. rhe cmpowcmcnts of citizens throughgrassroots pnwpntion, and the promotion of good govemsnce. - 103 - scrbnti nmtwgmieiii cirpuciry hntildiiig efforts which coinprisc, legully cunstitutins. tmpo\vcriiig, rcsciucturing, and c;tpacitn!ing municipaiitics as the basic units of urban pm-nancc, responsible for service delivery. cmporvernrerit, and encouraging wealth crcariuri across Ethiopia's rapidly grorviirg cities and secondary towns; a nution-widc arid sector-specific irririnlivcs such :is ihc tiorcdii- and scho~l-nc~ projecls to enhance ICT penetralion and ongoing cfforts to dcsclop applicarions related to core public maiiag~iiientsuch as financial. personnel, and land rnanagemcnl systems. as wcll its s w o r specific WJ ~orit~tiuaity-b;is;Lld iriitiutises; ..'I - 104- f l u .sysmrr I * C $ I ~ Ito r-nmp-upC~ovt'rnniei~t'~ revenue pcrfoniianoc including through ttic roll-OUIui ongoing initiatives in iux policy development. tax administration and Custorlis adiiiii~i~traiti~~i reforrns. efforts to strcngrhsri formal chccks and balanccs 2nd :iccouiirnbiIity rnccfimisms in rite p ~ i sysfcw through a well-sequenced. integmted reforin of thr, judiciary, taw w niakieg, hu'cnfotceriient, w d legislative oversight insatutions, b. IIIrcsponsc to rhesc ctiallctigccs, the Govcrnmcnr has rcccritly lauricltcd a thirdphcise of the ir:inslbrmatron program designed fo scale up suiiport for the six core public sector refunti programs lhrouph the crcniion of the five-ycur omnibus federul specific purpose PSCAP. The Goventnierrt's vision, rcllected in its national progm docurwrit for {tie IJSC'AI.', is based on tlircc pillurs-siii~iil~;:ncotis, itarion-widc imphientarion of SIX subprogr", sequenced in fine v. ilh regional and locai priorities; alignnien[ o i program support with Erhiopia's puhlic Fiiiaricial nianrlgcincnt and inkrgouc"nental system: unci pooling of dotior resourceb iind h:intiorritation ui' fiduciury requiremerits tlirough ii Sccror-WiJc Approscfi [hat involkcs all intercatd parrilers, 7 , 11) ixmuing a Sector-Wide Aplmach (SWAP) to PSCAP, thc Ciowniment has takes severin1 iniportant steps during tlir proyam prepnration and design process that bode well iur the roll-oul of this curnpret~erisivc,riation-wide agenda. First, thc Ministry of C'apaoi[y Building coordinated n nation-wide bottom-up plmiiing cxercisc iiivolviag a wiJr 1'iingCot' ministries, thc judiciary, and legislative: branch at the federal level. as well as all oi Ethiopia's nine regions and two city administration; (tie process sought IU d i n e dit: types uf cupxily building activities envisaged under PSCAP aid prcpdrc. costed incdium-tcrm iitd antitlid plans for lllc implcmcnrstion of' thesc rtctivitics in a properly sequenced rnaniier. Second, tlie Minislry of Finance and Ecconornic Drvelopriient dcsipnarcdP S C M rls ;If'cdrral spccii-rc p u q ~ s ctrtiesfcr, appropriarcdat thc fcdcrid Ic~cl. tlrcrcby wsuriiig 11i;it PSCAP XSI)U~CCS 10 regions iirc atdcliriond 10 111~'g~i~et%f purposes truxfc't's that rcgioiis olrcady rcctiw from the federal government. Third, the overdl system underpinning PSC.'Al' has beeri detailed across tiers of goveriimciit including ttir: deleguGon of irnplemeiikition rcsponsibililics in line with rnuridutes cis WII tis the dcfinitioii of explicii rulcs of {he gri~ricgovcnling acccss, allocotion, and execution iiicluding o siniple forniula to allacaie timc-bound drawing rights ta I'SCAP reswrces ;LC~[ESSregional sirltes, follorvt~lby performancebased disbursements a~ well iwniid- iid d - y e a r rwllocatioii o l a slrarc: or drawiirp tigl~tsto perfonncrs. Fourdi. in encouraging - 105 - donors to coinitlit to pooling under LL single design for the Prop-" the Government has worked clostty with donor patrrws Encludirig IDA on alignment with the Government's I'inaticial culcndar as well as its m c d i m - w i i pliinijitig. annuid budgixiiig, ittid nioiittily SUE-based disbursentcirt procedures. FiTih and finally, the (losemment has devqlopzd *'matrix nianilgetitcnt" structiire in wliich ti-ctcrrtl subproprarns j~rovidrproto1ype.s. cluidliiy assunince, arid support monitoring and evaluation. whilc fcderil and rcgional bcnc'i;ci:wics SCI iinyleinenintion prioriiies mi targets from a menu of subprogrm activities through i'omial l'articipatioii and Pcrformitiw Agrcc.mcnrs. 8. O v e r dI.we vicw thc iiitciisive ptcprarion uiid dcsigri pruccss underpirtriing PSCAP :is u sirung fouridation for lever-uging inuch-needed international assistance and also for rapidly scaling up eifons that are die center of Ethiopia's prospects for ncbieving a wide ranpe ot'social iiiid ccoiioiriic dewlopnieii~ubjcctives relaied tu pciverty reduction. 9. Ovei.all. YSCAP i s the Goww"enl's priinmy instrurneni for effecting LI far-reaching twsfoiiiiatioii in thc \ ~ thc StiItc h\ciIrrii[cs povcriy rcduciiuo. AS such, the Progill is y expected to contribute to three key otitcornes across rhc fcdci~il,rcgional. ntid loctil lcvels--rnore effective delivery of urban, ruml, and social services; greatcr empower" iit thc grrtssroou lcvel; ;t mort' I'nvcirable invemicnt climate resulting froni improved p~rblicscc~orgoveniuiicc itrid rule of' luw, WNYCOuicomeb are to be xhieved through die scale-up of six public sector capacity building subprograms. \Lhich hclp improvc thc predictahility and transparency of rewurcc Flows. rhc inclusiveness of pl:iiining and budgeting, incentives 311d mc)liv;ttiori for staff at all levels, revenue pcrfonnancc and tiscal ;tutunomy, ihc cfticicirc) of public sector opt?rutjc)r)s, arid (fit: iranspitreiicp arid accoutitnhiIit) of goscrnmcnt iiistiiurions, CONCLUS[ON I[). In conciusioi~Iwould likc to rcilcrtitc tire Go~crr7~iiicnt'~ comrniIinwf IO subs~siirially deepen stake iruisformation through capacity buildirlg in order tu aclitcvc thc key development outcomes envisaged in the SDPIIP, While significant Treasury resources ovcr ita past ~ w o yews Iiave been comniiuecl arid uliliad Tor PSCAP-related activities ut the iodcrul and rcgional levcls, the ~~~aiinblc. rcsoiirccs to scale up our cfforts arc insufiicieiii to meet our time-bound goals ovcr tlic FY2UO3-2OU9period and to rediae rbe desired i m p x i un the lives of Ethiopia's citizens :uid their caminunities, Consequently, ~ l i ctiovcrriincrrl views support from IDA fbr our Public Sector Capucity Buildlog larugramt i i r o,.*u g ~ pI* r o p o ~ c ' r iport project as ilkey pillar ot' your institution's support 5w 1"-.I I. ... to Ethiopia's pov;t'rty rtduction M pinoniic developmen\ efforts. 'T Your / MAP SECTION