Document of The World Bank FOR OFFICIAL USE ONLY Report No: 72452 - TZ PROGRAM APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 167.6 MILLION (US$255 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR AN URBAN LOCAL GOVERNMENT STRENGTHENING PROGRAM (PROGRAM-FOR-RESULTS OPERATION) October 10, 2012 Urban Development & Services Practice 1 (AFTU1) AFCE] Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 10, 2012) Currency Unit = Tanzanian Shillings (TSh) US$1 = TSh 1,575 US$1 = SDR 0.66 (0.65702591) FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ACG World Bank Anti-Corruption Guidelines (applicable to PforR operations) APA Annual Performance Assessment ASDG Agriculture Sector Development Grant CAS Country Assistance Strategy CBG Capacity Building Grant CDG Council Development Grant CDR Council Development Reports CFR Council Financial Report DMDP Dar-es-Salaam Metropolitan Development Project D by D Decentralization by Devolution DLI Disbursement Linked Indicator DP Development Partner FY Fiscal Year EAC East African Community ESMM Environmental and Social Management Manual ESSA Environmental and Social System Assessment F&C Fraud and Corruption GPS General Planning Scheme GoT Government of Tanzania HSDG Health Sector Development Grant ICT Information and Communications Technology IMF International Monetary Fund INT World Bank Integrity Vice Presidency LGA Local Government Authority LGDG Local Government Development Grant LGRP Local Government Reform Program LGSP Local Government Support Project MAC Minimum Access Conditions MDGs Millennium Development Goals MoF Ministry of Finance MoLHHSD Ministry of Lands, Housing and Human Settlements Development NASCAP National Anti-Corruption Strategy and Action Plan NEMC National Environmental Management Council O&M Operations and Maintenance PBGS Performance Based Grant System PMO-RALG Prime Minister's Office - Regional Administration and Local Government PDO Program Development Objective PAP Project Affected People PforR Program for Results PI Performance Indicator PPRA Public Procurement Regulatory Authority SIL Specific Investment Loan TANROADS Tanzania National Roads Agency TSCP Tanzania Strategic Cities Project TDV 2025 Tanzania's Development Vision 2025 ULGA Urban Local Government Authority UPG Urban Performance Grant VFM Value for Money WSDG Water Sector Development Grant Vice President: Makhtar Diop Country Director: Phillipe Dongier Sector Manager: R. Mukami Kariuki Sector Director: Jamal Saghir Task Team Leader: Barjor E. Mehta UNITED REPUBLIC OF TANZANIA URBAN LOCAL GOVERNMENT STRENGTHENING PROGRAM Table of Contents I. STRATEGIC CONTEXT .............................................................................................................. 1 A. Country Context............................................................1 B. Sectoral and Institutional Context.............................................. 3 C. Relationship to the Country Assistance Strategy (CAS) and Rationale for Use of Instrument........7 II. PROGRAM DESCRIPTION.................................................................................................... 8 A. Program Scope .......................................................... 8 B. Program Development Objective (PDO)........................................14 C. Program Key Results and Disbursement Linked Indicators (DLIs) ..................... 15 D. Key Capacity Building and Systems Strengthening Activities ........................... 21 III. PROGRAM IMPLEMENTATION ........................................................................................ 22 A. Institutional and Implementation Arrangements...................................22 B. Results Monitoring and Evaluation........................................... 24 C. Disbursement Arrangements and Verification Protocols............... ..............25 D. Sustainability.......................................................... 27 IV. ASSESSMENT SUMMARY ................................................................................................... 28 A. Technical (including program economic evaluation) ...............................28 B. Fiduciary ............................................................. 29 C. Environmental and Social Effects............................................. 34 D. Integrated Risk Assessment Summary.......................................... 35 E. Program Action Plan.......................................................36 A nnexes ...................................................................................................................................................... 39 Annex 1: Detailed Program Description............................................ 39 Annex 2: Results Framework........................................... ........50 Annex 3: Disbursement Linked Indicators, Arrangements and Verification Protocols....................... 53 Annex 4: Summary Technical Assessment..........................................74 Annex 5: Summary Fiduciary Systems Assessment.................................... 85 Annex 6: Summary Environmental and Social Systems Assessment. ................ ....... 102 Annex 7: Integrated Risk Assessment ...................................... ...... 112 Annex 8: Program Action Plan...................................... ............ 117 Annex 9: Implementation Support Plan ................................ ............ 120 PAD DATA SHEET United Republic of Tanzania Urban Local Government Strengthening Program (ULGSP) PROGRAM APPRAISAL DOCUMENT Africa Basic Information Date: October 10, 2012 Sectors: Sub-national government administration (100%) Country Director: Philippe Dongier Themes: Decentralization (60%); Municipal governance and institution building (40%) Sector Manager/Director: R. Mukami Kariuki / Jamal Saghir Program ID: P118152 Lending instrument: Program for Results Team Leader(s): Barjor E. Mehta Program Implementation Period: Start Date: October 25, End Date: December 15, 2018 Expected Financing Effectiveness 2012 Date: January 25, 2013 Expected Financing Closing Date: December 2018 Program Financing Data Loan [ ] Grant Term: Standard IDA terms and has a final maturity of forty (40) years including a grace period of X] Credit ten (10) years. For Loans/Credits/Others (US$M): Total Program Cost: USD 255m Total Bank Financing: USD 255m Total Co-financing: Financing Gap: Financing Source Amount Borrower/Recipient IBRD IDA: New 255 Others Financing Gap 1 Total 255 Borrower: United Republic of Tanzania Responsible Agency: Prime Minister's Office - Regional Administration and Local Government (PMO-RALG) Contact: Mr. Jumanne A. Sagini Title: Acting Permanent Secretary, PMO- RALG Telephone No.: +255 026-2321607 Email: ps@pmoralg.go.tz Expected Disbursements (in USD Million) Fiscal Year 2013/14 2014/15 2015/16 2016/17 2017/18 Annual 17.7 44.3 71 61 61 Cumulative 17.7 62 133 194 255 Program Development Objective(s) To improve institutional performance for urban service delivery in Program urban local government authorities. Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X] Does the project require any waivers of Bank policies applicable to Program-for-Results operations? Yes [ ] No [X] Have these been approved by Bank management? Yes [] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No Overall Risk Rating: Substantial Legal Covenants: Name Recurrent Due Date Frequency Program Operations Manual No Effectiveness Once Financing Agreement Reference 5.01 (a) Description of Covenant Recipient has prepared and adopted the Program Operations Manual in a manner satisfactory to the World Bank. Name Recurrent Due Date Frequency Performance Assessment Manual No Effectiveness Once Financing Agreement Reference 5.01 (b) Description of Covenant Recipient has prepared and adopted the Performance Assessment Manual in a manner satisfactory to the World Bank. Name Recurrent Due Date Frequency Environmental and Social Management Manual No Effectiveness Once Financing Agreement Reference 5.01 (c) Description of Covenant Recipient has prepared and adopted the Environmental and Social Management Manual in a manner satisfactory to the Bank. Name Recurrent Due Date Frequency Program Participation Agreements No March 1, 2013 Once Financing Agreement Reference C. 3 Description of Covenant The Recipient shall, not later than March 1, 2013, enter into a Program participation agreement with each Program ULGA detailing mutual responsibilities for the implementation of the Program and detailing other terms and conditions as may be approved by the Association ("Program Participation Agreement"), such terms and conditions to include the obligation of said Program ULGA to: (i) carry out its activities under the Program with due diligence and efficiency 11 and in accordance with the Program Fiduciary, Environmental and Social Systems, the Program Operations Manual, the Performance Assessment Manual, the Environmental and Social Management Manual and the Anti-corruption Guidelines; (ii) maintain policies and procedures adequate to enable it to monitor the progress of its activities under the Program and the achievement of the Program's objectives; (iii) enable the Recipient and the Association to inspect the Program activities within the Program ULGA's jurisdiction, its operation and any relevant records and documents; (iv) prepare and furnish to the Recipient and the Association all such information as the Recipient or the Association may reasonably request relating to the foregoing; and (v) (a) develop for each Fiscal Year, an infrastructure action plan in accordance with the Performance Assessment Manual, detailing the infrastructure investments to be carried out by the Program ULGA during the FY; (b) furnish said plan to the Association not later than June 30 of each FY; and (c) adopt and thereafter implement such infrastructure action plan so adopted ("Infrastructure Action Plan"). Name Recurrent Due Date Frequency PMO-RALG's capacity building plan Yes By April 30 Annual Financing Agreement Reference C. 4 Description of Covenant The Recipient shall for each Fiscal Year: (a) develop in accordance with the Program Operations Manual, a capacity building plan detailing the capacity building activities to be carried out by PMO-RALG in respect of the Program ULGAs in the said FY; (b) furnish said plan to the Association not later than April 30 of each FY; and (c) thereafter adopt and implement the capacity building plan as shall have been agreed with the Association ("Capacity Building Plan"). Name Recurrent Due Date Frequency Program Report/Annual Review meeting Yes Program report within three months of beginning of Annual Financing Agreement Reference III. A each new FY/ Annual Review meeting with six months of the end of the FY Description of Covenant The Recipient shall: (a) monitor and evaluate the progress of the Program and prepare Program Reports in accordance with the provisions of Section 4.08 of the General Conditions with each Program Report covering the period of one (1) Fiscal Year; (b) furnish said Program Report to the Association not later than three (3) months after the end of the period covered by such report; and (c) not later than six (6) months after the end of the period covered by such report, convene an annual Program review meeting with participation from PMO-RALG, Program ULGAs, other relevant government institutions, the Association, development partners and civil society to review Program implementation. Name Recurrent Due Date Frequency Program Financial Audit Yes By the twelfth month of the end of each FY Annual Financing Agreement Reference III. B Description of Covenant The Recipient shall: (1) have the Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions with each such audit covering the period of one (1) Fiscal Year; (2) consolidate the audited reports of the Program ULGAs and PMO-RALG and prepare an action plan to address any concerns emanating from the audits; and (3) furnish said consolidated audit reports, the action plan ( if any) and a related Management Letter to the Association not later than twelve (12) months after the end of the Fiscal Year. Name Recurrent Due Date Frequency Procurement of the annual independent Yes FY2013/14: By February 28, 2013; Following FYs: Annual assessment by July 31 of each year Financing Agreement Reference III. C Description of Covenant The Recipient shall, for each Program ULGA and for each FY throughout the period of implementation of the Program: 1.Carry out or cause to be carried out, in accordance with the Performance Assessment Manual, an assessment covering said FY to determine: (a) whether the Program ULGA has met the Minimum Access Conditions for said FY; (b) the Program ULGA's Institutional Performance Score for said FY; and (c) the Program ULGA's Infrastructure Action Plan Implementation Score for said FY ("Annual Performance Assessment"); 2. Furnish said assessment, by not later than six (6) months after the end of said FY to the Association for its review; and 3. For purposes of carrying out each such assessment, engage independent consultants, not later than July 31 of each FY, with terms of reference, qualifications, and experience satisfactory to the Association, provided that for purposes of the Annual Performance Assessment for the FY 2013/2014, the Recipient shall engage the independent consultants by not later than February 28, 2013. Name Recurrent Due Date Frequency Baseline survey and Impact evaluation Yes Baseline Survey within 12 months of Effective date/ Annual Financing Agreement Reference III. D Impact Evaluation within 6 months of the Closing Date Description of Covenant The Recipient shall: (a) not later than twelve (12) months of the Effective Date, carry out under terms of reference satisfactory to the Association, a baseline survey for the Program; and (b) not later than six (6) months of the Closing Date, carry out under terms of reference satisfactory to the Association, an assessment of the overall impact of the Program. Name Recurrent Due Date Frequency Value for Money Audits Yes Within 4 months of the end of the FY Annual Financing Agreement Reference III. E Description of Covenant The Recipient shall: (1) in each Fiscal Year beginning in FY 2015/2016, carry out under terms of reference satisfactory to the Association, a value for money audit of the Program activities implemented by the Program ULGAs in the preceding Fiscal Year and furnish said audit to the Association not later than four (4) months after the end of the Fiscal Year to which the audit relates; and (2) ensure that the findings of the audit are taken into account in the Annual 111 Performance Assessment for the Fiscal Year to which the audit relates. Name Recurrent Due Date Frequency Program in national budget (MTEF) Yes September 30 of each FY Annual Financing Agreement Reference V Description of Covenant The Recipient shall ensure that: (a) not later than September 30 of each FY of the Program, the Program activities and expenditures for said FY have been reflected in its national planning and expenditure framework and have been included in the Recipient's national budget as adopted for said FY, in a manner satisfactory to the Association; (b) adequate funds for carrying out the Program activities have been provided in the adopted national budget; and (c) all funds so provided are availed in a timely manner to PMO-RALG and the Program ULGAs, as the case may be, to ensure proper Program implementation. Name Recurrent Due Date Frequency Infrastructure Action Plans Yes June 30 of each FY Annual Financing Agreement Reference C. 3 Description of Covenant Recipient shall, not later than March 1, 2013, enter into a Program participation agreement with each Program ULGA detailing mutual responsibilities for the implementation of the Program and detailing other terms and conditions as may be approved by the Association ("Program Participation Agreement"), such terms and conditions to include the obligation of said Program ULGA to: (i) carry out its activities under the Program with due diligence and efficiency and in accordance with the Program Fiduciary, Environmental and Social Systems, the Program Operations Manual, the Performance Assessment Manual, the Environmental and Social Management Manual and the Anti-corruption Guidelines; (ii) maintain policies and procedures adequate to enable it to monitor the progress of its activities under the Program and the achievement of the Program's objectives; (iii) enable the Recipient and the Association to inspect the Program activities within the Program ULGA's jurisdiction, its operation and any relevant records and documents; (iv) prepare and furnish to the Recipient and the Association all such information as the Recipient or the Association may reasonably request relating to the foregoing; and (v) (a) develop for each Fiscal Year, an infrastructure action plan in accordance with the Performance Assessment Manual, detailing the infrastructure investments to be carried out by the Program ULGA during the FY; (b) furnish said plan to the Association not later than June 30 of each FY; and (c) adopt and thereafter implement such infrastructure action plan so adopted ("Infrastructure Action Plan"). Name Recurrent Due Date Frequency Mid Term Review No January 30, 2016 Once The Recipient shall: 1. Carry out not later than January 30, 2016 a midterm review to assess the overall progress in implementation of the Program; 2. Prepare and furnish to the Association, at least three (3) months prior to such review, a progress report on the implementation of the Program, of such scope and in such detail as shall be acceptable to the Association; and 3. Review, jointly with the Association, and thereafter take all measures required to ensure the efficient completion of the Program and the achievement of the objectives thereof, based on the conclusions and recommendations of said report and the Association's views on the matter. Team Composition Bank Staff Name Title Specialization Unit UPI Roland White Program Coordinator Inter-governmental Fiscal Systems AFTU1 Barjor Mehta Lead Urban Sp Urban Local Govt. Systems SASDU Onur Ozlu Economist Fiscal Decentralization/Urban Economics AFTU1 David Mulongo Urban Specialist Local Government Systems AFTU1 Theresa Gamulo Procurement Analyst Procurement AFTU1 Marie Claire Li Tin Yue Senior Program Asst Bank Systems AFTU1 Mary-Anne Mwakangale Program Assistant Bank Systems AFCE1 Parminder Brar Lead Fin. Mgmt Sp Public Financial Management Financial AFTFM Donald Mphande Sr. Fin. Mgmt Sp Management AFTME Mercy Sabai Sr. Fin. Mgmt Sp Financial Management AFTME Reginald Lekule Consultant Local Government FM AFTME Denis M. Biseko Sr. Pub. Sect. Sp Governance, Fraud & Corruption AFTP5 Edward C. Anderson ICT Policy Sp. Systems Integration TWICT Diego Garrido Martin M & E Sp. Performance Indicators AFTDE Pascal Tegwa Sr. Procurement Sp Procurement AFTPE Donald Mneney Sr. Procurement Sp Procurement AFTPE Gisbert Kinyero Procurement Sp Procurement AFTPE Raymond Mbishi Procurement Consultant Procurement AFTPE Jane Kibbassa Sr. Environment Sp Environmental Safeguards AFTN3 Helen Shahriari Sr. Social Sp Soc. & Resettlement Safeguards AFTCS Cary Anne Cadman Sr. Forestry Sp Environment and Social Systems AFTSG 1v Stephen Mukaindo Counsel Legal Arrangements LEGAM Luis Schwarz Senior Finance Officer Disbursement CTRLD Non Bank Staff Name Title Office Phone City Amy Faust E T Consultant Dar-es-Salaam, Tanzania Jesper Steffensen Performance Based +45-60-21-44-43 Copenhagen, Denmark Grant Systems Sp. V UNITED REPUBLIC OF TANZANIA URBAN LOCAL GOVERNMENT STRENGTHENING PROGRAM PROGRAM APPRAISAL DOCUMENT I. STRATEGIC CONTEXT A. Country Context 1. Over the past decade Tanzania has had high levels of growth (around 7%) and has shown resilience to shocks. The main drivers of growth are: manufacturing which grew at around 9 percent between 2003 to 2008, with exports -mainly regional exports -- having grown by about 17% annually since 2005; services sector - including trade, transportation, and tourism-- which has grown at around 8% over the past decade; and agriculture - though facing-- stagnation-- having grown at around 4% per year since 2000. 2. The growth outlook for Tanzania continues to remain optimistic, although there are certain risks. The economy is estimated to grow by 6.8% in 2012, slightly lower than the previous year. The medium term growth outlook remains positive. Achieving a buoyant outlook is dependent on addressing infrastructure bottlenecks, structural reforms, and carrying out sound public finance policy and public financial management. However, this remains vulnerable to domestic and external shocks including the Eurozone debt crisis. The level of foreign aid is already projected to decline significantly in FY2012/13. Inflation remains high (17.4%) despite tight monetary policies. Also, the low level of reserves and the appreciation of the Tanzanian shilling may reduce exports and increase imports. 3. Tanzania needs to monitor its overall macroeconomic situation including the risks to fiscal and debt sustainability. Fiscal consolidation for the central government is on track and is in line with the IMF Policy Support Instrument program. The proposed budget framework for 2012/13 is expected to reduce the fiscal deficit to 5.5 percent of GDP, closer to the level before the global financial crisis. The latest debt sustainability analysis (June 2012) shows that Tanzania's risk of debt stress remains low but is sensitive to borrowing terms and the government's fiscal position. Given the uncertainties in the external environment and the public investments through parastatals, Tanzania needs to manage its fiscal and debt sustainability. 4. Despite the stable macroeconomic situation, poverty remains prevalent in the country. The proportion of the population living below the poverty line has stagnated at around 30 percent since 2001, and the average household reports an income 40 percent lower than the average for Sub-Saharan Africa. 5. In addition to widespread poverty, Tanzania is also rapidly urbanizing. The proportion of the population living in areas administered by formally classified Urban Local Government Authorities (ULGAs) has increased significantly - in mainland Tanzania from 5.7 percent of the total population in 1967 to 24 percent in 2005. The level of urbanization is even higher if measuring "urban" from a population density perspective, with more than 33 percent of the mainland population (approximately 11 million people) living in high density, "urban" areas in 2002. This rapid urbanization trend is projected to continue: the ratio of people living in urban areas is likely to grow from 24 percent in 2005 to 38 percent in 2030, and the urban population is expected to grow at more than twice the rate of the population as a whole, so that by 2030, it is estimated that more than 25 million Tanzanians will be living in urban areas. 1 6. However, institutional systems and infrastructure have not kept pace with the rapid urbanization. Improving service delivery and management of related infrastructure in rapidly urbanizing contexts requires that the responsible local institutions develop sufficient capacities and systems to take on these roles effectively. The infrastructure investment needs of urban areas are significantly higher than in rural areas, particularly in areas like transport, sanitation, and so on. As yet, Tanzania does not have a governmental program which targets these needs effectively. The risk that a poorly managed urbanization process may begin to constrain growth and worsen, rather than improve, social and service delivery outcomes in Tanzania's secondary cities is beginning to grow. 7. To address prevalent poverty, the Government of Tanzania (GoT) finalized a five-year (2010/11-2014/15) national growth and poverty reduction strategy, MKUKUTA II' in November 2010. MKUKUTA II is a medium-term plan that aims to achieve the goals of Tanzania's Development Vision 2025 (TDV 2025) and the Millennium Development Goals (MDGs). TDV 2025 aspires to make Tanzania a middle income country characterized by high quality livelihoods; peace, stability, and unity; good governance; a well-educated and learning society; and a strong and competitive economy by 2025. 8. One of the core pillars of MKUKUTA II, similar to MKUKUTA I, is the national decentralization reform, known as Decentralization by Devolution (D by D). Promulgated in 1998, D by D is the Government's overarching decentralization policy. It aims to reduce poverty and improve service delivery through decentralizing resources and responsibilities to the local level. The policy reforms introduced by D by D give local government authorities (LGAs) a wide range of responsibilities previously not seen in Tanzania. These responsibilities include public sector functions and services such as the provision of primary and secondary public education and public health services, as well as economic or municipal functions, including the construction and maintenance of roads, access to markets and the collection of solid waste. The financing for these responsibilities comes from flows provided by the fiscal decentralization component of LGRP (component 3) and a limited number of own-source revenues. 9. The first phase of Government's D by D reform process - executed through the Local Government Reform Program (LGRP) - was completed in 2008 after 10 years of implementation and the second phase was immediately launched the same year through LGRP II with the goal of providing accelerated and equitable socio-economic development, public service delivery and poverty reduction across the country. LGRP II was built on the gains attained by the program's first phase, and is tasked with furthering and deepening decentralization and D by D. Overall, LGRP has strong political and policy endorsement, a legacy of over 10 years of decentralization and implementation, and other public sector reforms and sector development programs (SDPs) in it. LGRP (phases I and II) achieved a significant shift of responsibilities and resources to local governments in Tanzania. To meet the increased level and type of responsibilities at the local government level, the fiscal decentralization component of LGRP brought about a systematic increase in the level of development grants and other development resources made available to LGAs. 10. The process of intergovernmental fiscal and institutional reform ushered in through D by D has progressed steadily. Today, LGAs in Tanzania are responsible for service delivery in the key sectors of agriculture, health, education. In aggregate, LGAs accounted for over 25% of total public sector expenditure in FY20 10/11, up from 18.7% in FY2001/02. They have the ability to levy taxes, fees and charges - though the majority of local authority revenue comes in the form of transfers from central government. These transfers are in three categories: (i) personal emoluments; (ii) other charges; and (iii) 1 Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania. Concurrently, the Revolutionary Government of Zanzibar finalized the Zanzibar Strategy for Growth and Reduction of Poverty (Kiswahili acronym MKUZA 11), covering the same period. 2 development funds. Personal emoluments and other charges are for recurrent expenditures while development funds are for discretionary expenditures and for sector-specific investments. 2 11. Tanzania's 168 LGAs are divided into urban local government authorities (ULGAs) and rural local government authorities. The 26 ULGAs in mainland Tanzania are divided into five cities, fifteen municipal councils and six town councils. At the central level, the Ministry responsible for overseeing the local government system in mainland Tanzania is the Prime Minister's Office - Regional Administration and Local Government (PMO-RALG). 12. The chief instrument through which GoT has implemented D by D is known as the Local Government Reform Program (LGRP). Over time, LGRP has introduced a number of intergovernmental fiscal transfer programs. One of the most important of these is GoT's performance- linked grant system for LGAs, known as the Local Government Development Grant (LGDG), also referred to as the "Government program". B. Sectoral and Institutional Context 13. In 2004, GoT introduced the Local Government Capital Development Grant (LGCDG) as a grant flow to local governments. Prior to the introduction of the LGCDG, direct development grants to LGAs were minimal and not performance based. LGAs received certain additional development resources from sectoral development programs and from area-based development programs. These resources were contained within the respective line ministry's budget or within PMO-RALG's ministerial budget (known as Vote 56), and the use of these resources was often earmarked or controlled in a top-down manner. The LGCDG, financed by the Bank and bilateral donors, was formula based. It also introduced minimum qualification standards aimed at building fiscal decentralization and ensuring proper accountability in the use of public funds. 14. The LGCDG has evolved into the Local Government Development Grant (LGDG) Program with several sub-programs and has become a mainstream performance based fiscal transfer. By introducing LGDG -the Government Program - the Government created a formula-based, transparent and predictable fiscal flow mechanism to disburse funds to all 133 LGAs in the country, on the basis of the institutional performance achieved. Initially, the LGDG was set up with two windows: (a) the Capital (later "Council") Development Grant (CDG), which provided funding for capital expenditure selected at the discretion of recipient LGAs using their local planning and budgeting systems; and (b) Capacity Building Grants (CBG) which provided funding to support capacity building at the local level. Today, the Council Development Grant and the Capacity Building Grant are collectively known as the "LGDG core". Overtime, new sector windows (LGDG non-core) have been added as the government has rationalized and decentralized funding for development needs in particular sectors where LGAs have core responsibilities. Today the LGDG system consists of the following sub-programs or windows: * LGDG Core, established in 2004, as described above; * LGDG Non-Core, added between 2007 and 2009 o Agriculture Sector Development Grant (ASDG) established in 2009 for agricultural extension and development; o Water Sector Development Grant (WSDG) established in 2007 for water and sanitation infrastructure and services; o Health Sector Development Grant (HSDG) established in 2009 for primary healthcare services. 2 The total number of LGAs has gone up from 133 to 168 as ofFY2012/13. The assessments presented as part of preparation of this Program refer to 133 LGAs. Number of ULGAs remains as 26. 3 15. The main thrust of the LGDG system is to incentivize the improved institutional performance of LGAs while providing discretionary and sector-specific funding for development purposes. The LGDG system's chief goal is to improve the overall, long-term functioning of the local government system in Tanzania, so as to improve the quality of investments. More specifically, its objectives are to: * Enhance the delivery and management capabilities, productive efficiencies and financial sustainability of local governments; * Improve access of communities especially the poor, to local services through expanding the physical stock of new and rehabilitated infrastructure; * Improve the sustainability of local development infrastructure through ensuring proper planning and adequate operations and maintenance (O&M); * Provide a national system for the delivery of development grants to LGAs. 16. All LGDG funds are allocated on a formula basis3. There are different allocation formulae for different LGDG windows. The LGDG core windows, for instance, are allocated based on population (70%), poverty indicator (20%) and land area (10%) while the HSDG is allocated based on population (70%), poverty indicator (10%), distance of council medical vehicle route (10%) and under five years-old mortality rate (10%). 17. Disbursement of the allocations is done after LGAs undergo an annual assessment. The assessment measures LGA performance against two sets of indicators: (i) minimum access conditions; and (ii) performance indicators. Before LGAs fully access the LGDG system funds, they are required to meet a set of minimum conditions. This requirement is to ensure that funds transferred to LGAs are properly used and in compliance with GoT statutory and administrative requirements. These minimum conditions are derived from laws, regulations and guidelines including, the Local Governments Act, Local Authority Financial Memorandum, Public Procurement Regulations and the Local Government Authorities Tender Boards Regulations. While seeking to ensure sufficient safeguards for the utilization of the grant funds, the minimum conditions are also designed to promote compliance with the basic statutory and regulatory requirements for local government operations. They are usually in the form of yes/no questions and are simple to evaluate during an assessment process. They are necessary to ensure that the funds are used effectively, efficiently, sustainably and with integrity. Those LGAs which fulfill all minimum access conditions receive their allocation based on the score they obtain against the performance criteria. (Note: Not all minimum conditions were applied in the FY2012 assessment. PMO- RALG has confirmed that this was an exceptional circumstance arising from difficulties associated with the procurement of the assessment4.) LGAs which do not comply with the minimum access conditions are put under stronger supervision and monitoring. This performance assessment is conducted annually and the results, as well as the amount of funds to be disbursed to each LGA are made public through mass media countrywide. Disbursements are released from the central government to LGAs quarterly. 18. The LGDG system is jointly funded by GoT from its own sources, seven bilateral partners5 and the World Bank. All funds to LGAs flow through the Ministry of Finance (MoF). Bank support to the LGDG has been provided through the Local Government Support Project (LGSP)7. Since its foundation, Although LGDG funds from DPs are allocated on a formula basis, the disbursement of the Government contribution to the LGDG Core was phased in and became fully formula compliant in 2008/09. There has been conflicting data on the nature of the disbursement of the GoT contribution since then, but some recent evidence suggests that since 2010/11, the formula has not been routinely used. 4 This possibility could not arise under the proposed Program as DLIs 1, 2 and 3 which rely on the completion of the annual assessment would not be satisfied. 5 Belgium, Finland, Germany, Ireland, Japan, the Netherlands, and Sweden. 6 World Bank contributions through LGSP to the LGDG core ended in December 2010. 7 The Local Government Support Project (LGSP) closed on June 30, 2012. 4 LGDG disbursement has increased steadily. Disbursement of LGDG core funds has increased from US$ 22.4 million in FY2005/06 to US$ 68.4 million in FY2010/11. The Government's own source contribution has also increased consistently. For instance, while the Government's share of the LGDG core disbursement in FY2005/06 was 7% (US$ 1.5 million out of US$ 22.4 million disbursed), the ratio has increased progressively to 22% in FY2010/11 (US$ 15 million out of US$ 68.4 million disbursed) and is projected to grow to 40% in FY2011/12.' In the context of GoT's tight overall budgetary position, this trend confirms the Government's commitment to fiscal decentralization and the LGDG. 19. The LGDG system has established a transparent and predictable system of fiscal flows from central government to LGAs and produced concrete results. By introducing the LGDG, GoT rationalized myriad ad hoc area-based programs, and showed its commitment to allocating resources for development to LGAs through a performance-based system. Prior to the introduction of LGDG, development transfers from the central government to local governments were not a function of LGA performance and were not based on an equitable formula. The LGDG system set up a transparent fiscal transfer mechanism in which allocations were driven by performance; additionally, the LGDG system makes LGA disbursements public through mass media that is accessible by ordinary citizens. 20. The LGDG system and the larger local government reform process have achieved a number of significant improvements in LGA performance. For example, the requirement to include communities in LGA budgeting and planning has improved participatory planning and budgeting, as well as accountability at the LGA level9, the increased volume of funding channeled to LGAs has led to an increased amount of investments in LGA infrastructure and serviceso. The performance assessment element of the LGDG system has improved LGA systems ". These improvements are consistent with public opinion. When asked in 2003 in an independently conducted citizen survey if local government reforms are improving service delivery, 60.5% responded "yes". This rate went up to 70.24% when the survey was repeated in 2009. Similarly, when asked in 2003, whether local government reforms would lead to more participation from ordinary people in the planning process of the respondents, 76.6% 12 responded positively and this result went up to 81.43% in 2009 21. LGAs continue to face significant challenges. These include: (i) LGA financial management performance which, after an improvement from FY2005/06 through FY2008/09 appears to have stagnated. While the rate of unqualified audits among 133 LGAs increased from 54% in FY2007/08 to 58% in FY2008/09, it deteriorated to 49% in FY2009/10, with an increase back to 54% in FY2010/11 (though the fluctuation is partly attributable to the fact that in FY2009/10 the audit scope and rules were made more stringent); (ii) LGA overall ability to raise and collect own source revenues is another significant challenge. The amount of LGA own source revenues collected has increased since the early 2000s, but the ratio of own source revenues in the overall LGA budget remains low, particularly in the area of property taxation, which is an LGA mandate. Another important area of improvement for LGAs is public participation, accountability and oversight mechanisms. The LGDG system has contributed to improvements of these mechanisms at the LGA level, however, more needs to be done, as evidenced by public perception. Results from the citizen survey conducted in 2003 showed that those responding positively to the question whether individuals can influence the local government planning system have increased from 44.6% in 2003 to 58.65% in 2009, but more than 40% of respondents do not believe they See paragraph 21 and footnote 10 for further information and qualifiers. 9 Tidemand, Msami, Impact of Local Government Reforms in Tanzania, 2010 10 MDF Consulting, Local Government Development Grant System Mid Term Review, 2011 1 Liviga, Roell, Mhina, Effectiveness of "Decentralization by Devolution": Financial Resources versus Absorption Capacity, 2010 12 Kirama, Katera, Ngalewa (REPOA), Formative Research on the Local Government Research Program in Tanzania, Summary of Results of Third Citizen Survey Report, 2010 5 can influence planning at the LGA level. Similar responses are seen in questions on the citizens' ability to access the LGAs' financial statements and other LGA level information. 22. Additionally, despite contributing to performance improvements, the LGDG system itself faces a number of challenges. Three are particularly important. 23. First, while the system appears to have leveraged aggregate LGA performance in its early years, a "performance plateau" seems to have been reached. Under the current system, 110 LGAs (out of 133) meet the program's minimum conditions and are expected to receive 'very good' performance scores, while only 16 LGAs are expected to get an 'average' performance rating. Given the "success" of most LGAs in attaining 'very good' performance, the performance assessment system as it exists no longer appears to be providing much of an incentive for LGA institutional systems enhancement. 24. Second, while performance assessments under LGDG are generally completed on time, there are delays in quarterly disbursements offunds from the central government to LGAs. This delay makes it difficult to plan and execute projects at the LGA level. It also contributes to the reported poor budget execution at the local level, where undisbursed balances in LGA accounts are carried forward from year to year. 25. The third and final challenge is that from an urban perspective the existing LGDG system does not meet the unique institutional and infrastructure needs of ULGAs. As mentioned above, due to Tanzania's high population growth and urbanization rate, the country's urban areas have significant institutional and infrastructure needs. Yet because the existing LGDG system does not differentiate between urban and non-urban LGAs, the only discretionary funds within LGDG provided to ULGAs to address their infrastructure needs - which are significantly larger than those of rural LGAs - and to incentivize the performance of these institutions which require significantly more capacity than in rural areas, is through the LGDG Core (i.e. the Council Development Grant and Capacity Building Grant windows), which amounts to approximately $2/capita/annum. 26. In this context, GoT intends to introduce a new window within the LGDG focused specifically on meeting the investment needs and leveraging the improved institutional performance of Tanzania's rapidly growing secondary cities. This window, to be known as the Urban Performance Grant (UPG), will add a new fiscal transfer to the intergovernmental fiscal system in Tanzania. This system is already fairly complex and there are potential disadvantages in complicating it further. Broadly speaking, simplicity in intergovernmental fiscal design is conducive to administrative efficiency, eases the local budgeting process, and reduces the reporting and compliance burdens of recipient local governments. On the other hand, addressing the needs of ULGAs has become both pressing and distinctive. International experience also shows that attempting to crowd too many objectives into any single fiscal transfer instrument tends to dilute focus, thereby weakening incentives and undermining efficacy. This is particularly so for performance grants which gain their traction from a clear and consistent link between the institutional performance that is targeted and the fiscal (grant) incentive. 27. Against this backdrop, the option of adapting the LGDG Core grant to achieve the goals of the UPG, rather than creating a new grant window, is not considered feasible. There are three chief reasons for this. First, given the need to develop significantly greater institutional capacity in urban local governments, which is required to provide services to rapidly growing populations and support increasingly complex built environments, a more demanding and suitably focused annual performance assessment (APA) system is required. While, over time, the lessons learned from the implementation of this system will be incorporated into the broader LGDG assessment system, a number of the measures proposed for urban councils may not be appropriate for the majority of LGAs which are rural in nature. Second, given the urbanization pressures indicated above and the more complex nature of service delivery 6 systems in urban areas (where reliance on networked systems is much greater than in rural areas), the funding requirements of ULGAs in respect of the provision of basic municipal services is significantly greater than those in rural areas. Accommodating these differentials within the existing LGDG Core grants would involve a significant distortion of the existing formula for the horizontal distribution of funds between local governments. Finally, because GoT wishes to direct additional funding to improving the delivery of municipal services through sizeable investments that increase the productivity of town/city economies (e.g. secondary road networks at the municipal level rather than smaller disaggregated sub- projects at the local or neighborhood level), the menu for this window will be less discretionary - hence will need to function under a different set of rules, more akin to the other sector windows - than the LGDG Core. 28. The Urban Performance Grant (UPG) will begin by targeting 18 ULGAs and gradually be expanded to reach all ULGAs. The initial selection of 18 LGAs is based on several factors. Firstly, the funding requirements for a UPG that serves all 26 ULGAs would be considerable (US$ 255 million is for the estimated requirement of the current 18 ULGAs). Secondly, there are already several other ongoing or planned investment programs supporting similar investments in other ULGAs in Tanzania. Thirdly, in light of the experience gained in designing and co-financing the LGDG, a phased approach to introducing new fiscal transfers has worked well. It is expected that, as was the case with the LGDG, over time the UPG will be expanded to include all existing ULGAs in Tanzania. Furthermore, a number of smaller but rapidly growing Town Councils will also graduate to ULGA status and become eligible for the UPG. 29. While the ULGSP will be focused on urban local governments, hence the third LGDG challenge (meeting the needs of growing urban areas) identified above, will also contain measures to strengthen the first two challenges (the performance plateau and slow pace of disbursement) within the LGDG more broadly, via (i) strengthening the overall incentive system applicable to LGAs more broadly, and (ii) ensuring that LGDG funding is disbursed to LGAs in a timely manner. The modalities for achieving this are outlined above and subsequent sections of the PAD. C. Relationship to the Country Assistance Strategy (CAS) and Rationale for Use of Instrument 30. There are three primary reasons that a PforR instrument is appropriate for ULGSP. First, the UPG will form part of the existing intergovernmental fiscal architecture which operates on a programmatic basis - i.e. the LGDG. As with the other LGDG windows, it will continue on a permanent basis after the conclusion of the ULGSP, as an ongoing fiscal program leveraging both government and development partner resources. Second, the basic goal of the UPG is to leverage the institutional performance of the LGAs it will target, and to do so in an enhanced manner while ensuring that expanded local urban infrastructure is developed. Because of the direct relationship between the ULGA institutional results achieved, and the Banks disbursements to central - and thence local government - the PforR instrument allows for a much cleaner and directly incentivizing approach, to achieve the PDO, than, for example, a SIL. It also ensures - through the use of DLIs targeted specifically at national government actions required to optimize the administration and execution of the UPG - that the incentives of both the central and local levels of government are effectively aligned around the goals of the Program much more effectively than is possible with the SIL instrument. Finally, it is cardinal to the objective of the UPG - as it is to all the windows which constitute the LGDG - that relevant government systems at the local level, as well as the central level, (e.g. the mechanics or "plumbing" of the intergovernmental fiscal transfers system) are used, improved and integrated. Again, the PforR instrument is particularly appropriate for achieving this. In the case of the ULGSP, the integration of the operation's performance and disbursement modalities with the budgeting, planning and funds flow mechanisms of both the central and local governments is of specific importance. 7 Relationship to the CAS 31. The objectives of the World Bank regional strategy for Africa, called "Africa's Future and the World Bank's Support to It," are to increase Africa's competitiveness and employment, to reduce its vulnerability to climatic and other shocks, and to improve governance and public sector capacity. The proposed intervention is fully aligned with the strategy: It will respond to the pillar on competitiveness and employment, which recognizes the need for competitive cities because productive and sustainable urban development will be a key driver of wealth and jobs across Africa. Additionally, the strategy underlines the fact that cities are the space for development that goes beyond individual sectors as they provide services and simultaneously create an environment for innovation, production, trade, and investments, and offer a venue for private sector development. The focus on institutional systems strengthening will contribute to the Africa Strategy's governance and public sector capacity foundations. 32. The proposed new window will directly contribute to the achievement of two of four strategic goals13 laid out in the CAS for FY2012-15: (i) to build infrastructure and deliver services and (ii) to promote accountability and governance. The urban performance grants contribute to the first CAS goal, while the performance incentive mechanism, which includes results in regard to improved accountability, will contribute to the second CAS goal. More specifically, the proposed intervention will directly contribute to CAS outcome 2.4: improved management and delivery of urban services as well as the cross cutting CAS Outcome 4.1: improved accountability and efficiency of public financial management. 33. The proposed new window is also consistent with the Government's Letter of Sector Development Policy on Urban Development. In January, 2010 the Ministry of Finance and Economic Affairs issued a letter of sector policy in support of the Tanzania Strategic Cities Project. While recognizing significant challenges, the Government stressed the need for enhanced support to the country's urban areas and the need for long term financing of the significant investment requirements in urban infrastructure. The scope of the letter of sector policy extends to ULGSP. 34. The proposed operation will complement other Bank support to the urban sector. This includes the Tanzania Strategic Cities Project (TSCP) which supports seven of the country's 26 ULGAs; and the proposed Dar-es Salaam Metropolitan Development Project (DMDP), which will support service delivery improvements in Dar es Salaam. The remaining 18 ULGAs14 will be the initial target of the ULGSP, with the aim of incorporating other ULGAs in the Program in subsequent phases. According to the 2011 population estimates, these 18 target ULGAs have a combined population of 2.6 million people, which is roughly 6% of the country's total population (42 million people) and 25% of the country's urban population (11 million people). II. PROGRAM DESCRIPTION A. Program Scope 35. The Government program (LGDG) with its current windows as of 20 10/11(solid lines), and with the proposed new (sub)Program as of 2013/14 (dotted lines) can be summarized as follows: 13 Tanzania CAS (FY2012-15) lays out four strategic objectives: 1. Promote inclusive and private sector-led growth, 2. Build infrastructure and deliver services, 3. Strengthen human capital and safety nets, and 4. Promote accountability and governance. 14 Morogoro, Tabora, Moshi, Sumbawanga, Shinyanga, Songea, Singida, Musoma, Iringa, Njombe, Bukoba, Kibaha, Babati, Geita, Korogwe, Mpanda, Lindi, Bariadi. The list excludes the ULGAs covered under the current Tanzania Strategic Cities Project and the 4 LGAs in Dar es Salaam which make up Dar es Salaam, as they will be covered under the proposed Dar es Salaam Metropolitan Development Project (DMDP), expected to be presented to Bank Board for approval in FY14. 8 Government progran- Local Government Development Grant system- summary Actual disbursed amounts in US$/million for FY2010/11 LGDG Core Agriculture Water Sector Health Sector Proposed (CDG+CBG) Sector Development Development Urban Development Grant Grant Performance Grant (WSDG) (HSDG) Grant (ASDG) (UPG) Year started FY2004/05 FY2007/08 FY2009/10 FY2009/10 FY2013/14 Function area Discretionary for Agricultural Water and Primary Discretionary all investments extension and sanitation healthcare for within LGA development infrastructure services infrastructure mandate (CDG), and services investments in capacity building UPG menu (CBG) Disbursement $ 68.3 $ 27.3 1 $ 10.9 $35.5 million Total actual funds disbursed under LGDG system - $106.5 million 36. The proposed urban window, to be called the Urban Performance Grant (UPG) will be added to the LGDG windows summarized earlier. UPG will fully utilize and enhance the key elements of the LGDG system. Namely, similar to current windows, it will determine ULGA allocations through a population based formula, and disburse funds on the basis of an enhanced ULGA performance assessment (minimum access conditions first, and then specific separate performance indicators). In doing so, UPG will leverage institutional strengthening and support local capacity building. UPG funds will be primarily used by ULGAs to meet their infrastructure needs laid out in the Program's investment menu (Annex 1). The UPG window will have an associated set of implementation activities which will include capacity building needed for ULGAs to be able to respond to the performance incentive mechanism, as well as the independent annual performance assessment which will determine the disbursements for each ULGA in a year. These implementation activities will be managed by PMO-RALG, which is responsible for decentralization and local government affairs in mainland Tanzania. The first phase of the UPG, which will be funded under the Urban Local Government Strengthening Program (ULGSP), is expected to run for a period of six years - from 2012 to 2018. 37. ULGSP's key aim will be to enhance ULGA performance such that they can face the challenges posed by rapid urbanization within a decentralized institutional environment. In line with the Decentralization by Devolution (D by D) policy of the government which requires strengthened local governments and the need to leverage enhanced institutional performance in urban local governments - which have more demanding institutional needs as well as higher investment requirements for municipal infrastructure - the annual performance assessment for the target ULGAs will be enhanced and targeted to urban activities relative to the existing one used for other LGDG funding allocation purposes. The key areas on which the annual performance assessment will focus are as follows: (Annex 3 of this document shows a detailed breakdown and explanation of minimum access conditions and performance indicators for each of these areas). i. Urban planning systems. Rapid urbanization in Tanzanian ULGAs has made urban planning systems even more crucial than they are under average urbanization rates. The proposed UPG will ensure that the urban planning systems developed in ULGAs will be in full compliance with the 15 It has generally been reported that no funds were disbursed under WSDG in FY2010/11. However, information on this is unclear. 16 The UPG allocation for the first full cycle (FY2014/15) is expected to reach US$35.5million. 9 Tanzanian national urban planning framework. Specifically, the new grant window will do this by rewarding ULGAs performance towards systematically developing their own General Planning Schemes (GPS) which are required to guide and manage the rapid pace of current and future physical developments within their jurisdictions to prepare for the expected future growth and not having to retrofit post-growth; ii. Own source revenues. The current heavy reliance of ULGAs on transfers from the central government, limits the investment choices these local governments can make in the long run (amongst other things). Building on this, UPG will focus primarily on enhancing ULGAs' property tax systems because: (a) it is a buoyant source of revenue for urban areas as it is directly linked to the local economy; (b) it is an LGA mandate with legal instruments in place for valuation and rating of urban properties; and (c) analysis shows that the actual LGA revenue from property taxation is lower than the potential. UPG will enhance property taxation systems through financially rewarding the establishment and management of updated LG property tax systems or overall increase in taxable properties valued and billing collection ratio of property taxes, among others. This will strengthen the ULGAs ability to operate and maintain the infrastructure investments and to demonstrate the link between local taxation and service delivery. iii. Fiduciary systems. UPG will enhance ULGA fiduciary systems to ensure that the ULGA funds are managed in line with national financial management and procurement laws, regulations and rules, as well as with internationally accepted norms. It will do this firstly through a set of minimum fiduciary access conditions. Should a ULGA fail to meet these conditions, it will not be able to access UPG funds for that year. Secondly, UPG will financially reward the enhancement of ULGA fiduciary systems via the annual performance assessment which will measure progress towards indicators such as the rectification of all issues from previous audit reports, timely reconciliation of accounts, or procurement performance according to the Public Procurement Regulatory Authority (PPRA). iv. Infrastructure implementation and operations & maintenance (O&M) systems. It is crucial to have systems to properly implement and sustain projects undertaken at the ULGA level. To this end, UPG incentive mechanisms will financially reward ULGA performance in O&M planning and budgeting, as well as physical progress in planning, construction, rehabilitation, maintenance or repairs carried out with UPG funds, among other criteria in this area. v. Accountability and oversight systems. Drawing on the overall LGA level shortcomings in this area, UPG will adopt a two tier approach using fiduciary and environmental and social management systems to enhance the accountability and oversight systems. For fiduciary systems, UPG funds will be available only if ULGAs: (i) meet the minimum access condition in this area; and (ii) make further enhancements, such as making public the own source revenue utilization, or using the consultative process for UPG funds utilization. For the second tier - environmental and social management - ULGAs will be rewarded for adopting an environmental and social management system, and ensuring that the systems in place function to identify, minimize, mitigate and monitor impacts on the environment and communities. 38. Disbursement of UPG fund allocation will be made on the basis of ULGA performance. ULGAs will be expected to enhance their capacity to meet the minimum conditions and make progress towards performance indicators in the areas of urban planning, own source revenue enhancement, fiduciary management, infrastructure implementation and O&M and the accountability and oversight mechanisms, summarized above. Each year, the PMO-RALG will commission an independent assessment which will measure each ULGA's performance against these criteria. The score each ULGA receives from the annual assessment will determine the disbursement of the UPG. Disbursement from the central government to local governments, whose amount will be determined by the annual assessment, will be made twice a year (bi-annually). 10 39. As explained above, the geographic scope of ULGSP at the onset of the Program, will be limited to a first set of 18 of the 26 ULGAs in Tanzania, which are currently not being supported through other Government or Bank financed investment programs. These ULGAs are; Morogoro, Tabora, Moshi, Sumbawanga, Shinyanga, Songea, Singida, Musoma, Iringa, Njombe, Bukoba, Kibaha, Babati, Geita, Korogwe, Mpanda, Lindi, Bariadi. 40. Allocation of UPG funds among these 18 ULGAs will use a population based formula. In determining this formula, alternatives considered included: (i) total population; (ii) urban population; and (iii) using the LGDG core allocation formula (70% population; 20% poor residents; 10% capped land area). Total population was selected as the basis for the UPG allocation, primarily for the sake of simplicity and transparency. Poverty and settlement patterns are also relevant criteria (as urban finance needs tend to increases with poverty rates and urban density), but reliable data is not available for these variables. Breakdown of allocation for each of the 18 ULGAs is provided in Annex 1 of this document. 41. The overall UPG funding amount for the Program duration has been determined as a function of various factors. International good practice shows that in order for a performance based grant function to work well, the size of the transfer needs to be adequate to create response from local governments and their constituents. In other words, the potential financing should be attractive enough to bring about the institutional change sought at the local government level. Specifically in the Tanzanian urban context where there are urban infrastructure gaps, the annual allocation needs to be adequate to fund urban investments in order for the ULGAs to respond to the incentive mechanism, within their absorptive capacity constraints. In the context of ULGA , this has been targeted at a total of approximately US$ 18 per capita/ per annum, when the system has been fully introduced in FY2015/16. Therefore, the UPG pool is structured to be on average US$ 18 per annum per capita17. 42. The annual allocation for each full grant cycle will range between US$35.5 million for the Program start year (FY2014/15) and US$52.2 million for the following four years. In the initial year (FY2013/14) the performance indicators will not apply and the US$9 million will be allocated to ULGAs, subject to an assessment of minimum conditions (spelled out in Annex 3), which will include most of the current LGDG minimum access criteria and an additional number of conditions pertaining to environmental and social management, financial management and procurement". ULGAs which fulfill these minimum conditions will receive a grant, part of which they can use to build their capacity to respond to the full performance assessment which will take place for the grant cycle in FY2014/15. From FY2014/15 onwards, a full performance assessment of both minimum access conditions and performance indicators will be conducted each year. Only those ULGAs which fully meet the minimum access conditions will be eligible to receive UPG funds. Those ULGAs which do not meet all of the minimum access conditions will not be able to access funds, but will receive capacity building support from PMO- RALG to support accessing the funds in the subsequent years. Annex 1 of this document provides a detailed description of the UPG cycle. 43. The Program will also include a set of parallel but related activities to ensure that the UPG system functions properly. These activities are explained below in the "Key Capacity Building and Systems Strengthening Activities" section below and further in more detail in Annex 1. 44. The Program incorporates lessons learned from the challenges faced by the ongoing Government program, the LGDG system in its design. The ongoing Government program is facing a 17 FY2015/16 includes an initial allocation to ULGAs under DLIs 1, 2 and 3 which rises over the life of the Program in line with increased absorptive capacity. Disbursements will be over a five year period and the per capita amounts are calculated with the assumption of ULGAs meeting the expected annual DLI targets. 1 Annual assessment in FY2013/14 will also conduct a baseline survey of performance indicators. These values will be used only for informational purposes and will not affect disbursement, which will be based solely on minimum access conditions. 11 number of challenges. Namely, how to adequately resource ULGAs whose service delivery requirements are more complex and expensive than those of rural LGAs. The only source of discretionary funds for ULGAs within the current LGDG framework is through the existing CDG, which is on average US$ 2 per capita/per annum. Given that the financing needs of urban local governments tend to be greater than the needs of non-urban local governments, the US$2 per capita/per annum discretionary fund allocation currently provided by LGDG falls far short of providing sufficient financial incentives for systems reform among ULGAs. The Program aims to address this shortfall by addressing the needs of ULGAs by providing them a larger amount of discretionary funding (within their absorptive capacity). The Program design also incorporates lessons learned from the delayed LGDG disbursements from the central government to LGAs. To reduce the risk of delays in UPG fund disbursement, the Program (i) simplifies the disbursement process by reducing the number of disbursements within a year from four (quarterly) to two (bi-annually) and (ii) incorporates timely releases of funds from GoT to ULGAs as part of DLI verification. To prevent the performance plateau faced by LGDG Core, the Program's performance assessment system "raises the bar" for achievement in each Program year and contains a correction mechanism to kick in during Program midterm review to make necessary adjustments to the performance system. Additionally, the comprehensive capacity building program (explained in detail below) allows the ULGAs to respond to the incentives. Finally, DLI 6 allows for these enhancements of the ULGSP to be brought into the LGDG core. 45. The infrastructure investments which the ULGAs will carry out with UPG financing will fall within their mandate and will include council roads and related infrastructure, public spaces for market and trade, solid waste management (a full and detailed list of eligible infrastructure investments is provided in Annex 1) and are not expected to entail significant and irreversible adverse impact on the environment or people. Contract values will typically remain relatively low in line with the nature of municipal infrastructure activities in secondary urban areas in East Africa. In-depth fiduciary, social and environmental capacity assessments have been conducted for the ULGAs which will carry out the activities. Risks and mitigation measures have been identified and agreed with the Government and ULGAs. The assessments confirm that risk levels are manageable. 46. The ULGSP is intended to leverage sustained improvements to the overall LGDG government program in a number of different respects. First, as regards funding, once fully in place- in FY2014/15-the UPG (US$35.5m) is expected to constitute (annually) about 25% of the LGDG system (at 2010/11 LGDG disbursement level), which has jointly been funded by GoT from its own sources, seven bilateral partners and the World Bank. As context, it should be noted that Tanzania is a poor, fiscally constrained country in which ongoing donor support is particularly important - roughly one third of the total annual budget comes from donor sources. As with other such countries, the funding composition of specific programs (i.e. how much is funded respectively by the Government, the Bank, and other donors) can vary substantially depending on the evolving circumstances regarding the broader fiscal environment, changing donor emphases, and the level of donor-funded budget support in the total government budget. Prospects of greater Government funding are significant as recent gas finds point to an improved financial position in the future. 47. Nonetheless, and with significant variations, the LGDG seems to have been characterized by three broad trends which can be illustrated with reference to the LGDG Core (see graph below):19 (a) increasing aggregate funding volumes as the scope of the program and the amounts within sub-programs have increased. Within the LGDG Core, the amount grew from TSh38.2bn (US$29m) in 2005/06 to 19 The LGDG Core is the longest established of the LGDG windows and the only one for which it has been possible to get reasonably reliable data. The data used here includes all the government and donor flows which have been integrated into what is now known as the LGDG Core (grant names have changed over time) since 2005/06. 12 TShl09.3bn (US$68m) in 10/1120; (b) increasing amounts of government funding within sub-programs. For the LGDG Core, the Government contribution grew from 7% in 05/06 to 22% in 2010/11, and is projected to grow to 43% in 2011/1221; and (c) a decreasing proportion of Bank funding. For the LGDG Core, Bank funding began at 45% in 06/07 and phased out completely in 2011/12. It may be noted here that a similar - and more pronounced - trend has been evident in Uganda which has a similar program, which was initiated with 90% Bank funding around 2000 which has decreased to zero today, with the local government performance grant transfers there being entirely government funded. The initial Bank funding provided to the new UPG sub-program is intended to play the same sort of catalytic role that it did in the case of the LGDG Core (and the Local Government Performance Grant in Uganda) and to leverage increasing amounts of non-Bank funding into the sub-program over time. Funding Source (per cent) of LGDG Core FY2006/07 - FY2011-12 100%- 1GoT IDA * DPs 80% - 20% - 0%MM_ FY2006/07 FY2007/08 FY2008/09 FY2009/10 FY2010/11 FY2011/12 48. Second, the activities and experiences of the UPG will be leveraged to strengthen and enhance the functioning and performance of the broader LGDG system. One area is of particular importance - the enhanced annual assessment, which will apply to the 18 target ULGAs under the UPG will be reviewed during Program midterm, which is expected to take place in FY2015/16. Lessons learned will be integrated into the broader LGDG annual assessment in order to address some of the limitations and weaknesses of the existing program (see above). A DLI designed to incentivize this is included within the Program (DLI 6). 49. Third, GoT wishes to use the Bank as the initial funding source for the operation. It is committed to expanding the Program to include other ULGAs with the possibility of introducing some of its own funding into the Program as it develops. As indicated earlier, the Bank provided the initial funding for the overall LGDG along with other Development Partners. During preparation of the ULGSP Program, dialogue was held with the development partners (DPs) who, in the context of their ongoing commitments to LGDP and the LGRP, indicated broad overall support for the Program with the Bank as the initial funding source. 50. In year three, a stock-taking exercise will be undertaken during Program midterm to explore the possibilities for graduating additional ULGAs which are not part of the initial target group into the Program, and to formalize the process for doing so. As part of this process, the funding arrangements and activities for the Program will be reviewed in the context of its disbursement performance at that time, and arrangements will be made for leveraging additional funding from government and/or DP sources, together with any Program restructuring that may be necessary. 20 However, it should also be noted that, as with other government expenditures, the LGDG is vulnerable to the broader fiscal and budgetary constraints and pressures that GoT faces on a year-to-year basis, so this progression has not necessarily been linear. 21 Preliminary budget numbers only. Not yet confirmed or certain. 13 51. Nonetheless, there are fiscal sustainability and policy risks to the Program. It is possible either that Government's overall fiscal position may deteriorate leading to affordability constraints with respect to transfers to LGAs, including for the UPG, or that policy could shift unfavorably with respect to support to urban areas, resulting in a diminution of funding for the UPG. The former risk is mitigated to some extent by GoT's overall fiscal outlook. The latter is mitigated by the fact that urbanization pressures are unlikely to abate for the foreseeable future. Clearly, however, the degree to which the Program can command political support, hence attract both Government and DP resources, will depend significantly on its implementation success, particularly in the early years. 52. The expenditure framework for the Program is as follows: Program Financing: ULGSP expenditures and annual disbursement forecast (US$, million) FY2012/13 FY2013/14 FY2014/15 FY2015/16 FY2016/17 FY2017/18 Total @ Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Program end Grant Flows to 0 9 35.5 52.2 52.2 52.2 20122 ULGAs via UPG window Funds for 0 8.8 8.8 8.8 8.8 8.8 44 PMO-RALG results to execute the UPG Funds for 0 10 10 improvements to the Government program based on UPG experience Total ULGSP budget 0 17.7 44.3 71 61 61 255 Total IDA 0 17.7 44.3 71 61 61 255 financing B. Program Development Objective (PDO) 53. The PDO is to improve institutional performance for urban service delivery in Program urban local government authorities. The following three outcomes are expected from the Program: (i) 18 ULGAs with enhanced institutional structures and better local governance defined in terms of improved urban planning systems, increased own source revenue generation and collection (with a particular focus on property taxation), enhanced fiduciary systems management, improved service delivery systems and enhanced accountability and oversight mechanisms; (ii) newly constructed or repaired urban municipal 221The amount disbursed annually against this expenditure item will be determined by the scores achieved by ULGAs on the annual assessment. The annual amounts for DLIs 1, 2 and 3 are fixed against expected targets for each FY. If ULGAs perform below the expected level, actual disbursement will be lower. If they perform higher than expected, actual disbursement will be higher than planned. If ULGA performance exceeds expected targets cumulatively, there will potentially be a financing gap and additional financing will be needed. Any financing gap or surplus arising out of the difference between expected and actual performance (hence actual disbursement against this budget line item) will be assessed and addressed within the Program during mid-term review and throughout implementation. 14 infrastructure; and (iii) enhanced central government LGDG mechanism to support and deepen decentralization. C. Program Key Results and Disbursement Linked Indicators (DLIs) Key Results 54. The Program will produce enhanced institutional performance resulting in: * Improved urban planning; * Increased own source revenues from property tax; * Efficient fiduciary management; * Improved infrastructure, delivery and O&M; and * Strengthened accountability and oversight systems. 55. The independent annual assessment will be the main tool to assess progress. The aggregate score of all the LGA annual assessments will determine progress towards PDO. Performance indicators which the assessment will use to measure progress are summarized below: Summary overview of the main areas to be assessed is given below Improved Urban Planning System * General Planning Scheme (GPS) for Council adopted Increased Revenues from Property Tax * Updated Local Government property tax system in place * Increase in the number of properties in the property register * Increase in taxable properties valued * Billing collection ratio of property taxes * Increase in property tax collected Efficient Fiduciary Systems * Average score on the PPRA for targeted ULGAs * Efficient FM system in place Improved Infrastructure, Implementation and Operation & Maintenance (O&M) * Performance Grant Utilization Plan in place and updated annually * Physical targets for utilization of performance grant achieved * Increase in amount of Own Source Revenues (OSRs) transferred to the development account * Annual disbursement of performance grant * 0 & M plan in place and executed Strengthened Accountability and Oversight Systems * Consultative process for Performance Grant Utilization in place * Annual progress reporting and disseminating systems in place * Information on use of OSR publicly disclosed * ULGA Service standards in place * Systematic records maintained on all environmental and social management activities implemented by ULGAs * Robust system established for handling social, environment and resettlement grievances * All participatory consultative processes on ULGA UPG activities address the relevant environmental and social considerations * Resettlement Action Plans implemented and Environmental Management Plans prepared prior to initiating civil works 56. The indicators below will measure progress towards the achievement of PDO: 15 * Indicator 1: Annual performance score ofparticipating ULGAs as assessed by the independent annual performance assessment. This indicator will convert the result of the annual performance assessment to the progress towards PDO. * Indicator 2: Disaggregated list of financed investments by type and/or sector built or rehabilitated, including, council roads and related infrastructure, slaughterhouse/abattoir, commercial market infrastructure, dumpsite rehabilitation, community waste collection points. The physical infrastructure projects to be financed by the UPG will be determined by ULGAs on a demand-driven basis. Therefore, the indicator will measure the investments delivered, rather than progress against set targets. 57. The score in the full performance assessment (first PDO indicator) is the key element to measuring the success of ULGSP, while the second PDO indicator will capture the improved infrastructure that will be financed through the UPG and which will result in improvement of service delivery at the local level. 58. Due to the fact that institutional capacity building is an incremental process and will take time, it is expected that ULGAs will gradually achieve the targets, starting from a low base in the initial years of the Program. This will provide an incentive to improve performance every year and therefore avoid the problems identified in the current LGDG performance assessment. In addition, the indicator targets will be reviewed throughout implementation, and more specifically at mid-term review to undertake possible refinement or adjustments needed in line with the improvement in ULGAs' performance. Disbursement Linked Indicators (DLIs) 59. The ULGSP has three categories of DLI: * DLIs 1, 2, and 3: Strengthened institutional and delivery performance by ULGAs (US$201million) The fundamental objective of these DLIs is to leverage improved performance and results in the target ULGAs to ensure (i) that the basic fiduciary, project planning and execution, and environmental and social management conditions are in place such that the ULGAs can absorb the increased funding provided under the UPG; (ii) enhanced institutional strengthening of the ULGAs to ensure sustainable, long-term improvements in urban infrastructure and management utilizing the UPG and other resources; (iii) effective ULGA infrastructure delivery utilizing the UPG over the life of the Program. Collectively, these three DLIs address the core of the PDO. Performance against these three DLIs determines the overall quantum of funding disbursed by the Bank for the UPG; * DLIs 4 and 5: Strengthened ULGA public sector management capacity (US$44 million) These leverage and disburse according to results achieved by PMO-RALG in strengthening the public sector management capacity of ULGAs; * DLI 6: Overall strengthening of LGDG program (US$10 million) This DLI leverages and disburses according to results achieved by PMO-RALG in strengthening the overall LGDG system on the basis of lessons learned from the Program. 60. The specific objectives and functioning of these DLIs are described below. DLIs 1, 2 and 3: Strengthened institutional and delivery performance by ULGAs 61. DLI 1 - "ULGAs have strengthened institutional performance and achieve Program minimum conditions in the annual assessment ". Each ULGA will undergo an assessment of its compliance with the UPG Minimum Conditions (MCs). The purpose of the MCs is to ensure that basic conditions are in place for a ULGA to receive and control funds, and to plan and execute infrastructure projects without 16 unacceptable fiduciary and environmental and social management risks. ULGAs have to comply with all the MCs to receive Program funds, as each MC is a basic safeguard for a specific area of focus. The allocation on this DLI is US$ 9 million per FY (i.e. total US$ 45 million over the ULGSP Program period) which is approximately US$ 3 per capita per year. The MCs are derived from the current LGDG system, but they have been enhanced relative to the LGDG MCs. Based on the assessment, it appears feasible for all 18 ULGAs to be able to comply with the MCs and this therefore forms the performance target for this DLI (100% compliance). 62. The disbursement to each ULGA which complies with the Program minimum conditions will be based on the per capita allocation (US$ 3 per annum) multiplied by its population. The total amount disbursed in each FY towards this DLI will be the sum of the allocations for each compliant ULGA. If the number of ULGAs which fully comply with the minimum conditions is less than 18, then the total disbursement from the Bank will be reduced accordingly. Although ULGAs which do not comply with the MCs will not receive any UPG funds in any given year, their performance against standard indicators will be assessed. They will also be eligible to receive DLI 1 funds in future years if they comply with minimum conditions in the future years. 63. DLI 1 contains measures that relate to DLI 2 and 3. First, if any ULGA does not comply with the minimum access conditions, its score on DLI 2 and 3 will be zero. Second, in order to ensure that ULGAs are not rewarded for poor performance, one of the Program minimum access conditions ensures that any ULGA whose DLI 2 score decreases by 20 points or more (against the baseline which will be established in the March 2013 Assessment), will not receive DLI 2 funding for the forthcoming year. 64. As in the LGDG system, the Program's capacity building activities - DLI2 (explained in detail in Annex 1) will primarily focus on those ULGAs which do not fully meet the Program minimum conditions, to ensure that they can fully meet these conditions in the following years. 65. DLI 2 - "ULGAs have strengthened institutional performance as scored in the annual performance assessment". From 2014/15 on, each ULGA will undergo a full assessment of its performance against both the Program minimum conditions and performance indicators (in year 2, performance indicators # 11 and # 17 will not apply as the ULGAs will not have had the opportunity to perform against these measures). The purpose of this indicator is to leverage strengthened institutional capacity and performance which is cardinal to improved, sustainable urban infrastructure and service delivery and management. Each ULGA is individually assessed against the performance indicators, which cover - hence incentivise - the key areas in which ULGAs need to strengthen their institutional performance and capacity in order to absorb and manage increased funding, better deliver urban services and manage and govern their areas in a sustainable manner. The assessment takes the form of a multi-day field visit by a team of experts that will be contracted to conduct it (who will simultaneously undertake the assessments for DLIs 1 and 3). Each ULGA is allocated funding based directly on its performance score in the annual assessment. Calculation of the allocations and disbursements will be in two steps as follows (a more detailed description of the specific formulae used is contained in the Bank Disbursement Table): Step 1: Determination of the overall amounts to be disbursed from the Bank to GoT. This step relates to the total disbursement for the DLI and is calculated on the basis of the average achieved score of the ULGAs against the DLI 2 performance targets for each FY. For example, in FY 2014/15 the DLI target for the average ULGA performance score is 60 (out of 100). If the target is achieved, then the full allocation (US$26.5 million) will be disbursed to GoT (and an identical amount will be disbursed by the Government to the Program ULGAs as per step two below). If the target is exceeded, the total disbursement will be greater (e.g. for this FY, an average score of 80 would result in a US$ 35.33 million disbursement) and this amount will be transferred to 17 target ULGAs; if the target is not reached, then disbursement amount will drop proportionately (e.g. for this FY, an average score of 50 would result in US$22.08 million disbursement), as would the total transferred to the ULGAs. In order to leverage consistently improved performance results, the target to achieve the disbursement of the given funding pool (US$26.5 million) rises over time, from 60 in FY2014/15 to 90 in FY2017/18. If these targets are exceeded in any given year, a proportionally greater amount than the US$ 26.5 million allocation will be disbursed. Consequently, if ULGA performance consistently exceeds targets - i.e. the Program is very successful - the total funding requirement will exceed the amount allocated to DLI 2. This will be dealt with either through internal Program re-allocations or through additional funding from the Bank, Government and/or other sources, depending on circumstances. At mid-term the trend will be more clearly established and a course of action will therefore be agreed. Step 2: Determination of the amounts to be disbursed from GoT to each ULGA: This step determines the horizontal distribution of the total amount. This will take the overall pool calculated in step one above and divide it between the MC compliant ULGAs in accordance with their population and annual scores, thus ensuring full incentive compatibility of the DLI. For each ULGA every point scored on every performance indicator will count and will have an impact on the amount of funds they receive. 66. Each annual allocation for DLIs 1, 2 and 3 will be transferred from the Bank to GoT, and from GoT to the ULGAs in two equal six month installments. In order to mitigate the risk of excessive delays in the GoT-to-ULGA transfers, verification of the GoT-to-ULGA transfer for the previous period will constitute part of the overall verification protocol for these DLIs (see Annex 3). Any given tranche will only be disbursed from the Bank to GoT once all previous disbursements from GoT to ULGAs have been appropriately made. 67. DLI 3 - "Local infrastructure targets as set out in the annual action plans are met by ULGAs utilizing the Program funds ". The key purpose of this DLI is to leverage improved local infrastructure delivery by ULGAs over the life of the Program. Measurement of ULGA performance in this area, which will also take place as part of the annual assessment, will focus on actual physical progress of infrastructure delivered against the ULGA annual action plan and the quality of infrastructure built as assessed through value for money audits to be conducted by PPRA. A system of prior verification of the ULGA action plans will be put in place whereby the contracted capacity building teams will support the ULGAs to ensure that these action plans are comprehensive, realistic and have clearly identifiable and time-bound targets. In order to ensure that the quality of infrastructure delivery is properly leveraged, from 2015/16 (once Program ULGAs have been able to establish a record of executing projects using Program funding) value-for-money audits of Program infrastructure in all 18 ULGAs will be commissioned by PMO-RALG from the PPRA, and the results of these audits will count 50% of the weighting of the DLI. This DLI functions very similarly to DLI 2, and the same two-step approach to determining the total disbursement amount and allocating it to ULGAs outlined above applies, though naturally with a different indicator. The Program minimum conditions also apply. As in DLI 2, the performance targets for this DLI increase each year, from 70 points in FY 2015/16, 80 points in FY 2016/17 to 90 points in FY 2017/18. For FY2016/17 and FY2017/18, the results of the value for money audits will constitute half of ULGA performance. The sum of the amount to be allocated to ULGAs, provided that the target is achieved, will be US$ 16.7 million for each of the FYs 2015/16, 2016/17 and 2017/18. As in DLIs 1 and 2, the actual total amount for disbursement to GoT may increase or decrease depending on the actual average performance of the ULGAs. DLIs 4 and 5: Strengthened ULGA public sector management capacity 68. DLI 4 - "Number of ULGAs with all core staff in place". Disbursements under DLI 4 (and 5 and 6) will be made to the central government. While all ULGA staff are local government employees, senior 18 appointments are made by the central government. Without having a core senior staff complement in place, the risks that UPG funding will not be utilized or controlled properly obviously increase23. The main purpose of this DLI is thus to provide an incentive to ensure that PMO-RALG makes these appointments in a timely manner and retains these staff in Program ULGAs (which is why the DLI is repeated annually). Upon verification that at least nine of the Program ULGAs have the requisite full staffing (all ten positions listed in the footnote below) in place, US$155,500 per annum will be released for each ULGA with full staffing. Should the number of ULGAs with the full senior core staffing be below nine at a given Program year, no funds will be disbursed under this DLI. 69. DLI 5 - "Completion of annual PMO-RALG capacity building activities for Program ULGAs". Like DLI 4, DLI 5 leverages central government actions which are fundamental to the success of the Program. It focuses on and disburses against the successful completion of planned PMO-RALG executed capacity-building activities among the Program ULGAs on an annual basis. These activities are important to ensure that ULGAs are able to respond effectively to the incentives created by DLIs 1, 2 and 3. DLI 6: Overall LGDG strengthening 70. DLI 6 - "PMO-RALG has adopted an enhanced LGDG assessment system derived from lessons learned from the annual Program assessments ". This DLI leverages a strengthening of the overall Government program - the LGDG - through incentivizing PMO-RALG to introduce a more robust annual LGDG performance assessment based on the lessons learned from the experience of the enhanced assessment utilized by the ULGSP Program. Results framework 71. The results deriving from DLIs 1 and 2 will be reflected in PDO Indicator # 1, which will record the overall strengthening of Program ULGAs over the life of the Program. Results deriving from DLI 3 will be reflected in PDO Indicator # 2. Intermediate results indicators will reflect the achievements of the Program under DLIs 4, 5 and 6, and some of the results achieved under DLI 2. 72. With this background, the Program DLIs matrix is presented below: DLI Matrix | Total Indicative timeline for DLI achievement 23 The full senior core staff complement is defined in the PMO-RALG scheme of service and comprises council director, council treasurer, council internal auditor, council engineer, council community development officer (in charge of environmental and social systems management), council supplies officer, council assistant supplies officer (in charge of procurement), council town planning officer, council planner and council human resources officer. 19 Financi As % of DLI ng Total Baseline Allocate Financ d to DLI ing FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 Amoun t DLIs 1, 2 and 3: Strengthened institutional performance and infrastructure delivery by ULGAs DLI 1 ULGAs have strengthened institutional N/A N/A24 18 18 18 18 18 performance and ULGAs ULGAs ULGAs ULGAs ULGAs achieve Program minimum conditions in the annual assessment Allocated amount: 45 18% 0 9 9 9 9 9 DLI 2 ULGAs have strengthened institutional N/A N/A N/A 60 70 80 90 performance25 as scored in the annual performance assessment Allocated amount: 106 42% 0 0 26.526 26.5 26.5 26.5 DLI 3 Local infrastructure targets as set out in the N/A N/A N/A N/A 70 80 90 annual action plans are met by ULGAs utilizing the Program funds Allocated amount: 50 20% 0 0 0 16.727 16.7 16.7 DLIs 4 and 5: Strengthened ULGA public sector management and capacity DLI 4 Number of ULGAs 0 N/A 100% 100% 100% 100% 100% with all core staff in place28 24 The first disbursement is expected in July 2013, (due to reasons explained in the grant cycle section in Annex 1). The March 2013 assessment will measure compliance against minimum access conditions, set the baseline against performance indicators and determine the disbursement to be made in FY13/14. 25 In the areas of urban planning, revenue enhancement, fiduciary systems, implementation of infrastructure, operations and maintenance and oversight systems including environmental and social systems management. 26 Rising targets against constant allocation amounts are deliberately established to leverage increasing performance for each Program year. 27 Same as in DLI 2, rising targets against constant allocation amounts are deliberately established to leverage increasing performance for each Program year. 20 Indicative timeline,1r DLI achievement As % of Finanl Total FnneFinanc ng ing DLI FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 Allocate AonBasehine d to DLI A Allocated amount: 14 4.5% 0 2.8 2.8 2.8 2.8 2.8 DLI 5 Capacity Completion of annual building PMO-RALG capacity N/A N/A activity 50% 60% 70% 80% building activities for plan Program ULGAs adopted Allocated amount: 30 12% 0 6 6 6 6 6 DLI 6: Overall LGDG Strengthening DLI 6 PMO-RALG has adopted an enhanced LGDG assessment N/A N/A N/A N/A 100% N/A N/A system derived from lessons learned from the annual Program assessments Allocated amount: 10 3.5% 0 0 0 10 0 0 Total Financing 255 100% 0 17.7 44.3 71 61 61 Allocated: D. Key Capacity Building and Systems Strengthening Activities 73. The Program's key capacity building and systems strengthening activities will include the capacity building needed at the ULGA level to ensure UPG functions effectively and achieves its intended results. In line with good international practice, these capacity building activities will be a combination of formal classroom based instruction and other more direct, in-depth and issue-specific mentoring, as well as just-in-time training support, to build durable capacity at the ULGAs. As such, the ULGSP capacity building approach will have two interrelated tracks; (i) ULGAs will access formal, classroom-style training from local institutions in line with their local needs using UPG resources and (ii) PMO-RALG will provide an intensive and ongoing program of capacity-building support to ULGAs managed and coordinated from the center. Activities under (i) will be procured by ULGAs by using up to five percent of their UPG funds, on the basis of annual capacity-building plans which are formulated on the same timing cycle as their physical plans. Capacity building advisors attached to PMO-RALG will provide assistance in the formulation of these plans. The existence and execution of the annual capacity building plans will be verified through the annual performance assessment. Training of type (ii) will be provided through a number of centrally procured and managed mentoring and issue-specific response 28 PMORALG is responsible for providing core staffing. Core staffing composition is explained in detail in the Verification Protocol and Bank Disbursement tables. 21 teams which will be deployed in the field to visit and spend time with the ULGA technical staff. Given that the capacity-building needs of ULGAs vary, and that these will shift over time as initial needs are satisfied and new needs emerge, this resource will be provided, within a number of broad thematic areas, on a highly flexible basis. The main focus of this support will be on the key areas of weakness identified through the assessments undertaken for the Program preparation, such as financial management, procurement, social and environmental management, urban planning, contract management and execution, monitoring and reporting. The formulation of capacity building plans at the ULGA level, as well as the overall PMO-RALG support to be provided will be overseen by a small capacity building team at PMO-RALG. The key systems strengthening activities will also include the annual performance assessment and the impact evaluation, to be procured by PMO-RALG. III. PROGRAM IMPLEMENTATION A. Institutional and Implementation Arrangements 74. The Program will be implemented through the same institutional architecture used under the LGDG system. Under the Program's implementation arrangements, as under the LGDG system, the responsibilities will be as follows: * Reflecting the decentralized nature of the Program, participating ULGAs will take primary responsibility for implementing their own subprojects including all fiduciary, and reporting requirements. Namely, ULGAs will be responsible for: (i) using nationally guided participatory budgeting arrangements to plan for the way in which they will use grant funds, both for infrastructure investments and capacity building activities (planning and budgeting); (ii) using the funds they receive according to the participatory budgeting priorities and national laws and regulations (fiduciary systems, anti-fraud & corruption mechanisms and oversight mechanisms); and (iii) monitoring and reporting on the use of the funds and the associated outputs and outcomes (reporting). As such, ULGAs will have primary responsibility for the institutional strengthening activities and implementation of infrastructure subprojects. Program implementation will be done using the existing ULGA structures with the respective Council Director as the ULGA level accounting officer. The relevant council officials will be responsible for the implementation, supervision and oversight of their respective subprojects and institutional strengthening activities. Management of the completed investments, including O&M, will be the responsibility of ULGAs. * PMO-RALG will be responsible for the overall management of Program activities, ensuring coordination and providing technical support to ULGAs. Specifically, it will be responsible for (a) providing the necessary caliber and number of staff for each ULGA according to nationally set norms; (b) providing the hard and soft infrastructure (i.e. IT), technical assistance and capacity building to ULGAs in many areas including financial management, procurement, and environmental and social management; (c) commissioning and overseeing the independent annual performance assessment; (d) communicating the results of the annual performance assessment to the Bank and obtaining the Bank's verification of it; (e) making public the results of the annual performance assessment and the corresponding grant funds to be disbursed to ULGAs mass media; (f) requesting and following up with the Ministry of Finance and the Bank of Tanzania to disburse the funds to ULGAs on time; (g) collecting and aggregating data from ULGAs to track the use of grant funds; and (h) overall management of the Program, including preparing the Program report. 22 PMO-RALG Permanent Secretary 1 Directorate of Urban Development Program Coordinator Respective Regional ULGSP Sub-Coordinator Secretariats Financial Management Specialists Oversight, Advisory Procurement Specialists andMentoring Social and Environment Specialist Institutional Strengthening Specialist Monitoring and Evaluation Specialist 18UGAs 75. PMO-RALG will manage and coordinate the Program, with the Permanent Secretary of PMO- RALG as the overall accounting officer for Program funds. PMO-RALG has demonstrated its capacity to manage externally supported Government programs and projects such as the World Bank supported Urban Sector Rehabilitation Project (USRP, 1997 to 2003/4; LGSP, since 2004/5; and TSCP, since 2010). With respect to ULGSP, a specific team which will manage the Program's operation will be created in an established unit dedicated to urban issues. This unit consists of its own personnel within the Directorate of Urban Development and works in collaboration with other departments. The team is led by a Program Coordinator, supported by Sub-Coordinators for each of the Government's urban programs and staffed by two full time financial management specialists, two procurement specialists, a social and environment specialist, a monitoring and evaluation specialist and support staff. All staff members of the unit have participated in multiple training programs in their areas of work. The unit is housed in a dedicated fully equipped office space. 76. PMO-RALG will produce and submit to the World Bank within three months of the beginning of each new fiscal year an annual Program report which will provide information on the following: * Summary of the assessment results, including the performance of Program ULGAs and the disbursed amounts; * Summary of aggregate Program expenditures and Program infrastructure delivered by ULGAs; * Execution of the PMO-RALG capacity building plan; * Summary of aggregate capacity building activities undertaken by ULGAs; * Summary of aggregate environmental and social performance reports from each ULGA, including information on grievances; * Summary of aggregate information on procurement grievances; * Summary of aggregate information on fraud and corruption issues as provided by PCCB (see section on anti-corruption guidelines). 77. The assessment of Program ULGA capacity indicates that most have a basic level of planning, fiduciary and environmental and social management capacity. The analysis shows that few ULGAs have significant practical experience with design, procurement and supervision of the scale of infrastructure projects which this Program intends to fund. ULGAs have not yet developed the capacity to deal with large investments because the financing that they receive is not sufficient to undertake urban- 23 specific investments. Thus, it is clear that the existing capacity needs to be enhanced incrementally and new capacity needs to be built in areas where none exists or is weak, such as in civil engineering, environmental and social assessment and ICT. The enhancement of existing levels of capacity and building capacity in new areas is not simply a means to an end under the proposed ULGSP. Rather, as expressed clearly in the PDO, this is the central objective and focus of the Program. As such, the Program will incentivize ULGAs to enhance their capacity through UPG and provide the necessary financial resources -available from within the grant itself, as well as from PMO-RALG- for capacity building. B. Results Monitoring and Evaluation 78. The Program will be monitored, and evaluated using a number of M&E tools throughout implementation including regular reports from ULGAs to PMO-RALG, the Annual Performance Assessments, Value-for-the Money Audits, Midterm Review and Impact Assessments. 79. At ULGA level the Program data, including physical investments to be financed by the UPG, will be captured using an amended version of the existing monitoring and evaluation system at the ULGA level. The existing system is as follows: All LGAs in Tanzania use a standardized monitoring and reporting system which tracks transfers, own source revenues and expenditures by sector and activity. The system is composed of two main elements; first is the quarterly Council Financial Report (CFR) which was introduced in FY2006/07. The CFR tracks budget plan and execution, use of own source revenues, use of transfers from the central government (disaggregated by recurrent funds, block grants and development funds) and expenditures (disaggregated by recurrent expenditures and development expenditures). The second element of monitoring and reporting system at the LGA level is the quarterly Council Development Reports (CDR). The CDR was introduced in FY2008/09 and captures council development expenditures on all projects undertaken by the council. The UPG will become a distinct line item which the ULGAs will report against in the CFR. Also, each investment financed by the UPG will be captured in the CDR as a distinct development project and source of funding. 80. The two reports provide a standardized monitoring and reporting system for presenting financial and council project information on a quarterly basis to the council, local community, regions and central government. The financial report is required to be presented quarterly to the LGA council committee responsible for finance along with the regular income and expenditure statement. The financial reports are then transmitted to the respective region which then shares them with PMO-RALG and the Ministry of Finance (MoF). Reports are also made public as part of PMO-RALG's LGA Consolidated Quarterly Financial Report and on the internet (www.pmoraig.go.tz/Iginformation). The monitoring and reporting system described above is sometimes poorly implemented by the LGAs. The ULGSP will therefore support the proper functioning of the system in two ways. First, implementation of the CFR and CDR will form one of the criteria in the annual performance assessment. Second, part of the capacity building to be procured by PMO-RALG will focus directly on monitoring and reporting. 81. The Program will ensure that the ULGAs submit timely quarterly environmental and social performance reports to PMO-RALG using the guidance provided by PMO-RALG in the Environmental and Social Management Manual for ULGSP. The submission of these reports is an important performance measure in the annual performance assessments of the ULGAs. 82. At national level, the ULGA M&E system managed by PMO-RALG will combine and verify data collection and data quality in ULGAs. PMO-RALG is responsible for planning and supervising the implementation of the annual performance assessment, which is the major M&E tool to verify the performance of the ULGAs. The annual assessment will be carried out by an independent firm to ensure the objectivity of the process. The assessment will be carried out in line with the Performance Assessment 24 Manual, being developed by PMO-RALG, with its content and quality acceptable to the Bank. The Manual will provide clear definitions for each indicator as well as comprehensive guidance on the scoring. Adjustments which might be needed to the performance indicators and scoring will be done throughout implementation in line with agreed procedures and particularly at the mid-term review to address any possible shortcomings or changes on the ground. 83. At PMORALG level, the internal PMO-RALG M&E system will capture key data that will allow an assessment of the decentralization support structure, e.g. capacity of PMORALG to ensure timely and agreed transfers of funds to the LGAs and the institutions' ability to provide needed capacity development and technical assistance to the LGAs. 84. PMO-RALG will ensure that a Program Impact Evaluation is conducted. The process will be launched early on in the Program to ensure that a proper baseline can be established from which performance can be tracked. During FY2012/13 and FY2013/14, the methodologies of the impact evaluation will be established, the consultants contracted, and the baseline data gathered. The evaluation will continue over the life of the Program. Specific methodologies which may be utilized include (i) using high frequency data from financial management, taxes and procurement to understand how the introduction of performance based grants affect the management of the Program ULGAs; (ii) using the triggers and the intensity of grant treatment to study the link between the intervention and developmental outcomes; and (iii) introducing variation in treatment through pairwise randomization of the 18 ULGAs to test either alternative capacity building modalities or the introduction of non-monetary incentives to public servants to improve on the performance targets which include own resources (taxation), urban planning, fiduciary, accountability and infrastructure O&M. The first annual performance assessment will be applied as a baseline for the institutional performance. Furthermore the results framework contains a number of baselines, e.g. on the number of core staff in place, which will be used to track performance on an annual basis during the regular reviews and the annual performance assessments. 85. Finally, the annual audits conducted by the CAG and the Value-for-the Money Audits under PPRA of which results will be included in the annual performance assessments from FY 2015/16 will be important tools in tracking the institutional and infrastructure performance improvements. 86. The ULGSP is designed to improve the M&E capacity of participating ULGAs as well as the capacity of PMO-RALG. The ULGAs will receive training and assistance as part of the capacity building support that PMO-RALG will put in place. The main focus of the M&E training activities will be: i) data collection and management, ii) active use of M&E data to inform policy decision and planning at local and central level, iii) linking of M&E system with transparency and accountability initiatives/ activities and iv) linking the results of the annual performance assessments to the capacity building support provided by the PMO-RALG as part of implementation of the CB plan as well as from the discretionary funds available under the investment menu for UPG. 87. The performance and capacity building on M&E is embedded in the Program Action Plan, the DLIs and the Program Results Framework. The annual performance assessments, the quarterly progress reports, impact assessments, and Mid-Term Review, etc. will be applied in the Program Results Framework to monitor the overall performance of the program against its objectives. C. Disbursement Arrangements and Verification Protocols 88. Disbursements of Program funds towards DLIs 1, 2 and 3 will be made bi-annually, while the disbursement of funds towards DLIs 4, 5 and 6 will be made annually. 89. Verification protocol for DLIs 1, 2 and 3 is as follows: 25 o PMO-RALG will commission an annual performance assessment to be undertaken independently; o The independent assessment will measure the performance of each ULGA against the Program's minimum access conditions and performance indicators (see paragraphs immediately below on this for DLIs 3 and 4). On the basis of this, it will assign a score to each ULGA; o The score attained by each Program ULGA (provided that it is compliant with the minimum conditions) in the annual performance assessment will be converted to the corresponding financing amount. Upon the announcement of CAG's audit results for ULGAs, the clean audit compliance minimum condition will be verified. The sum of these individual amounts will comprise the disbursement to be made for that year; o As part of the due diligence and implementation support, the Bank will review (i) the assessment results, (ii) allocation amount to each ULGA and (iii) that the disbursement from the central government to ULGAs of the funds in the last period has been done on time; o The allocated amount will be disbursed in two tranches and transfers will be aligned with the budget cycle of the ULGAs (see UPG Grant cycle, Annex 1). o As part of its due diligence, the Bank will undertake a regular quality assurance exercise of the annual performance assessment to ensure continued robustness. 90. The verification protocol for DLI 3 (which will start in FY2015/16) will compare the ULGA annual action plans for UPG utilization with the actual execution rate of the (sub)-projects, funded under the UPG. In addition to this, in FY2016/17 and FY2017/18, the outcomes of the value for money audits will also be factored in. The "execution rate" will be determined by a review of the bills of quantities, and verified by the physical progress against planned targets. Hence, for projects not yet fully completed, e.g. a road project, progress on the major items in the bills of quantities29 will be reviewed, both in the regular reports from the engineer, as well as through field trip verification of the actual implementation rate. The rate of completion measured by the bills of quantifies against planned annual target will be determined for each project as per its status at the end of each fiscal year30. The completion rate (%) of each project, when determined, will then be weighted with the relative contracted size of the projects to get an aggregate result, see the example below: DLI 3 verification example Contract amount Implementation rate against planned completion * Project (USD) Weighted Project 1 100,000 70% 70,000 Project 2 500,000 80% 400,000 Project 3 50,000 90% 45,000 Total Plan 650,000 100% 515,000 Weighted implementation rate for this ULGA 0.79 79% *Progress of projects monitored through bills of quantities and field verification 91. The verification protocol for DLI 5 will comprise of the review of implementation ratio of the annual plan to build capacity of ULGAs, which will be put in place by PMORALG. The template for the 29 This will be done e.g. for roads by reviewing the bills of quantities on earthwork, sub-base, base, wearing course asphalt, etc used, other inputs compared to the full project amount. 30 Assessments will be conducted on September of each year, hence the verification of this DLI will review end of FY reports, minutes and actual progress at the time for the assessment. 26 plan will be included in the operations manual. As part of verification of this DLI, each activity will be assessed and the ratio of implementation against planned targets will be determined, taking into account the budget size of each activity. 92. The verification protocol for DLIs related to central government performance will be done based on administrative reports as well as information from the annual performance assessment and confirmed by the Bank during the regular bi-annual implementation support missions. 93. M&E system and arrangements for ULGSP will consist offour different layers: * M&E system at ULGA level. As explained in the reporting section above, these systems already exist to capture information necessary for LGDG. ULGAs will use these systems to report on Program implementation, and to capture administrative data and data on local infrastructure and services delivered by UPG funds; * National LGA M&E system managed by PMORALG. These systems exist to capture data on the implementation of LGDG. PMO-RALG will build on these systems to meet the Program's aggregated data requirements on all participating ULGAs which will be based on standard reporting requirements and on the annual performance assessment; * PMO-RALG internal M&E system to capture its ability to improve the decentralization support system at the central level. * Impact assessment to review the impact of the overall Program and its achievement of the PDO. D. Sustainability 94. The Program preparation and design strives to ensure three kinds of sustainability; (i) sustainability of assets built with Program funds; (ii) fiscal sustainability of the Program in the medium to long term; and (iii) institutional sustainability. * Sustainability of assets is addressed by the requirement of ULGAs to provide a viable O&M plan for the investments they will undertake with Program funds. This requirement is a performance indicator and the annual execution of O&M will be measured by the performance assessment. Additionally, the Program's focus on the enhancement of ULGAs' own source revenue will help ensure that the funds needed to provide O&M of assets are available. * Fiscal sustainability of the Program is ensured through the fund allocation calculation. This calculation has considered what is affordable over the long term. Namely, as explained above, the approximately US$18 per annum/per capita UPG amount represents a balance between what is needed to address the needs of ULGAs in Tanzania, what these ULGAs can absorb and what is affordable by the Government in the long term. Importantly, in line with historical precedent, it is expected that in the medium to long term, other DPs might contribute towards the Program and as financing becomes available, the Government would provide incremental financing. * Institutional sustainability is ensured through the incentive mechanism which rewards improved local government management. The Program ULGAs will be well-positioned to become the first wave of high-performing local government authorities in Tanzania. As mid level urban authorities, they have a growing economic base, more vibrant private sector, more progressive and more capable political leadership, and are in a better position to attract and retain more capable administrative staff. In addition, due to the higher population density of urban agglomerations, the shorter distances involved within the urban core and higher penetration of ICT based systems (data enabled cell phones, internet etc.), urban LGAs are in a better position to interact with the majority of their constituents, including individual residents, but also civil society organizations as well as the private sector. 27 IV. ASSESSMENT SUMMARY A. Technical (including program economic evaluation) 95. The LGDG is a transparent and predictable fiscal transfer system introduced in FY2004/05 as part of the overall fiscal decentralization efforts to strengthen the resource base and capacity of the country's 133 LGAs. The Government remains committed to decentralization and therefore intends to introduce the UPG as a new window that aims to respond to the rising importance of the country's urban centers, by arresting deteriorating service delivery and responding to the needs of rapidly rising urban populations. Thus, the UPG has high strategic relevance for Tanzania's development priorities. 96. The Program will adopt a performance-based grant system (PBGS). The assessment shows that this is the right approach to leveraging long term institutional results at the local government level. Over the last 10-15 years, PBGS have been used in an increasing number of countries, and more than 20 developing countries are now piloting, consolidating or expanding this important intergovernmental fiscal grant instrument. The experience with PBGS, whereby discretionary grants are used to promote performance of local governments in core defined areas, has generally been encouraging, and there is expanding evidence to prove that PBGSs can and do have a positive impact on LG performance and thus on decentralized infrastructure and service delivery. Over a relatively short space of time and in several countries, the implementation of PBGS approaches has produced tangible and positive results, inter alia: i) better LG compliance with legal and statutory requirements; ii) improved planning, public financial management and procurement at the local level; iii) greater attention to, and improved performance in, cross-cutting areas such as gender mainstreaming, environmental management, good governance and transparency; iv) more-focused LG capacity building; and v) consistent use of capital grants to finance 31 investments in core poverty-alleviation areas and with improved value-for-the money . There is also encouraging evidence that PBGSs impact positively on areas such as the cost efficiency of service delivery and targeting of poverty alleviation.32 International experience has also shown that PBGSs are valuable and innovative elements in overall reforms of intergovernmental fiscal relations, and that they can impact positively on the overall reform agenda in many countries attracting additional funding from development partners and the central government. 97. In Tanzania, reviews of the earlier system of PBGS under the LGSP/LGDG (carried out in 2008, 2010 and 2012) show an impact of the incentives within the entire planning and implementation cycle from planning to auditing, particularly when the performance measures incentivize local government performance. However, it is clear that the design of the system matters. Some of the core lessons learned are: (i) the importance of having independent and highly qualified performance assessment systems in place, which are credible and reliable, ii) timely grant disbursements and assessments, iii) simple, quantifiable objective performance measures, which are adjusted to the local context and program objectives, and iv) institutional anchoring of the system and firm implementation arrangements with strong policy buy-in. These have all been important design considerations under the ULGSP, and the UPG, which takes into account lessons learned over the past decade in Tanzania and elsewhere. 98. The LGDG- which the design of the UPG is based on- is technically sound. The design of the UPG addresses the requirements of various urban areas in Tanzania. It is designed to be introduced as an additional new window within the existing LGDG, thus fully embedded into the larger Tanzanian national fiscal transfer architecture to ensure its sustainability. An important part of the technical assessment was to ensure a sound selection of local governments to participate in the Program. The selection of the 18 3 E.g. documented by VfMv audits of the LGDP in Uganda. 32 See e.g. the UNCDF publication: Performance-Based Grants - Concept and International Experience, 2010, which has a review of 15 countries which has implemented PBGS. 28 Program ULGAs is based on the strategic relevance of second-tier ULGAs in the country's rapidly urbanizing context. These ULGAs are not only growing rapidly and therefore facing urgent development needs, they have also been assessed as having relatively higher capacity levels. Therefore, this is the group that is most likely to best respond to the incentive structure presented under the Program 99. The Program's expenditure framework consists of a total of US$ 255 million, of which US$ 201 million will constitute the UPG and go directly to Program ULGAs for investments specified under the investment menu (Annex 1); US$ 44 million will support and leverage PMO-RALG activities and results directly linked to the execution of the UPG; and US$10 million will support the overall Government program strengthening, based on UPG experience. UPG funds will finance goods, services and training. These funds (US$201 million) will flow from the central government to the local governments and will be disbursed on a bi-annual basis. The Government's program (LGDG) currently uses funds flow mechanisms, tested through the previous IDA supported program, to disburse funds to the local governments. The Program will use these well established channels which form part of the current Tanzanian budget system (see Annex 1 for details). 100. An economic evaluation of the Program assessed: (i) the rationale for public provision; (ii) its economic impact; and (iii) a counterfactual scenario where the Program is not introduced. The assessment shows a strong rationale for public provision and financing to increase the institutional capacity and performance of ULGAs to deliver urban services- good local governance is a combination of creating proper legal, political and institutional framework as well as of actively building local authority capacity. Analysis of the Program's economic impact, for similar investments in the country indicate that the economic impact of urban infrastructure investments are positive, with a high average economic internal rate of return (average EIRR calculated as 24.5 percent for urban roads, 13.8 percent for solid waste management investments and 18.4 percent for bus and truck stands). Additionally, the Program will produce unquantifiable benefits by deepening "decentralization by devolution" and strengthening the institutional systems of central, regional local government entities. The final factor - the counterfactual scenario - where the government's LGDG moves forward without the proposed Bank supported Program expects that existing grants of approximately US$ 2 per capita continue to flow to the 18 ULGAs, without the proposed UPG. However the existing systems are not adequate to achieve the proposed Program's objective of building ULGA capacity and performance, as is evidenced by the fact that the per capita amounts are too low, and as of 2012, the vast majority of LGAs meet the minimum access conditions laid out in the Government's LGDG program and all councils are expected to receive a 'very good' performance evaluation. While it is clear that capacity and performance challenges among ULGAs continue and urban service delivery remains weak; it is agreed that without the proposed Bank supported UPG, the LGDG would not be adequate for achieving the proposed objective of increased ULGA performance in service delivery. B. Fiduciary 101. A fiduciary assessment has been conducted covering the Program institutional framework, fiduciary management capacity and implementation performance. The legal and regulatory Framework for this Program's fiduciary systems was found to be comprehensive and in line with international principles and standards for public procurement and financial management. The primary weaknesses in fiduciary performance of entities proposed for this Program is in compliance with the regulatory provisions. Context 102. Since 1998, the Public Financial Management (PFM) system of Tanzania has been undergoing reform. It has until recently been assessed as one of the better performing PFM systems in Africa. 29 However the reform momentum appears to have slowed. Annual assessments point to a deterioration in performance. In FY20 10/11, the Controller and Auditor General issued an adverse opinion on the annual financial statement of the Government of Tanzania. This was due to a number of reasons, including: non compliance with international accounting standards, non compliance with the Public Finance Act, and concerns regarding inadequate disclosure of investments, liabilities and the level of overdraft. In FY2011/12 the situation improved with the annual financial statement receiving a qualified opinion. At the local government level, the number of local governments that received a clean audit opinion declined from 100 in FY2007/08 to 72 in FY2011/12, though this was partly a result of the introduction of an enhanced audit process over this period which required the participating ULGA financial statements disclosure to accord with International Public Sector Accrual Accounting Standards. This is not surprising considering the fact that accrual accounting standards usually take time to be ingrained into local government practice. Most recently, some signs of improvement are evident e.g. the number of clean audit opinions increased from 66 to 72 between FY2010/11 and FY2011/12, including some of the Program ULGAs. 103. Key challenges highlighted by the CAG in the FY2011/12 audit report directly impact fiduciary risk across the 133 LGAs of Tanzania. These are: (i) Internal controls and internal audit: This is a major area of concern. CAGs audit report for FY 11 has stated that internal audit is ineffective in 90% of LGAs, that the IT control environment is inadequate in 83% of LGAs, that Audit Committees are largely ineffective in 73% of LGAs and that there is no risk management framework in 53% LGAs; (ii) Fraud Prevention and Control: CAG's Audit Report also states that a fraud assessment of 68 LGAs carried out in FY2011/12 found that LGA managements have not documented or put in place fraud prevention plans. There is also no process for management to monitor "Red Flags" that could alert them to the symptoms of fraud. Due to this CAG has concluded that there is a high risk of concealing management or operational level fraud in LGAs; (iii) Procurement Compliance: In the same audit report, CAG has expressed concern at the low level of compliance with procurement procedures, at laxity in control over contract payments, at poor supervision of LGA projects, at procurements being made without Tender Board approval, at the missing documentation in LGAs relating to procurement and the manner in which several of the assessed LGAs ordered and paid for goods that were not delivered. 104. Overall, cash management has also become a binding constraint in recent years. The Rapid Budget Analysis (November 2011) noted that budget deviation deteriorated in FY2011/12 owing to incomplete and delayed releases as well as reallocations. The overall budget execution rate for the Central Government declined to 83% in FY2011/12 compared to 90% in FY2010/11. This situation adversely affected fund flows to LGAs and LGDG program last year. In FY2011/12 CAG's Audit Report states that only 53% of overall LGDG funds were released. No funds were released throughout the year for the Rural Water Supply window of LGDG. 105. Recent fiduciary reform efforts in Tanzania include amendments to the Public Finance Act in 2010, creation of the Office of the Internal Auditor General, and the roll out of the new version of accounting software Epicor to all local governments, which along with improved training, is expected to improve the overall financial management of participating local governments. The Government has launched a Public Finance Management Reform Program and strategy for 2012 - 2017 focusing on: (i) revenue management; (ii) planning and budgeting; (iii) budget execution, transparency, and accountability; (iv) budget control and oversight; and (v) capacity building and training, IFMS and electronic service delivery, PFM institutional and legal framework. In order to prevent and combat corruption, the Public Procurement Regulatory Authority (PPRA) and PMO-RALG have both developed Anti-Corruption Strategies and Action Plans that include: i) registry management of information; ii) procurement procedures; iii) capacity building of human resources; iv) sensitization of public rights and duties; v) storage and safeguarding of data; vi) public service complaints handling. 30 Program 106. Against the background of the above-mentioned observations at national and local government level, a financial assessment of several of the participating ULGAs found that most have average internal controls, while a minimum of three have weaker internal controls which are being addressed through additional staff and the introduction of risk based internal audits. While fraud prevention plans have not been put in place in the participating ULGAs, they have mostly relied on the strength of their internal controls and citizen participation in economic and financial activities of the local governments. Given the substantial increase in the funding amounts flowing to the Program ULGAs, the financial management risk rating for the Program is high. The social accountability aspects will further enhance detection of fraud and corruption with the participation of citizens as well as civil society where applicable. The development of robust internal auditing practice, which is a precondition for program effectiveness, will further enhance ULGA internal controls and act to detect fraud and corruption. 107. Assessment of procurement arrangements found that: (i) fiduciary staffing in ULGAs is at a very basic level although it has been increasing consistently under the LGDG system, albeit from a very low starting point. In the four participating ULGAs visited, the PMUs are staffed by two or three officers; (ii) most procurements for goods and non-consulting services fall under new framework agreements that minimize the scale of fraud and corruption practices observed under the previous shopping procedures; (iii) most works packages are procured competitively and ULGA performance in advertising tender opportunities has increased to 90%; (iv) compliance with the use of standard bidding documents has increased to 74%; (v) records in the ULGAs are scattered, incomplete with no proper filing system or adequate space for keeping records; (vi) procurement complaints handling mechanisms exist, although log books are not systematically kept for recording these complaints; and (vii) contract management in the UGLAs was weak. 108. Procurement risk of the participating ULGAs and PMO-RALG is rated high. The major risks with regards to procurement in the ULGAs are; (i) inadequate qualified procurement staff; (ii) poor records keeping of procurement documents; (iii) possible delays in procurement process due to additional layer of the approval process embedded under the new Public Procurement Act (2011). The Law requires the Finance and Planning Committee of the ULGA to scrutinize the decision of the ULGA's tender board before award of contract is made, which could lead to (iv) too many tender board meetings; and (v) delays in authorizing and effecting payments. 109. Based on the fiduciary context and assessment, the overall fiduciary risk for the Program is high. 110. The Program will address fiduciary risk in four ways. First, the UPG incentive mechanism and the Program's annual performance assessment, i.e. the minimum access conditions and performance indicators. In addition it will also adopt (as a performance indicator) the 13 compliance indicators used by PPRA to assess PMO-RALG and participating ULGAs. The standardized tool used by PPRA measures: institutional set-up; procurement plan; process; quality assurance; and contract management. Second, the Program will finance a set of capacity building activities at the PMO-RALG and ULGA level. These activities will include the areas of financial management and procurement. Third, Program DLIs directed towards central government (i.e. fulfillment of core staffing at each ULGA and timely disbursement of funds) will help reduce fiduciary risk. Fourth, in year three of the program (August- September 2015), PMO-RALG will begin engaging PPRA to conduct performance audits (value for money audits) annually in all the 18 ULGAs to determine performance in particular with regards to management of contracts and quality of works. The results from these audits will be incorporated in the annual assessments from FY2016/17. 31 111. It is important to note that this broad group of Program activities aimed at reducing fiduciary risk complements a number of other interventions and reforms introduced or supported by the Government, Bank and development partners in improving central and local government fiduciary capacity. Fraud and corruption 112. The October 2011 Report on Value for Money Audits of 136 Constructions Projects by the Public Procurement Regulatory Authority has flagged fraud and corruption in local governments as a major area of concern. This VFM audit covered 17 LGAs including one of the 18 Program ULGAs, six public authorities, and 7 Tanzania National Roads Agency (TANROADS) regional offices. The audit covered aspects related to (i) planning (15%), (ii) procurement (15%), (iii) contract administration (15%), and (iv) quality of works (55%). The study audited 91 projects of LGAs for a value of Tshl9bn. The main findings of the study with regards to quality of works were that 62 projects (68%) of the LGA audited projects with a total value of TshslO,056,982,629 (53% by value) were assessed to be of unsatisfactory quality and that serious malpractices were noted in most LGAs. A key finding of the report was that some engineers and technicians in some LGAs conspired with contractors to certify and pay work items which did not exist or with lower specifications than what was provided in the contract documents. 113. In assessing these LGAs PPRA applied its red flag checklist for identifying corruption in construction contracts. Any entity scoring more than 20% on that checklist has a strong likelihood of fraud or corruption in its procurement. The seventeen LGA's were assessed as part of this exercise and only one is among the participating ULGAs. Ten of them (60%) crossed the threshold of 20% in which the participating ULGA (Singida) scored 24%. The finding of this report is that fraud and corruption risk in construction contracts in LGAs is high. 114. In this context, and given the fiduciary weaknesses discussed above, fraud and corruption are considerable risks under the Program. These risks will be mitigated as follows: 115. The main factor that leads to F&C is a weak fiduciary environment. Improving this environment in the target ULGAs is a specific goal of the Program, and will be addressed directly through the various main modalities outlined elsewhere in this document. More specifically: * The UPG and annual assessment. The annual assessment will include, as minimum access conditions and performance indicators, measures such as strengthened financial management and procurement systems and mechanism for handling grievances related to fraud and corruption, publicly advertising the bidding procedures, disclosing contract awards to the public and having a consultative process for the UPG; * Capacity building program to be managed at PMO-RALG and ULGA levels. Elements of this program will specifically focus on accountability and monitoring at the ULGA level to minimize the fraud and corruption risk; * DLI leveraged steps that central government will take to ensure, for example, that core fiduciary staff are in place at the ULGA level for each year of the Program; * Additional agreed measures e.g. in ULGA disbursement years one and two (FY2013/14 and FY2014/15), PPRA will conduct several value for money audits in at least two or three of the Program ULGAs, respectively, to determine performance in particular regards to management of contracts and quality of works. As Program ULGAs establish a record of execution of projects using Program funding from FY2015/16 onwards, PMO-RALG will commission PPRA to conduct value for money audits for all Program funds in all 18 Program ULGAs and the results will be incorporated into the annual assessment relating to DLI 3, constituting 50% of the weighting of the DLI. 32 116. Second, the Government of Tanzania has agreed to implement the Program in accordance with the Anti-Corruption Guidelines (ACG) applicable to PforR operations as follows: a. Debarment list of firms and individuals. Companies and individuals debarred by the Bank and the PPRA will be posted and updated every six months on the PMO-RALG website. This will include the list of temporary suspended firms and individuals, which the PMO-RALG will obtain from the Bank. In general, the risk of having a debarred firm or individual in the Program is low, since most of the tenders will be small and carried out through National Competitive Bidding (NCB) process. Nevertheless, PMO-RALG will share this information with all Program ULGAs, instructing them to comply by appending the debarment list to the annual Grant Award announcement which will be made public - and go to all Program ULGAs. This list will also be used by procurement advisors working as part of the PMO-RALG capacity building program to monitor ULGA compliance. ULGA compliance with the debarment list will also be monitored through the Program annual assessment. b. Sharing information on fraud and corruption allegations and investigations with the Bank. In line with the ACGs, GoT will share with the Bank relevant information on fraud and corruption allegations, investigations and actions taken as needed. At the local level, each ULGA has an Integrity Committee (IC) to which fraud and corruption complaints are reported. Fraud and corruption complaints related specifically to procurement may also be made to the ULGA Accounting Officer. The Bank has been informed that under Tanzania's legal system, the primary agency for investigating corruption is the Prevention and Combating of Corruption Bureau (PCCB). Where PCCB investigations reveal that a given case is primarily one of fraud rather than corruption, the PCCB refers it to the police for further investigation and prosecution. The PCCB has 98 district offices including one in all the 18 Program ULGAs. The PCCB has a national workforce of about 1700 staff of which approximately half are involved in investigation. In this context, fraud and corruption allegations made in respect of Program funds to the LGAs via either the ICs or the Accounting Officer will be referred by these entities to the district offices of the PCCB. The PCCB will keep a record of such allegations, or allegations from any other source regarding Program funding, and the actions taken on them. Once annually, it will provide a national compilation of all fraud and corruption allegations, investigations and prosecutions throughout the Program to PMO-RALG. PMO-RALG will include this in the annual Program Report that will be submitted to the Bank. c. Investigation of fraud and corruption allegations. GoT has advised that (i) the Prevention and Combating of Corruption Act permits the PCCB to cooperate and collaborate with the Bank in the fight against corruption, and permits the PCCB and the Bank to undertake joint investigations of sanctionable practices if and when the parties so agree; (ii) the Bank may also undertake its own investigations of F&C allegations under the Program. In this context, the investigation of F&C allegations under the Program will be handled through three possible modalities, depending on circumstances. * The PCCB will undertake its own independent corruption investigations arising from allegations reported to it as per sub-paragraph b above. * The PCCB and INT will undertake joint corruption investigations. The initiation, scope and operational procedures will be decided on a case-by-case basis by PCCB and INT. * INT will undertake its own F&C investigations. To this extend, the Program Participation Agreements to be entered into between PMO-RALG and ULGAs will ensure that PMO- RALG and the INT are able to acquire all records and documentation that they may reasonably request from Program ULGAs regarding the use of Program funding. 33 117. Third, and more broadly. PMO-RALG has developed a Local Government Anti-Corruption Strategy and Action Plan Phase III 2010 - 2015 which it will implement on an LGA-wide basis throughout the country. The plan builds on two phases corresponding to National Anti-Corruption Strategy and Action Plan (NASCAP) phases I and II and seeks to strengthen: i) registry management of information; ii) procurement procedures; iii) capacity building of human resources; iv) sensitization of public rights and duties; v) storage and safeguarding of data; vi) public service complaints handling. 118. It should also be noted here that the implementing entity PMO-RALG has been managing the ongoing LGSP since 2005. For the past seven years of implementing Bank projects, there have been no governance and anticorruption issues at the PMO-RALG level and the most recent Tanzania financial management regional in-depth supervision review commissioned by the World Bank has found no incidence of fraud. Program Audit 119. The Program audit will comprise the regular audits of the Program's 18 LGAs and PMO-RALG conducted by the Controller and Auditor General (CAG). This audit may be supplemented with a special audit regarding the flow and timing of Program funds to the beneficiary institutions. C. Environmental and Social Effects 120. An Environmental and Social Management System Assessment (ESSA) was conducted in order to examine the existing system for environmental and social management as well as how this system performs in practice. The ESSA also assessed gaps between the system and the environmental and social principles of OP/BP 9.00 Program-for-Results Financing. The ESSA is informed by a desk review of relevant laws, regulations and policies; field visits to ULGAs; coordination with Government counterparts and Development Partners; and an ongoing stakeholder consultation process. 121. Based on the scope and scale of projects to be financed under ULGSP, environmental and social impacts are expected to be minimal to moderate in scale, with most adverse impacts limited to the construction phase and being site-specific and temporary. All investments will undergo an environmental and social impact assessment process per Tanzanian environmental systems. These procedures are outlined in an Environmental and Social Management Manual (ESMM) which has been prepared by PMO-RALG with technical guidance from the Bank and inputs from stakeholder consultations including technical staff at the national and ULGA levels. The screening process in the manual will include criteria to exclude certain categories of projects (e.g. new landfills and new roads) as well as projects of a scale that would include significant negative impacts that are sensitive, diverse, or unprecedented on the environment and/or affected people, which are excluded from PforR financing. 122. In assessing the system for environmental and social impact assessment (ESIA), the overarching finding from the ESSA is that, while the legal and regulatory framework is largely adequate and impacts are generally managed, in practice most ULGAs are not systematically involved in the environmental and social impact process, nor are these issues mainstreamed into overall urban planning or the project cycle. This is due to several reasons. Many ULGAs have not typically implemented the types of projects that would require an ESIA, and human and financial resources are often lacking. As the ESIA process is typically handled at the central level, approval times can be lengthy leading to project delays, or at times projects move forward while waiting for the environmental certificates which are required by law. Because ULGAs have limited mandate and resources for regular project monitoring, and the central agency is under-staffed, monitoring environmental and social impacts during project implementation has been a particular issue. 34 123. For social management systems, the ESSA found significant gaps between Tanzanian systems and the PforR requirements for resettlement and compensation. This in part stems from the definition of eligibility for compensation, where Tanzanian law focuses on formal landholders as compared to a broader definition of project affected people in OP/BP 9.00 that includes those lacking legal rights to land. Additionally, Tanzanian law allows for works to proceed before compensation is paid, and full replacement cost of assets is not required. The ESMM will bridge these policy gaps, which has also been the case in similar projects in Tanzania that have used Resettlement Policy Frameworks, which both PMO-RALG and the Ministry of Lands, Housing and Human Settlement Development (which handles the valuation and compensation process) are familiar with. There are existing institutional roles and responsibilities for handling resettlement in Tanzania, yet the system at times faces delays in paying compensation such that projects may move forward before project affected people are compensated. 124. The ESSA findings suggest that in both PMO-RALG and ULGAs there is a strong willingness to strengthen environmental and social management systems as described in the ESSA and PAD Annex 6. The measures to do so that have been developed under ULGSP are: (i) defining an effective methodology for improved ESM at the ULGA level; (ii) technical guidance and implementation capacity, which outlines (a) the ESM approach and provides operational guidance for complying with relevant laws and regulations for the works included under the UPG, and (b) bridges gaps between Tanzanian systems and OP/BP 9.00, and (iii) addressing resource constraints, which includes measures to overcome constraints with respect to human and budgetary resources, through both the Program incentive structure (e.g., Performance Indicators) as well as the comprehensive environment and social capacity building program. 125. The measures outlined under each of these areas are addressed and integrated into the overall Program through inputs in the Program design, inputs to the Program Action Plan, and inputs to the Program Implementation Support Plan. D. Integrated Risk Assessment Summary 1. Integrated Risk Assessment Summary Risk Rating Technical Substantial Fiduciary High Environmental and Social Moderate Disbursement Linked Indicator Substantial Overall Risk Substantial 35 2. Risk Rating Explanation 126. In view of the low level of stakeholder risk, moderate level of country, environmental and social systems risks, and the substantial level of technical and fiduciary risks, the overall risk rating of the operation is substantial. The overarching measures to mitigate these risks will be firstly the series of institutional enhancement activities which will be financed by the Program, and secondly the incentive mechanism under the UPG. E. Program Action Plan 127. Based on the technical, fiduciary and environmental and social systems assessments, and drawing on the lessons from LGDG implementation, a time-bound Program Action Plan has been developed with the Government to address issues and risks. The following table summarizes these core issues. A number of these issues/risks are dealt with at the Program design and DLI level, while others are legal covenants and agreements: Summary of the Program Action Plan Cross Cutting/ General Issue/risk Action/Completion Time Frame Responsible Party Instrument description Adequate LGAs with core staffing levels33, Appointment of PMO-RALG DLI4 staffing at including in procurement, financial staff before ULGAs management and social and effectiveness, environmental systems appointed and staff in place in place according to national LGA throughout staffing norms Program Sufficient PMO-RALG maintains Program unit Throughout PMO-RALG Covenant capacity in as described in the implementation Program PMO-RALG and institutional arrangements Program Unit to manage UPG Effective PMO-RALG develops annual Annual PMO-RALG Covenant execution of capacity building plan (including all capacity fiduciary, environmental and social building management requirements) and activities submits to Bank at the latest on April 30 of each year Overall PMO-RALG will produce an annual Annual PMORALG Covenant Program Program Report and convene an progress annual Program stakeholder review meeting, which will be attended by PMORALG, ULGAs, World Bank and other development partners. Fiduciary Quarterly Internal audit of funds Quarterly ULGA DLI1 Audit conducted by ULGA internal auditors Record Establish Records Keeping During project PMO-RALG and DLI 2 and 3 33 ULGA core staffing comprises council director, council treasurer, council internal auditor, council engineer, council community development officer (in charge of environmental and social systems management), council supplies officer, council assistant supplies officer, council town planning officer, council planner and council human resources officer. Qualifications of core staff are specified in GoT Scheme of Service. 36 keeping Management System implementation ULGAs PMO-RALG Sufficient budget is provided for all Annual PMO-RALG and Covenant has sufficient PMO-RALG Program activities Ministry of Finance budgetary related to annual assessment, resources to capacity building, impact evaluation undertake and value for money audits; and Program budgeted amounts are released on a activities timely basis to PMO-RALG throughout the year. Open bidding procedures to be Annual ULGAs DLI 2 and 3 publicly advertised (procurement) Contract awards disclosed to the Annual ULGAs DLI 2 and 3 public (procurement) Consultative process for Performance Annual ULGAs DLI 2 and 3 Grant Utilization in place. Annual financial and physical Annual ULGAs DLI 2 and 3 progress report presented to and discussed by the Council Annual financial and physical Annual ULGAs DLI 2 and 3 Transparency progress report disseminated to the general public via suitable (newspapers, local radio stations, web pages etc.) commonly available media. Information on use of own source Annual ULGAs DLI 2 and 3 revenue publicly disclosed Quarterly Financial progress reports Annual ULGAs DLI 2 and 3 prepared timely and available and Progress reports presented and discussed in CMT & Full Council Technical Issue/risk Action Time Frame Responsible Party Instrument description Quality of Annual value for money audits will Starting in PMO-RALG will Covenant infrastructure be phased in to all Program ULGAs, Program year 3. commission PPRA to which will be and incorporated into the annual carry out the audits. built by assessment. By FY2015/16, ULGAs using all ULGAs will UPG fSnds be covered annually and the VFM audit will be incorporated into the annual assessment. Independent The annual assessment is procured. (i) For PMO-RALG Covenant annual FY2013/14: By assessment February 28, undertaken on 2013 (ii) For a timely basis. following years by July 31 each year 37 Program Program will be entered into the March of every PMO-RALG and Covenant entered into Government budget as a distinct line year Ministry of Finance national item budget Impact Evaluation of impact of Program will Starts FY13/14 PMO-RALG Covenant evaluation be undertaken and ends in the final Program year Environmental, Social and Resettlement Environmental, Environmental and Social Before PMO-RALG Covenant Social and Management Manual developed that effectiveness Resettlement is consistent with Tanzanian systems technical and bridges gaps between those guidance systems and OP/BP 9.00 38 Annexes Annex 1: Detailed Program Description 1. The Development objective of ULGSP (proposed Program) is to improve institutional performance for urban service delivery in Program urban local government authorities. The proposed new urban focused window, to be called the Urban Performance Grant (UPG) will be added to the current LGDG windows, with the goal to improve institutional performance of Tanzania's rapidly growing secondary cities. 2. The UPG willfully utilize and enhance the key elements of the LGDG system. Namely, similar to current windows, it will determine LGA allocation using a population based formula and it will disburse its funds as a result of LGA performance assessment. In doing so, UPG will leverage institutional strengthening and support local capacity building. UPG funds will be primarily used by ULGAs to meet their infrastructure needs. The UPG window will have an associated set of activities which will include capacity building needed for ULGAs to be able to respond to the performance incentive mechanism, as well as the independent annual performance assessment which will determine the disbursements for each ULGA in a year. These implementation activities will be carried out by PMO- RALG, which is responsible for decentralization and local government affairs in mainland Tanzania. UPG and the associated implementation activities form the proposed Program (the Urban Local Government Strengthening Program or ULGSP). The Program is expected to run from 2012 until December, 2018. 3. The UPG funds will complement the larger LGDG financing pool, which disbursed US$ 106.5 million in FY2010/11 and is expected to continue to increase as per historical trend explained above. While the existing LGDG flows serve all 133 local governments in the country, the UPG will be introduced initially to serve the selected 18 ULGAs. It is expected that the grant will be mainstreamed into the larger fiscal decentralization architecture over time. This would be consistent with the established precedent in Tanzania where a series of development grants funded by development partners were initially introduced to serve a select group of local governments and over time were rolled out nationwide and receive an increasing proportion of their financing from the Government. 4. The following three overall results are expected from the Program:: a. 18 ULGAs, with approximately 25% of the country's urban population, with enhanced institutional structures and better local governance defined in terms of improved urban planning systems, increased own source generation and collection (with a particular focus on property taxation), enhanced fiduciary systems management, improved service delivery systems and enhanced accountability and oversight mechanisms; b. A set of urban municipal infrastructure investments which will be financed by the Program's incentive element; and c. Enhanced central government mechanisms that can support decentralization including on- time disbursement from the central government to ULGAs. 5. Program scope is as follows: a. Program duration: 2012 through 2018; b. Program envelope: US$ 255 million; c. Concentration on areas where ULGAs face challenges: 1. Urban planning systems; 2. Own source revenues from property taxes; 3. Efficiency in fiduciary systems (financial management and procurement) management; 4. Infrastructure implementation and operations & maintenance (O&M) systems; and 5. Accountability and oversight mechanisms. 39 d. (Initial) Geographic scope: 18 ULGAs: Morogoro, Tabora, Moshi, Sumbawanga, Shinyanga, Songea, Singida, Musoma, Iringa, Njombe, Bukoba, Kibaha, Babati, Geita, Korogwe, Mpanda, Lindi, Bariadi; e. Activities to be supported: Urban infrastructure investments and central government activities for supporting fiscal decentralization such as capacity enhancement, technical assistance and grant management. 6. Within these parameters, the proposed Program will strengthen the system of 18 ULGAs through the UPG under PforR modality. UPG will achieve this by leveraging the municipal infrastructure financing it offers. Namely, ULGAs will receive financing from the grant mechanism based on their performance against performance indicators. Depending on the score each ULGA receives as a result of an annual performance assessment which will measure their performance against the performance indicators, they will receive UPG financing. This financing will be used only for (i) municipal infrastructure investments (investment menu provided in table below) and (ii) capacity enhancement and technical assistance activities needed to respond to the incentives of UPG. UPG funds will be made available to ULGAs on the basis of their performance in the five local government management areas highlighted above (Improved Urban Planning System, Efficient Fiduciary Systems, Improved Infrastructure, Implementation and Operation & Maintenance (O&M) and Strengthened Accountability and Oversight Systems). Each year, the PMO-RALG will commission an independent assessment which will measure each ULGA's performance against a set of minimum conditions and a set of performance indicators (Annex 3). The score each ULGA receives from the annual assessment will determine the disbursement of the UPG. Disbursement from the central government to local governments, whose amount will be determined by the annual assessment, will be made twice a year (bi-annually). 7. The annual allocation for each full grant cycle will range between US$35.5 million for the Program start year (FY2014/15) and US$52.2 million for the following four years. The performance indicators in FY2013/14 will not apply and the US$9 million will be allocated to ULGAs subject to a minimum conditions assessment which will comprise most of the current LGDG minimum access criteria along with a number of additional conditions pertaining to environmental and social management, financial management and procurement34. ULGAs which fulfill these minimum conditions will receive a grant, part of which they can use to build their capacity to respond to the full performance assessment which will take place for the grant cycle in FY2014/15. From FY2014/15 onwards, a full performance assessment of both minimum access conditions and performance indicators will be conducted each year. Only those ULGAs which fully meet the minimum access conditions will be eligible to receive UPG funds. Those ULGAs which do not meet all of the minimum access conditions will not be able to access funds, but will receive capacity building support from PMO-RALG to support accessing the funds in the subsequent years. 8. UPG funding will comprise a progressively increasing per capita amount, designed to go up in line with the increasing capacity at ULGAs. UPG will start at US$ 3 per capita in FY2013/14, with disbursement against meeting the Program minimum access conditions (DLI 1), will go up to US$ 12 in FY2014/15 with disbursement against meeting the Program minimum access conditions (DLI 1) and performance against the institutional performance indicators (DLI 2), and reach US$ 18 in FY2015/16 and onwards, with disbursement against meeting the Program minimum access conditions (DLI 1) and performance against the institutional (DLI 2) and infrastructure (DLI 3) related performance indicators. Allocation envelope for each ULGA will be a function of the population of each council and the score attained at the annual performance assessment. Based on this, the table below provides an overview of likely annual and cumulative UPG for each ULGA, assuming the targets for DLIs 1, 2 and 3 are met 34 Annual assessment in FY2013/14 will also conduct a baseline survey of performance indicators. These values will be used only for informational purposes and will not affect disbursement, which will be based solely on minimum access conditions. 40 exactly as set in the DLI matrix. The exact annual disbursement per ULGA will be determined according to actual ULGA performance against DLI targets. Projected UPG allocations to 18 Urban Local Governments Population UPG Approximate disbursement Maximum possible @ US$ 18 per capita, disbursement over Program FY2015/16 d enov ULGA 2002 2012 (per year/ USD Million) Perio Census Estimate35 Assuming actualMillion) Assuming actual performance performance against DLIs 1, against DLls 1,2,3 meets 2, 3 meets target for target throughout Program FY2015/16 1 Tabora MC 188,005 420,000 7.5 28.9 2 Morogoro MC 227,921 327,000 5.8 22.5 3 Shinyanga MC 134,523 222,000 4 15.3 4 Sumbawanga 146,842 222,000 4 15.3 MC 5 Moshi MC 143,799 217,000 3.9 14.9 6 Musoma MC 107,855 205,000 3.7 14.1 7 Songea MC 130,860 189,000 3.4 13 8 Singida MC 114,853 184,000 3.3 12.6 9 Iringa MC 106,371 165,000 2.9 11.3 10 Bukoba MC 80,868 164,000 2.9 11.3 11 Kibaha TC 77,831 112,000 2 7.7 12 Geita TC 72,482 105,000 1.8 7.2 13 Babati TC 64,652 93,000 1.7 6.4 14 Korogwe TC 53,986 78,000 1.4 5.4 15 Mpanda TC 47,272 68,000 1.2 4.7 16 Lindi MC 41,075 72,000 1.3 4.9 17 Njombe TC 34,630 49,000 0.8 3.3 18 Bariadi TC 15,462 22,000 0.4 1.6 Total 1,789,287 2,914,000 52.5 201 9. The grant ULGAs will receive as a result of this assessment is intended to be used for capital investments from the menu detailed in the box below, at levels that can be absorbed and utilized effectively by each participating ULG. 35 2012 Census results will be included as soon as they are available. 41 Urban Performance Grant Investment Menu Sector Eligible Expenditures Council roads and * Road rehabilitation/upgrading: Grading, graveling, brick paving, tarmac, upgrading or related rehabilitation for which the ULGA is responsible (maximum 15 km per year) infrastructure * Road side open storm water drains/ stand-alone storm water drains for flood alleviation or erosion control * Street lights * Culverts * Small Bridges: 6m span or less * Minibus stands and bus stops (e.g. minibus parking areas for approximately 25 vehicles) * Taxi stands * Truck stands * Public car parking * Other road-related infrastructure (street furniture, vending platforms, signage) Markets and Trade * Slaughterhouse/abattoir (maximum capacity of 100 head of cattle per day) * Commercial market infrastructure Public Space * Public green space * Sports fields and facilities Solid waste * Dumpsite rehabilitation management * Community waste collection points * Equipment Project preparation * Expenditures related to preparation of infrastructure projects (design, supervision etc) and supervision Equipment * Equipment related to enhancement of relevant capacities for urban planning and OSR management, etc. Capacity building36 * Urban planning * Revenue mobilization (up to a maximum . Financial management of 5% of the annual . Procurement UPG disbursement * Accountability/oversight for each ULGA) * Infrastructure implementation * Areas of weaknesses identified during the annual UPG assessments Human resources management The following exclusionary criteria apply to works financed with the UPG, which will be included in the manual's screening criteria and has been agreed with PMO-RALG - these parameters will be communicated to participating ULGAs: * Road works outside of existing rights-of-way; * Works involving relocation of more than 20 households; * New landfills; * Activities that would significantly convert natural habitats or significantly alter potentially important biodiversity and/or cultural resource areas. 10. The investment menu above explicitly excludes possible high-risk activities. The infrastructure investments which will be supported by the Program will remain at the municipal level and the procedures for preparing projects will include criteria in the Environmental and Social Management Manual to screen for significant negative impacts that are sensitive, diverse, or unprecedented on the environment and/or affected people. Projects with these types of impacts are excluded from financing with the UPG. Contract values will typically remain low in line with the nature of municipal 36hVestments under capacity building element of the UPG menu are bound by the same limitations as the LGDG Core Capacity Building Grant with restrictions including foreign study tours or long-term education. 42 infrastructure activities in secondary urban areas in Sub-Saharan Africa. In-depth fiduciary, social and environmental capacity assessments have been conducted for the ULGAs which will carry out the activities. Risks and mitigation measures have been identified and agreed upon with the Government and ULGAs. It is confirmed that risk levels are manageable. Capacity Building under the Program 11. The incentive structure established by the UPG provides the primary mechanism through which the results of the Program will be leveraged, and the related DLIs; 1, 2 and 3 will account for the majority of disbursements under the Program (roughly 79%). In order for the UPG to function effectively, and to achieve its intended results, a range of intrinsically related activities will also form part of the overall Program. These will also be supported and leveraged through DLIs. 12. Technical Assistance in PMORALG. PMO-RALG will procure the services of a small capacity building team (initially to consist of two specialists, one of which will be accessed internationally) to manage and oversee the overall capacity building program. This team will also provide support to ULGAs in the development and execution of their own capacity building plans. 13. Technical Assistance to ULGAs. International experience - and particularly the experience of the World Bank in local government capacity building over the past decade - has shown that formal "classroom based" instruction needs to be combined with other more direct, in-depth and issue-specific mentoring, and "just-in-time" training support in order for capacity to be built. Building on this experience, the basic approach of the ULGSP to capacity building will have two interrelated tracks: i. ULGAs will access the more formal, classroom-style training from local institutions in line with their local needs using UPG resources. Training and support of this type will be procured by ULGAs themselves on the basis of annual capacity-building plans which will be formulated on the same timing cycle as their physical plans. Capacity building advisors attached to PMO-RALG will provide assistance in the formulation of these plans. ii. PMO-RALG will provide an intensive and ongoing program of capacity-building support to ULGAs managed and coordinated from the center. Training of this type will be provided through a number of PMO-RALG procured and managed mentoring and issue-specific response teams which will be deployed in the field to visit and spend ongoing time with the target ULGAs. Each team will comprise around six individuals and will cover four or five ULGAs, giving a total of four teams. Given that the capacity-building needs of different ULGAs vary, and that this will shift over time as initial needs are satisfied and new needs emerge, this resource will be provided, within a number of broad thematic areas, on a highly flexible basis. The chief features of this support will be as follows: * Teams will work with the 18 ULGAs to ensure that the annual action plans on the use of UPG funds will be developed in a comprehensive and realistic manner, with clear, time-bound targets for achievement. Teams will also support that the action plans are clearly linked with the annual procurement plans and the bills of quantities in the contracts for civil works. The existence and execution of the annual capacity building plans will be verified through the annual performance assessment. * The teams will provide support - hence constitute specialists - in the key areas of weakness identified through the assessments undertaken for Program preparation, i.e. financial management, procurement, social and environmental risk mitigation, planning, contract management and execution, monitoring and reporting. In addition to the direct on-the-job training, capacity building will involve the improvement of ULGA PFM and own source revenue management systems. 43 14. These activities will be secured through DLI 5. Given the flexible nature of the training they will provide (in both substance and delivery modality), it is not possible to quantify ex ante the outputs of these activities. The DLI will thus encompass two metrics: (a) the production of a capacity plan by PMO- RALG outlining the anticipated capacity-building activities to be undertaken for the forthcoming year; (b) the successful execution of the capacity-building plan of the previous year. Both metrics will be verified by the Bank's Program supervision team. 15. Annual Performance Assessments. The second major centrally executed activity to support the UPG as part of the overall Program is the annual assessment of the ULGAs which will be contracted in from a reputable private sector firm by PMO-RALG in order to ascertain the level of annual performance (hence UPG award amount) of the target ULGAs. The basis of this assessment will be the Program Performance Indicators, which can be found in Annex 3. Verification of the proper and timely execution of the annual assessment will be done as an intrinsic part of the verification of DLIs 1, 2 and 3. The robustness of the annual assessment will also be checked through an annual sample audit of the annual assessment which will be undertaken as part of Bank program supervision. Capacity bulIding summary and estimated cost Estimated Purpose Composition annuacs annual cost Technical 1. Help PMO-RALG manage and oversee . Senior capacity building US$0.5 million assistance in the overall capacity building/ technical expert (international) PMO- assistance program. * Senior capacity building expert RALG 2. Support the development and execution (local) of ULGA capacity building plans for activities to be procured locally. Technical Support ULGA technical staff in key areas Total of four teams, each US$2 million assistance at of weakness identified by Program composed of: (US$500,000 ULGAs assessments (financial management, * FM specialist each team) procurement, social and environmental risk * Procurement specialist mitigation, urban planning, contract * Social and environmental risk management and execution, monitoring and management specialist reporting) o Urban planner * Municipal engineer (contract management and execution) * Monitoring and reporting specialist Annual Conduct the independent assessment of US$0.6 million performance ULGAs against the minimum access assessment conditions and performance indicators 44 UPG Cycle37 16. The performance grant will be aligned with the local planning and budgeting process and be managed in three phases: a. First Phase38: The phase-in period (Minimum Conditions) will be the establishment of the grant on the basis of compliance with minimum access conditions, and will decide the allocations in FY 2013/14, with expected performance assessments in March/April 2013. During this period, the grant system will be established in the following way: A minimum conditions assessment will be conducted to measure the ULGAs' compliance with the enhanced access criteria for the Program. These criteria build on the minimum conditions of the ongoing Government program and have been enhanced to include social and environmental systems management. Namely, ULGAs will agree to carry out the processes and procedures of a technical manual for Environmental and Social Management tailored to the Program activities. Discussed in detail in the Program's Environmental and Social Systems Assessment (ESSA), the manual is consistent with Tanzanian systems and bridges the gaps between those systems and OP 9.00. Performance Measures will also be assessed at this annual assessment, but will only be applied to establish a baseline. Based on the results of this basic MC assessment, ULGAs will receive their allocations for the first FY 2013/14, which will be disbursed bi-annually. The timeline for the grant establishment phase is expected to be as follows: FY 2013/14: Allocations * December 2012: Indicative planning figures (IFPs) based on expected full ULGA compliance with the MCs; * January 2013: Local government budgeting process starts using the IPFs; * Minimum requirement assessment, including the CAG audit results (upon completion of contracts with company, expected in March - April 2013); * April 2013: Initial assessment completed, final disbursement amounts announced; * July 2013: ULGAs receive 50% of the first FY's disbursement (first half of FY 2013/14) * January 2014: ULGAs receive 50% of the first FY's disbursement (second half of FY 2013/14) b. Second Phase: The MC/PM assessment, scaled down with performance measures, which are not yet relevant for this first PM assessment39: Based on compliance with all minimum access conditions and the performance indicators in the assessment, the disbursements will be determined by assessment results. The second period is expected to process as follows: FY 2014/15: Allocations * September 2013: First minimum conditions/performance measure assessment started * December 2013: Assessment complete and allocations announced40 3 The full assessment and disbursement cycle is made to ensure full alignment with the national and local government budget cycles from the second year of disbursements. This first assessment of the minimum conditions will also make a baseline assessment of the ULGAs' performance against the performance indicators (not to be used for allocation purposes), and this will be applied to track the performance development from the onset of the Program as well as in the final calibration of the scoring in the assessment manual to be applied in the first assessment of the minimum conditions and performance indicators, see details on second phase. 38 The assessments in this year will be made later than in the subsequent years due to Program start up. 39 Some of the performance measures, e.g. disbursements and infrastructure achievements will only be applicable a year after the first disbursement of the UPG. 40 Will apply to FY 2014/15 allocations in alignment with local and national government budget cycles 45 * January 2014: Local government budgeting process starts, using the results from the assessments * March 2014: CAG ULGA audit results pertaining to FY2012/13 announced, performance assessment results verified against clean audit minimum condition * July 2014: 50% of annual allocation disbursed41 * January 2015: 50% of annual allocation disbursed42 c. Third Phase: The full MC/PM assessment period with the full number of performance measures, based on compliance with all minimum access conditions and performance indicators in the assessment, will begin with the assessment of MCs and PMs and the subsequent disbursements, which will be determined by full assessment results. The third period is expected to be as follows: FY 2015/16 Allocations: * September 2014: First full assessment started43 * December 2014: Assessment complete * January 2015: Local government budget process starts using the results * March 2015: CAG ULGA audit results pertaining to FY2013/14 announced, performance assessment results verified against clean audit minimum condition * July 2015: 50 % of the allocations disbursed44 * January 2016: 50% of annual allocation disbursed45 FY 2016/17 * September 2015: Second full assessment started * December 2015: Assessment complete * January 2016: Local government budget process starts using the results * March 2016: CAG ULGA audit results pertaining to FY2014/15 announced, performance assessment results verified against clean audit minimum condition * July 2016: 50% of annual allocation disbursed * January 2017: 50 % of the annual allocation disbursed FY 2017/18 * September 2016: Third full assessment started * December 2016: Assessment complete * January 2017: Local government budget process starts using the results * July 2017: 50% of annual allocation disbursed * March 2014: CAG ULGA audit results pertaining to FY2015/16 announced, performance assessment results verified against clean audit minimum condition * January 2018: 50% of annual allocation disbursed * December 2018: End of Program 17. The figure below shows a regular assessment process, whereby the results are fitting into the ULGA annual planning and budgeting process46. 41 As determined by the Sept-Dec 2013 assessment 42 As determined by the Sept-Dec 2013 assessment 43 2015/16 on (once Program ULGAs have been able to establish a record of executing projects using Program funding) value- for-money audits of Program infrastructure in all 18 ULGAs will be commissioned by PMO-RALG from the PPRA, and the results of these audits will count 50% of the weighting of DLI 3. 4 As determined by the September - December 2014 assessment 45 As determined by the Sept/December 2014 assessments. 46 Regular Assessment Cycle - September 2013 to December 2018 September Annual Assessment Started January December 50% of annual Annual disbursement Assessment made to ULGAs Completed 50% of annual disbursement made to ULGAs 18. The expenditure framework of the PforR Program will be a total of US$ 255 million. US$ 201 million will constitute the UPG and will go directly to Program ULGAs for investments specified under the investment menu (see above). US$ 44 million will support and leverage PMO-RALG activities and results directly linked to the execution of the UPG. US$10 million will support the overall Government program strengthening, based on UPG experience. 19. Under a scenario where all 18 ULGAs perform on the annual targets, total UPG disbursement would be US$ 9 m illion for FY2013/14, US$ 35.5 m illion for FY2014/15 an d US$52.2m for FY2015/16 and following years. The initial disbursement of US$9 million for FY2013/14 will be based on the performance of ULGAs against the Program mimimum access conditions, as assessed by DLI 1. 20. Once effective, the Program will be entered into the Government budget as a distinct line item, and the details of the Program's funds use will be captured in the national budget framework. Tanzania has a well developed budget classification where local governments classify expenditures in terms of capital expenditure, operating costs, goods and services. The current financial management reporting system as explained in the Medium Term Expenditure Framework (MTEF) and the Local Government Development Grant (LGDG) manual currently used will be used for the Program. ULGSP Funds Flow 21. UPG funds (DLIs 1, 2 and 3) will flow from the central to the local governments and will be disbursed on a bi-annual basis. As indicated in the following steps, the Government's program (LGDG) 46 As mentioned above, the assessments of the MCs in the first year will start later due to the start up of the Program. In case the audit reports are not ready at point of time for the assessments, the results of these will be incorporated in the final assessment reports (after verification) and informed to the ULGAs. 47 currently uses flow mechanisms to disburse funds to the local governments, and the Program funds will be channeled through these existing mechanisms that are well established within the Tanzanian budget system. UPG funds for DLIs 4 and 5 relate to strengthened ULGA public sector management capacity and DLI 6 relates to the strengthening of LGDG program. PMO-RALG will take the necessary actions towards fulfilling these indicators. Funds released from the Bank to GoT upon satisfaction of DLIs 4, 5 and 6 will be transferred to PMO-RALG within 30 days of the Bank to GoT transfer. 22. The modality for financing the ULGSP through the Exchequer Disbursement System will be via a direct transfer to the Program account. The amount disbursed annually will be determined by aggregate scores achieved by ULGAs on Annual Assessment. Steps to be followed are as follows: i. For DLIs 1, 2 and 3 PS PMO-RALG requests, through PS MOF, the disbursement of funds from WB based on the Annual Performance Assessment score/results. For DLIs 4, 5 and 6 PS PMO- RALG requests, through PS MOF, the disbursement of funds from WB based on the verification of results associated with these DLIs. ii. WB transfers funds to Bank of Tanzania - Revenue Development A/C managed by MOF.WB notifies in writing the PS MOF and PS PMO-RALG the transfer of funds to BOT. iii. MoF notifies PS-PMO-RALG of the availability of program funds in Tanzanian shillings iv. PS PMO-RALG requests funds to MOF by submitting TFN 368 to MOF - budget department. v. Budget department confirms the availability of funds with ACGEN's office. vi. PS MOF through budget department issues Treasury Release Warrant (TRW) vii. BOT transfers funds from Revenue Development A/C to Exchequer Development A/C held at BOT after getting instruction from ACGEN. viii. Funds are then transferred to Expenditure A/C held at BOT, which is managed by Central Payment Office (CPO) at MOF. ix. ACGEN instructs BOT (copying PS PMO-RALG) to transfer funds to a commercial bank. x. ACGEN instructs the specified commercial bank in writing to transfer funds to participating ULGAs development account. For the case of PMO-RALG (DLIs 4, 5 and 6), funds will be transferred to PMO-RALG program account. 23. The schematic arrangements through which this fund flow arrangement will take place is shown below: 48 ULGSP funds flow WORLD BANK IDA CREDIT(USD) BANK OF TANZANIA REVENUE DEVELOPMENT ACCOUNT (TZS) EXCHEQUER DEVELOPMENT ACCOUNT EXPENDITURE ACCOUNT COMMERCIAL BANK COUNCILS' DEVELOPMENTPRGAACON ACCOUNT 49 Annex 2: Results Framework Program Development Objective: To improve institutional performance for urban service delivery in Program urban local government authorities Indicator UOM Baseline Target Values Frequen Data Source/ Responsibility Definitions/ cy Methodology for Data Comments FY2012 FY2013/ FY2014/1 FY2015/ FY2016/1 FY2017/1 Collection /13 14 5 16 7 8 PDO Level Results Indicators 1. Annual performance score # 2013:0 The year 3 of participating ULGAs as 2 18 target value of assessed by the 60 is an independent annual (ULGAs 10 20 30 estimate. The performance assessment 2014: actual score in (Percent Annual the following Number of n/a 0 meet the 60 increase increase increase Annual Performance PMRALG years of the ULGAs Minimurm 60 vererthee over the Anul Prom ceMO LG yasfth ULGAsProgram over overthe Assessment Program will be year3 year3 year 3 based on the Access value) value) value) actual average Condition score attained 2015-2018: s) by ULGAs in Percent this year. 2. Infrastructure built or # The nature of rehabilitated using UPG 3 the investments funds, including47: to be made by * Council roads and ULGAs are related infrastructure ULGAs Council *elate ru tr Measured Measured Measured Measured Annua DpP n demand driven SSlaughterhouse/abattoir n/a 0 0 annually annually annually annually rep and will be " Commercial market rpr infrastructure determined * Dumpsite rehabilitation through the * Community waste annual planning collection points process. As such, they are 47 Nature and quantity of infrastructure to be delivered will be determined through the annual ULGA local participatory planning process. It is thus not possible to predict likely targets for infrastructure delivery. This indicator will thus be measured annually based on actual delivery. 50 inherently unpredictable. It is thus not possible to include baseline or target values for this indicator. Intermediate Results Indicators 3. Qualified core staff are in # Annual place in Program ULGAs 4 0 n/a 18 18 18 18 18 Annual Performance PMORALG Assessment 4. Annual PMO-RALG #For year 2: The capacity building activities 5 target will be for Program ULGAs for the plan to executed be formulated Capacity for year 3. For building Annual years after year % n/a 0 activity 60% 70% 80% 90% Annual Performance PMORALG 2: plan Assessment Percentage of adopted implemented activities compared to planned activities 5. ULGAs with computerized billing and invoice delivery system in place 51 6. ULGAs with an actual Annual expenditure on O&M N/A 0 0 10 13 16 18 Annual Performance PMORALG higher than 70% compared Assessment with annual O&M budget 7. ULGAs with no Annual PMORALG adverse/disclaimed audit 18 18 18 18 18 18 18 Annual Performance report for audited accounts Assessment 8. ULGAs with clean audit Annual PMORALG report for audited accounts 12 15 16 17 18 18 18 Annual Performance Assessment 9. Average score of ULGAs Annual PMORALG Score is based on the PPRA assessment on the PPRA % 64 67 70 74 78 82 86 Annual Performance for targeted ULGAs Assessment standardized assessment tool 10. Direct Program Direct beneficiaries (number), of ULGAs Council beneficiaries of which female 3,545,32 actual (percentage)48 0 0 0 2,626,485 2,913,648 3,219,581 Annual Dvlp. Plan PMORALG . (pretg)7 investments report financed by the UPG 48 Nature and quantity of infrastructure to be delivered will be determined through the annual ULGA local participatory planning process. It is thus not possible to predict likely targets for infrastructure delivery. This indicator will thus be measured annually based on actual delivery. 52 Annex 3: Disbursement Linked Indicators, Arrangements and Verification Protocols Disbursement-Linked Indicator Matrix Indicative timeline fr DLI achievement Total As % of Financing Total DLI Allocated to Financing li FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 FYI 7/18 Alloatedto inaning Baseline DLI Amount DLIs 1, 2 and 3: Strengthened institutional performance and infrastructure delivery by ULGAs DLI 1 ULGAs have strengthened institutional performance and N/A N/A 18ULGAs 18ULGAs 18ULGAs 18ULGAs 18ULGAs achieve Program minimum conditions in the annual assessment Allocated amount: 45 17.65% 0 9 9 9 9 9 DLI 2 ULGAs have strengthened institutional performance4g as N/A N/A N/A 60 70 80 90 scored in the annual performance assessment Allocated amount: 106 41.57% 0 0 26.550 26.5 26.5 26.5 DLI 3 Local infrastructure targets as set N/A N/A N/A N/A 70 80 90 out in the annual action plans are met by ULGAs utilizing the Program funds 49 In the areas of urban planning, revenue enhancement, fiduciary systems, implementation of infrastructure, operations and maintenance and oversight systems including environmental and social systems management. 50 Rising targets against constant allocation amounts are deliberately established to leverage increasing performance for each Program year. 53 Indicative imeline for DLI achievement Total As % of Financing Total DLI Allocated to Financing Baseline FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 FYI 7/18 DLI Amount Allocated amount: 50 19.61% 0 0 0 16.751 16.7 16.7 DLIs 4 and 5: Strengthened ULGA public sector management and capacity DLI 4 Number of ULGAs with all core 0 N/A 100% 100% 100% 100% 100% staff in place52 Allocated amount: 14 5.49% 0 2.8 2.8 2.8 2.8 2.8 DLI 5 Capacity Completion of annual PMO-RALG N/A N/A building 50% 60% 70% 80% capacity building activities for activity plan Program ULGAs adopted Allocated amount: 30 11.76% 0 6 6 6 6 6 DLI 6: Overall LGDG Strengthening DLI 6 PMO-RALG has adopted an enhanced LGDG assessment N/A N/A N/A N/A 100% N/A N/A system derived from lessons learned from the annual Program assessments Allocated amount: 10 3.92% 0 0 0 10 0 0 Total Financing Allocated: 255 100% 0 17.7 44.3 71 61 61 51 Same as in DLI 2, rising targets against constant allocation amounts are deliberately established to leverage increasing performance for each Program year. 52 PMORALG is responsible for providing core staffing. Core staffing composition is explained in detail in the Verification Protocol and Bank Disbursement tables. 54 DLI Verification Protocol Table # DLI Definition/ Scalability of Protocol to evaluate achievement of the DLI and data/result verification Description of achievement Disbursements Data Verification Procedure (Yes/No) source/agency Entity 1 ULGAs have The indicator will be satisfied when: Yes For (i) Private PMORALG PMORALG hires a reputable private sector consulting/audit firm strengthened firm will carry to carry out the independent annual performance assessment institutional (i) The annual performance out the annual (APA) to measure the performance of each ULGA against the performance assessment, using only the assessment Program's minimum conditions.APA determines whether all and achieve minimum conditions, has been MCs have been met, including the MC condition that the Program completed and the allocations to performance of a ULGA should not decrease by more than mimmum Program ULGAs have been For (ii) MoF maximum 20 points compared to the previous year's assessment. conditions in determined on this basis; The firm will calculate the allocation to each ULGA as per the the annual formula in the Bank Disbursement Table, and provide the assessment (ii) The Government has disbursed aggregate disbursement amount. the previous UPG tranche to all 18 ULGAs. PMORALG will verify that: (i) The assessment results are accurate (for the Program duration); (ii) The disbursement from the central government to ULGAs of UPG funds in the last 6-month period has been done on time, based on verifying the date on the Exchequer Issue Notification (EIN) which is the final transfer step from the MoF to ULGAs as explained in detail in Annex 1 (starting with the second disbursement of UPG for Program duration) As part of implementation support, Bank will: (i) review the assessment results and the allocation amounts; (ii) check the EIN to ensure the timely disbursement of UPG funds from GOT to ULGAs. 2 ULGAs have The indicator will be satisfied when Yes Private firm PMORALG As in DLI 1, PMORALG hires a reputable private sector strengthened the annual performance assessment will carry out consulting/audit firm to carry out the independent annual institutional has been completed (based on the the annual performance assessment (APA) to measure the performance of performance53 minimum conditions and assessment each ULGA against the Program's performance indicators. as scored in performance indicators) and the the annual allocation based on the score of all APA assigns a score to each ULGA. The private firm will performance ULGAs has been determined. calculate the allocation to each ULGA as per the formula in the assessment I I I I I Bank Disbursement Table, and provide the aggregate 53 In the areas of urban planning, revenue enhancement, fiduciary systems, implementation of infrastructure, operations and maintenance and oversight systems including environmental and social systems management. 55 # DLI Definition/ Scalability of Protocol to evaluate achievement of the DLI and data/result verification Description of achievement Disbursements Data Verification Procedure (Yes/No) source/agency Entity disbursement amount. PMORALG will verify that: (i) The assessment results are accurate (for the Program duration); (ii) The disbursement from the central government to ULGAs of UPG funds in the last 6-month period has been done on time, based on verifying the date on the Exchequer Issue Notification (EIN) which is the final transfer step from the MoF to ULGAs as explained in detail in Annex 1 (starting with the second disbursement of UPG for Program duration) As part of implementation support, Bank will: (i) review the assessment results and the allocation amounts; (ii) check the EIN to ensure the timely disbursement of UPG funds from GOT to ULGAs. 3 Local Achievement under this indicator Yes Private firm PMORALG Similar to DLIs 1 and 2 above, this DLI will also be measured infrastructure for FY2015/16 will be measured on will carry out through the annual assessment and therefore the same process targets as set the basis of actual delivery of the annual will apply. out in the infrastructure against targets laid out assessment annual action in the plan for the former year using and PPRA APA assigns a score to each ULGA (which starting in FY2016/17 plans are met UPG funds. For FY2016/17 and will carry out will include the value for money audit outcomes). The private by ULGAs FY2017/18, in addition to the actual the value for firm will calculate the allocation to each ULGA as per the utilizing the delivery of infrastructure against money audits. formula in the Bank Disbursement Table below, and provide the Program targets, the achievement of the DLI Private firm aggregate disbursement amount. funds will also include the outcome of the will include value for money audits. the PPRA's PMORALG will verify that: findings on (i) The assessment results are accurate (for the Program duration); the value for (ii) The disbursement from the central government to ULGAs of money audits UPG funds in the last 6-month period has been done on time, to the overall based on verifying the date on the Exchequer Issue Notification data. (EIN) which is the final transfer step from the MoF to ULGAs as explained in detail in Annex 1 (starting with the second disbursement of UPG for Program duration) As part of implementation support, Bank will: (i) review the assessment results and the allocation amounts; (ii) check the EIN to ensure the timely disbursement of UPG funds from GOT to ULGAs. 4 Number of Each ULGA has the requisite core Yes PMORALG World Bank No less than 60 days prior to the beginning of the new fiscal year, 56 # DLI Definition/ Scalability of Protocol to evaluate achievement of the DLI and data/result verification Description of achievement Disbursements Data Verification Procedure (Yes/No) source/agency Entity ULGAs with staffing in place (assessed every PMORALG will submit to the Bank a schedule listing the names all core staff year of the Program). and positions of all core staff for all 18 ULGAs. Also, prior to 60 in place days of the beginning of the new fiscal year, each ULGA will Core staffing is defined in the PMO- submit to the Bank a list of the names and positions of core staff. RALG scheme of service and The Bank will review consistency of the lists. comprises council director, council treasurer, council internal auditor, council engineer, council community development officer (in charge of environmental and social systems management), council supplies officer, council assistant supplies officer (in charge of procurement), council town planning officer, council planner and council human resources officer. 5 Completion Achievement of the DLI will be Yes PMORALG World Bank PMORALG will put in place an annual plan to build capacity of of annual determined on the basis of ULGAs. Among other things, the plan will specify the activity, its PMO-RALG execution of activities specified in objective, the resources assigned and the implementation capacity the PMO-RALG capacity building timeline. The template for the plan will be included in the building plan for ULGAs. operations manual. activities for Program Within 60 days of the beginning of the forthcoming fiscal year, ULGAs PMORALG will submit the plan to the World Bank which will verify that the plan is in the agreed format and is satisfactory. Within 30 days of the beginning of the fiscal year, PMORALG will submit a report of the implementation of the annual capacity building plan for the previous year to the World Bank. World Bank will verify the extent to which the plan has been executed and determine the DLI amount to be disbursed. 6 PMO-RALG Following the Program midterm No PMORALG World Bank When the enhanced system is introduced, PMORALG will share has adopted review, PMO-RALG, in with the World Bank task team (i) the circular to all local an enhanced consultation with the World Bank, governments indicating the changes to the assessment and (ii) the LGDG will develop an enhanced performance assessment manual for the LGDG assessment which assessment performance assessment system for will include the enhanced performance indicators and process. system the LGDG Core and introduces it 57 # DLI Definition/ Scalability of Protocol to evaluate achievement of the DLI and data/result verification Description of achievement Disbursements Data Verification Procedure (Yes/No) source/agency Entity derived from for the following fiscal year. lessons learned from the annual Program assessments 58 Bank Disbursement Table # Bank Of which Minimum Maximum financi Financing Deadne DLI value to DLI value(s) available for or be achieved expected to Determination of Financing Amount to be disbursed against achieved and DLI allocat Prio Adva Achieve to trigger be achieved verified DLI value(s) ed to r nces disbursemen for Bank the resu ts of Bank disbursemen DLI Its Financing ts purposes ULGAs Disbursement from the Bank is calculated on the basis of compliance of ULGAs with have minimum access conditions (including the MC that the performance of a ULGA strengthene should not decrease by more than maximum 20 points compared to the previous d year). institutiona 1 BDisbursement will be made provided that previous disbursements from GoT to performanc By ULGAs have all been made. 1 e and 45 0 0 Program 0 18 achieve completi Formula for disbursement from the Bank to GoT is: Program on * [total annual disbursement] = [total population in all minimum condition mimmum compliant ULGAs] X [3.1USD] conditions in the Formula for disbursement from GoT to ULGAs is: annual * [disbursement to each ULGA] = [total population in that ULGA] X [3.1USD], assessment provided that the ULGA has complied with the minimum conditions Disbursement from the Bank to GoT will be determined as: 1. Compliance of ULGAs with minimum access conditions measured (as above); ULGAs 2. Sum of scores of all ULGAs calculated (non-MC compliant ULGAs are have assigned a score of zero) and divided by 18; strengthene 3. A. If score equal to target for FY, full allocation, d B. If score below target for FY, pro-rata reduction, institutiona By C. If score above target for FY, pro-rata increase. 2 performanc 106 0 0 Progam 0 100 Disbursement will be made provided that previous disbursements from GoT to e54 as completi ULGAs have all been made. scored in on the annual Disbursement from the GoT to ULGAs will be determined as: Total disbursement performanc amount (as calculated above) divided across compliant ULGAs in accordance with e population and score. assessment Formula for disbursement from the Bank to GoT is: * [total annual disbursement] = [{sum of individual scores of all ULGAs/18}/ {target 54 In the areas of urban planning, revenue enhancement, fiduciary systems, implementation of infrastructure, operations and maintenance and oversight systems including environmental and social systems management. 59 Bank Of which Deadline Minimum Maximum Determination of Financing Amount to be disbursed against achieved and DLI financi Financing for DLI DLI value to DLI value(s) verified DLI value(s) ng available for Achieve be achieved expected to score for the FY}] X [target disbursement amount i.e. $26.5m] Performance targets for this DLI are: FY14/15: 60 FY15/16: 70 FY16/17: 80 FY17/18: 90 Formula for disbursement from GoT to ULGAs is: [disbursement to any ULGA] = [population of ULGA X performance score of ULGA] / [Y_ (population of ULGA 1-.. 18 X performance score of ULGA 1-.. 18)] X [total disbursement amount for the FY], providing that the ULGA has complied with the minimum conditions Disbursement from the Bank to GoT will be determined as: 1. Compliance of ULGAs with minimum access conditions measured (as above); 2. Sum of score of all ULGAs calculated (non-MC compliant ULGAs are assigned a score of zero) and divided by 18 3. A. If score equal to target for FY, full allocation, B. If score below target for FY, pro-rata reduction, C. If score above target for FY, pro-rata increase. Local infrastructu Disbursement will be made provided that previous disbursements from GoT to re targets ULGAs have all been made. as set out in the annual Disbursement from the GoT to ULGAs will be determined as: Total disbursement action By amount (as calculated above) divided across compliant ULGAs in accordance with plans are Program 0 100 population and score. pln ae 50 0 0 completi met by completi ULGAs on Formula for disbursement from the Bank is: utilizing * [total annual disbursement] = [{sum of individual scores of all ULGAs/18}/{target the score for the FY}] X [target disbursement amount i.e. $16.66m] Program funds Formula for disbursement from GoT to ULGAs is [disbursement to any ULGA] = [population of ULGA X performance score of ULGA] / [Y(population of ULGA 1-.. 18 X performance score of ULGA 1-.. 18)] X [total disbursement amount for the FY], providing that the ULGA has complied with the minimum conditions Performance targets for this DLI are: FY15/16: 70 FY16/17: 80 60 Bank Of which Deadline Minimum Maximum Determination of Financing Amount to be disbursed against achieved and DLI financi Financing for DLI DLI value to DLI value(s) verified DLI value(s) ng available for Achieve be achieved expected to FY17/18: 90 Core staffing is: Council director, council treasurer, council internal auditor, council Annually engineer, council community development officer (in charge of environmental and Number of ,starting social systems management), council supplies officer, council assistant supplies ULGAs m officer (in charge of procurement), council town planning officer, council economist, 4 with all 14 0 0 Program 9 ULGAs 18 ULGAs council human resources officer. core staff year 2 Qualifications of core staff are specified in GoT Scheme of Service. in place (FY13/1 4) $155,500 per ULGA with required staffing per year, if less than 9 ULGAs have the full staffing, no disbursement will be made. PMORALG FY13/14: PMO-RALG submits plan in agreed format. Completion capacity building plan Provided that PMORALG has prepared the capacity building plan for the o nnualAnnually formulated forthcoming year and that for 2014/15 at least 50% of the 2013/14 activities have PMO- RALG , starting for the been executed, for 2015/16 at least 60% of 2014/15 activities have been executed, for in forthcoming 2016/17 at least 70% of 2015/16 activities have been executed, for 2017/18 and 2018 5 capacity 30 0 0 Program year and N/A at least 80% of 2016 and 2017 activities have been executed, $6 million will be bctildig year 2 minimum disbursed. atve (FY13/1 execution ora 4) rates PrGrA specified achieved for the preceding year. PMO- RALG has Upon DLI achievement, $10 million will be disbursed. adopted an enhanced LGDG assessment By 6 system 10 0 0 Pom. N/A N/A derived completi from on lessons learned from the annual 61 Bank Ofwhich flead e Minimum Maimu Determination of Financing Amount to be disbursed against achieved and DI financi Financing for DLI DII value to DLI value(s) erified DLI value(s) ng available for Achieve be achieved expected to Program assessment s Program Minimum Access Conditions (MACs) for DLIs 1, 2 and 3 ULGSP MACs LU GL # G Indicators of Minimum Access Information Source and Assessment Procedures S G Grievance handing 1 X System in place for handling grievances55 Systemic record kept of all grievances related to Program social and environmental management and fiduciary issues. As part of APA, records will be obtained from designated staff for handling grievances on number of grievances filed, nature of grievances, status, and resolution and the status of grievances included in overall Program reporting to PMO-RALG will be verified. Establishment of operational grievance & dispute resolution desk at Mtaa & Ward Offices. Establishment of a functioning and participatory Resettlement Action Plan Committee. [Year 2 and on] Environmental & Social Management 2. LGA Environmental and Social Management Council ratifies use of the Environmental and Social Management Manual (ESM) to guide infrastructure X System in place and operational. investments. [Year 1] From LGAs, obtain list of staff with designated responsibilities for Environmental & Social Management and Resettlement Action Plans (including compensation). [Year 1 and on]. As part of the APA, verify all UPG projects have completed an environmental and social screening checklist per the ESMM procedures prior to start of the projects. Verify all projects requiring Environmental and Social Management Plans have included them in contracts for civil works and securing of Environmental and Social Impact Assessment Certificates from VPO and their associated specifications and conditions from NEMC. Where required, verify Resettlement Action Plan completed and implemented for all projects involving resettlement. [Year 2 and on] As the establishment of grievance systems in all 18 ULGAs will take time, this indicator will be effective in the second assessment round of the Program. 62 ULGSP MACs [U GL # G Indicators of Minimum Access Information Source and Assessment Procedures S G Resettlement Action Plans implemented prior to initiating civil works: All Project Affected People eligible for compensation are paid prior to relocation and/or initiation of civil works; and/or eligible Project Affected People relocated to alternative surveyed plots. The team will obtain records from the Council on the number of Project Affected People compensated and/or resettled; approval of compensation by Full Council, and evidence from the accounts department and RAP Committee that compensation has been paid, and reconcile with date of initiation of civil works. (Year 2 and on) Implementation of UPG 3. X [ Use of the UPG in accordance with the As part of the performance assessment the appropriate use of previous year grant resources will be assessed to investment menu (yes/no) avoid misuse of funds for other purposes than intended. (Year 2 and on) Financial Management 4. X X Final Accounts for the previous FY produced as From the NAO get the names of all LGAs that submitted the final accounts of the previous FY on time noting dates per section 45 (4) of the LGA 1982 and of submission. submitted to National Audit Office (NAO) within three months after the end of the FY (by September 30). 5. X X Internal audit in place and functional as provided * From the Internal Auditor, obtain and review the quarterly internal audit reports to verify that Internal Audit under section 45(1) of the LG Act 1982 and the Reports are produced. LAFM 1997 orders 12-16. (At least 4 Internal Audit Reports prepared during the previous 12 * From the Council Director obtain and review the minutes of the Finance and Planning committee for the past months and presented to Finance and Planning 12 months to verify that Internal Audit reports are presented to the Finance and Planning Committee. Committee). Planning and Budgeting 6. X X LGA having annual budget for the current FY From CT, obtain and review the budget for the current FY to establish whether: prepared as per guidelines and approved by * The budget was approved by the council two months before start of the FY; Council two months before the start of the * The budget was prepared as per the guidelines and LAFM regarding estimation of revenue and allocation financial year (by April 30th) expenditure; * The budget is presented in the stipulated format. Procurement 7. X Tender Boards and Procurement Management Review the existence of the tender board and its composition. Units and Engineering Departments properly From PMO-RALG get the set up of the Procurement Management Units and Engineering Departments established and adequately staffed as per PMU. regulations Council's Functional Processes 8. X X Regular meetings of the council - at least one From the Council Director obtain the minutes of the full council meetings and verify whether the council met 63 ULGSP MACs [U GL # G Indicators of Minimum Access Information Source and Assessment Procedures S G meeting held every 3 months (quarterly). quarterly during the previous FY. Audited Accounts - CAG Reports to be compiled by PMO-RALG. 9. r X X No adverse Audit Report for Audited Accounts From the National Audit office, get the names of all LGAs with adverse Audit Reports for Audited Accounts of of Council in previous FY. Council with the CAG report for Previous FY. Capacity Building Planning, Reporting and Accountability 10. X X LGA having a Comprehensive Capacity From the CHRO obtain and review the Capacity Building Plan for the current FY to establish, whether it was Building Plan for the current FY incorporating approved by Council and incorporates crosscutting sector capacity building needs. all crosscutting/generic capacity building needs of all sectors approved by Council on time (by April 30). 11. X X LGA has prepared quarterly reports on the From the RS obtain names of LGAs that submitted quarterly reports on utilization of development grants and CBG utilization of development grants and CBG for (CFR and CPR) reports for all the quarters for the previous FY. At the point of time of the assessment, all quarterly the previous FY indicating activities reports from previous FY should have been submitted to PMO-RALG. The team will check the submission by the implemented and funds spent and submitted to ULGA during the field visits and also review the issue at the RS level. PMO-RALG on quarterly basic (CFR and CPR reports). Additional MC on incremental performance (minimum sustainability in results achieved) 12. X The performance of a ULGA should not Review the assessment results from previous FY and compare with the current results of the performance decrease by more than maximum 20 points from assessments. If the score has decreased by more than 20 points, e.g. from 90 to 67 points, the ULGA has not passed one assessment to another this MC. 64 Program Performance Indicators Performance Indicators related to Institutional Improvements (scoring is between 0-100) for DLI 2. Performance Indicators in the table below will be assessed during the annual assessments. As mentioned, in the first assessment only the minimum access conditions will have impact on the UPG allocations. In the second assessment, which will encompass both minimum access conditions and performance indicators, few (2) of the performance indicators will not be applied. The two performance indicators which will only be applied from the third assessment, which will start from September 2014, are mentioned in the column with the Description, Information Source and Assessment Procedure. Performance indicators and scoring guide for the Annual Performance Assessment I. Urban Planning System Improved (maximum 10 points) 1. General Planning GPS for Council adopted by Council * The GPS plan needs to be completed as per MLHHSD guidelines and discussed at Council Scheme (GPS) for Management Team: Points are allocated per step Consultative meetings. Council adopted of completion in the MLHHDS guidelines: * The Process is handled by the Council GPS Technical Committee (Max 10 points) * The team will review whether there is compliance with each step in the guidelines and award Step 1: Preparation Process: 1 point points per step. Step 2: Initiation and Mobilization: 1 point Step 3: Data collection and processing, including maps and socio-economic data: 1 point Step 4: Data analysis: 1 point Step 5: Plan conceptualization: 1 point Step 6: Plan Preparation: 1 point Step 7: Plan adoption: 3 points Step 8: Plan approval: 1 point H. Increased Revenues from Property Tax (maximum 25 points) 2. Updated Local Computerized Property Register in place and 9 Since the project is targeting Urban LGA the priority is to get computerized systems, which will Government updated. help them to handle larger data bases. property tax system Yes: score 1 point; No: score 0 point in place Computerized billing and invoice delivery Sound databases must be followed up by effective billing and invoice delivery systems to ensure (Max 5 points) system in place. full coverage and inclusion of the entire tax base. Yes: score 2 point; No: score 0 point 9 Review of the billing system and the level of computerization. Multiple channels for property tax payment 9 Multiple channels refer to different option for tax payer to make payment such as regular bank, (collection) system in place. mobile payment system, etc. Yes: score 2 point; No: score 0 point * Strengthened collection systems will lead to higher revenues. 65 Performance indicators and scoring guide for the Annual Performance Assessment 3. Increase in the Increase in the number of properties in the Widening of the property tax base and maintaining pace with the physical growth of the ULGA number of properties property register, measured in percentage is important for sustained growth of revenues from property tax. The team will review the in the property By more than 30 %: score 5 points property registered for the last two years. register By 21% - 30 %: score 4 points (Max 5 points) By 11% - 20% score 3 points By 6% - 10 %: score 2 point By 1% - 5% score 1 Note: if the coverage is 100 %, then maximum points is given. 4. Increase in taxable Percentage of taxable properties valued as . Property taxation is based on valuation as prescribed in relevant Acts and government guidelines. properties valued compared to the total taxable properties in the 9 Review of the share of the taxable properties valued in the register. (Max 5 points) property register: Between 10 to 30%: score 1 point Between 31 to 50%: score 2 points Between 51 to 60%: score 3 points Between 60% to 70:score 4 points More than 70%: score 5 points 5. Billing collection Billing collection ratio of property taxes (%) * Measurement of collection ratio (actual collection / total of all invoices distributed) ratio of property Between 20 to 39%: score 1 point taxes Between 40 to 59:score 2 points (Max 5 points) Between 60 to 70%:score 3 points Between 71 to 80%:score 4 points More than 80%: score 5 points 6. Increase in property If the ULGA has increased collected revenue .Measurement of real collection growth from the previous year but one to the previous FY. tax collected from property tax in the previous FY as (Max 5 points) compared to the previous year but one: By more than 10 %: score 5 points By 7% - 10 %: score 3 points By 4% - 6% score 2 points By 1% - 3 %: score 1 point Less than 1% score 0 III. Efficient Fiduciary System (maximum 25 points) 66 Performance indicators and scoring guide for the Annual Performance Assessment 7. Average score on the Application of the PPRA scoring system with the The Public Procurement Regulatory Authority (PPRA) uses a standardized assessment tool. The PPRA for targeted following implications on the points: assessment manual contains the exact definition of each element and scoring guidelines. PPRA ULGAs determines an annual target score and which is used to benchmark MDAs and LGAs. PPRA (Max 10 points) PPRA: Score 95-100: 10 points indicators include: Score 90-94: 9 points 1. Existence of a Tender Board in accordance with the requirements of the Act and Regulations Score 85-89: 8 points 2. Existence of a PMU in accordance with the requirement of the Act and Regulations Score 80-84: 7 points 3. Percentage of tenders in which there was no interference between individual functions Score 75-79: 6 points 4. Prepared annual Procurement Plan Score 70-74: 5 points 5. Percentages of tenders! contracts which received compulsory approvals in various processes Score 65-69: 4 points 6. Percentage of open bidding procedures publicly advertised Score 60-64: 3 points 7. Percentage of contract awards disclosed to the public 8. Percentage of tenders complying with the stipulated time in the Act and Regulations Below benchmark: 60: 0 points. 9. Percentage of tenders using authorized methods of procurement in accordance with their limits of application 10. Percentage of tender using standard/approved tender documents 11. Percentage of tenders with complete Records 12. Formation and Function of inspection committees (goods) and project managers 13. Percentage of contracts which have been implemented as per the terms of contract 8. Efficient FM system Audit committee in place and operational p Review composition of the audit committee and ensure that it has had regular meetings in place (quarterly) with minutes for the proceedings. (Max 15 points) Yes: score 2 point; No: score 0 point Timely reconciled accounts in place and P Review the accounts and letters to the departments, meet with departments and check the Communication to Implementing Departments communication to ascertain that they have been informed about funds received. of funds received documented Yes: score 2 point; No: score 0 point P Review budgets and actual accounts from previous year as well as budget from this year, Unspent balances from previous FY are included and minutes from decision-making on budget allocations to see if the carried forward funds in the budget (as supplementary) for the on- have been properly budgeted for. going FY Yes: score 3 point; No: score 0 point Cash flow and procurement plans for following * Review cash-flow and procurement plans. FY in place with clear prediction of revenue and expenditures Yes: score 2 point; No: score 0 point 0 Review audit report from previous FY. 67 Performance indicators and scoring guide for the Annual Performance Assessment Clean audit report from previous audit. If yes: Score 6 * Review audit report and ascertain that all queries have been addressed, review minutes All Issues from previous audit report rectified from meetings, etc. (yes/no). If Yes: score 4 point; No: score 0 point (note that if there was a clean audit report the points are provided above and not under this sub-indicator) I.V Improved Infrastructure, Implementation and Operations & Maintenance (Maximum 20 points) 9. Up-dated annual plan Annual Plan for Development Budget, including * This is a measure for the planning process and for the utilization of the UPG. The annual plan including investments financed by the Performance Grant preparation process has to be consultative and must involve the relevant departments as well as investments from developed, and up-to-date with Annual Action the CMT included elected members of the Council. UPG is in place Plan for all UPG funded activities with clearly * Review of the annual action plan and ascertain that all UPG projects are included, with full (Max 5 points) identifiable project targets. budget, and clearly identifiable targets for achievements. Yes: point 5 No: point 0 10. Increase in amount Increase in amount of OSR transferred to the * Review the level of transfers from OSR to development account (account number 2 ULGA of OSR transferred development account level) for the last two FY. Note that only score can be obtained, e.g. 4 points (not 2 +4 points). to the development account More than 10% over last year amount = score 5 (Max 5 points) More than 7 %: score 4 point More than 5 %: score 3 points More than 3 %: score 2 points 3 % and below: score 0 points. 11. Annual utilisation of Use of the annual UPG compared to plan: * Review the development plan including the planned investments from UPG, and compared UPG More than 85 %: Score 5 with the actual spending by the end of the FY. (Max 5 points) More than 75 %: Score 4 More than 65 %: Score 3 More than 55 %: Score 2 This will only be applied from the third annual assessment, starting September 2014, as only 55 and below: Score 0 then will there be a FY with UPG spending to review. (Note if there are no options to ascertain the planning and use of the grants, the score is also rated as 0.) 12. 0 & M plan in place ULGA has Operations and Maintenance Plan * Review the plan and budgets and compare the total development budget with the budget for and executed including budgeting in place and the budget is O&M. minimum 5 % of the total development budget. 68 Performance indicators and scoring guide for the Annual Performance Assessment (Max 5 points) Yes: score 2 points No: score 0 point ULGA actual expenditure on O&M higher than * Review the actual use of funds on O&M for projects planned and budgeted for against the 90% compared with annual O&M budget. budget. (note only one score, e.g. 2 points (not 3 +2 points) can be obtained for this indicator) Higher that 90 %: score 3 Higher than 80 %: Score 2 Higher than 70 %: Score 1 70 % or below: score 0 point V. Accountability and Oversight Systems Strengthened (Maximum 20 points) 13. Consultative process The development plan is developed and * Review minutes from meetings in council, committees and from the meetings with the public. for the development discussed by (a) Full Council; (b) respective Cross-check information with various sources. plan in place. Ward Development Committees; and (c) the respective Regional Secretariat and with public (Max 2 points) consultations. Yes in compliance will all: score 2 points No: score 0 point 14. Annual progress Annual and quarterly financial and physical * Review minutes from the council and discuss the issues with administration and councillors. reporting and progress report presented to and discussed by the disseminating Council. systems in place. Yes: score 2 points; No: score 0 point Annual financial and physical progress report * This refers to the Councils overall financial and physical progress. Not only restricted to (Max 3 points) disseminated to the general public via suitable performance grant utilization. (newspapers, local radio stations, web pages etc.) commonly available media. Yes: score 1 point; No: score 0 point 15. Information on use Information on use of OSR publicly disclosed * Information disclosed on use of OSR could be part of annual budget report or other of OSR publicly (e.g. newspaper, notice boards, radio etc.). implementation reports. Review the documentation for disclosure of information. disclosed Yes: score 3 point; No: score 0 points (Max 3 points) 16. ULGA Service Service Charter including service delivery * Review Service Charter and ascertain that it complies with the scoring guide. Charters with improvement plan and targets adopted by the standards in place Council and disseminated to and made available to general public. (Max 2 points) Yes: score 2 points; No: score 0 point 17. Systematic records Environmental and Social Performance Reports * As part of overall Program reporting from LGAs to PMO-RALG, staff with designated maintained on all sent to PMO-RALG quarterly. responsibilities for environmental & social management and Resettlement Action Plans environment and Yes: score 5 points; No: score 0 point (including Compensation) report on a quarterly basis according to guidelines and manuals social activities provided by PMO-RALG. implemented by 69 Performance indicators and scoring guide for the Annual Performance Assessment ULGAs (max. 5 This will only be applied from the third annual assessment, starting September 2014, as only points) then will there be a FY with UPG spending to review. 18. All participatory Procedures for public participation in the 0 Verify in meeting minutes that at least one public meeting for infrastructure projects included consultative preparation and implementation of environmental and social issues. processes on ULGA Environmental and Social Impact Assessment 0 Verify from LGA that projects requiring environmental and social impact assessment has made program activities and Resettlement Action Plans followed. document publicly available, including dates for local disclosure and comment period, media address relevant outlets and location of documents. environmental and Yes: score 5 points; No: score 0 point 0 For projects requiring resettlement and compensation, verify that public sensitization meeting social considerations was held and that affected people have been involved in the consultations and interested and (Max 5 points) affected stakeholders had an opportunity to comment and provide feedback. (This indicator should be applied already from the September 2013 assessment as the plans asheand budgetshfor FY 201314, should apply this new system). TOTAL Maximum Points: 100 70 Performance Indicators related to Physical Progress on Local UPG Funded Investments for DLI 3 (Assessment in September 2014 with impact on FY 2015/16)56 Performance indicators and scoring guide for the Annual Performance Assessment 1. Local infrastructure targets as set out Physical targets as included in the annual action Achievement under this indicator will be measured on the basis of actual delivery in the annual action plans met by plan implemented. of infrastructure against targets laid out in the action plan for the previous year ULGAs utilizing the Program Funds. using UPG funds. The means for verification are: (Max 100 points) The % of implementation will be reflected directly in the score, i.e. 80 % = 80 points. * Measurement of the utilization of the UPG and ensure timely implementation of projects. Review all planned projects and the degree to which they have The score on this indicator will be between 0- been implemented by the end of the FY. 100. * Review annual and quarterly action plans and reports * Check sample projects from the field-work (on-the-spot of implementation rates) * Check the contract implementation progress and contract completions through the review of bills of quantities, see the description below. Implementation rate of each project will be assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects. This will only be applied from the third annual assessment, starting September 2014 (impact on the FY 2015/16 allocations), as only then will there be a full previous FY with UPG spending to assess. Total Score Maximum Score is 100 points 56 The indicators in the assessment will be different for the assessment in 2014 with impact on FY 2015/16 and the following years, as assessment of value for the money will start in the assessments from 2015 with impact on FY 2016/17. 71 Performance Indicators related to Physical Progress on Local UPG Funded Investments for DLI 3 (Assessment in September 2015 and following years) This will only be applied from the fourth annual assessment, starting September 2015 (impact on the FY 2016/17 allocations). Performance indicators and scoring guide for the Annual Performance Assessment 1. Local infrastructure targets as set Physical targets as included in the annual Achievement under this indicator will be measured on the basis of actual out in the annual action plans met action plan implemented. delivery of infrastructure against targets laid out in the action plan for the by ULGAs utilizing the Program previous year using UPG funds. The means for verification are: Funds. The % of implementation will be reflected (Max 50 points) directly in the score multiplied by 50 % * Measurement of the utilization of the UPG and ensure timely (weight of this indicator), i.e. 100 % = 50 implementation of projects. Review all planned projects and the points, 70 % = 35 points. degree to which they have been implemented by the end of the FY. * Review annual and quarterly action plans and reports The score on this indicator will be between * Check sample projects from the field-work (on-the-spot of 0-50. implementation rates) * Check the contract implementation progress and contract completions through the review of bills of quantities, see the description below. Implementation rate of each project will be assessed and there will a weighting of these to get a total score. The weight of each project will depend on the budgeted size of the projects. Assessed by the performance assessment teams. 2. Value for money in the % of projects implemented with a infrastructure investments funded satisfactory level of value for the money, The value for the money of each project (level of satisfactory value for the by the Program calibrated in the value for the money money) will be assessed and there will a weighting of these to get a total assessment tool. score. The weight of each project will depend on the budgeted size of the projects. The % of projects with a satisfactory level of value for the money will be reflected in The input from this will be provided by the PPRA (value for the money the score multiplied by 0.5 (which is the audits) to the assessment teams to include in the calibration and in the final weight of this indicator), i.e. 80 % calculation of the size of the allocations. satisfactory projects= 40 points, 70 % = 35 points. The score on this indicator will be between 0-50 (max). 72 Performance indicators and scoring guide for the Annual Performance Assessment Total Maximum Score = sum of indicator 1 and 2 = 100 points. 73 Annex 4: Summary Technical Assessment Technical Details of the Urban Performance Grant (UPG) design as summarized from the technical assessment 1. The Program budget structure's biggest item will be the UPG. Given the two core design features of (i) using population figures" and (ii) a progressively increasing vertical allocation amount which starts at US$ 3 per capita in FY2013/14, with disbursement against meeting the Program minimum access conditions (DLI 1), then goes up to US$ 12 in FY2014/15 with disbursement against meeting the Program minimum access conditions (DLI 1) and performance against the institutional performance indicators (DLI 2), and reaches US$ 18 in FY2015/16 and onwards, with disbursement against meeting the Program minimum access conditions (DLI 1) and performance against the institutional (DLI 2) and infrastructure (DLI 3) related performance indicators. 2. The amount and structure of the largest expenditure item, the UPG, has been identified as the most realistic and efficient option upon consideration of various vertical and horizontal structure scenarios. In determining the vertical structure of the grant the analysis indicates that a meaningful contribution to funding the investment needs borne by population growth and marginally catching up with infrastructure backlog would require the vertical allocation as mentioned immediately above. A number of options have been analyzed in determining the horizontal structure of the grant. 3. The first option is to construct a basic allocation formula based on urban infrastructure needs. However it was determined that such a formula would not be accepted by all stakeholders as objective. Establishing the need for infrastructure would require a central entity making decisions on nationally acceptable urban infrastructure service standards which are applicable across all types of Tanzania's climatic and ecological zones. Such standards do not exist and are not deemed to be useable in the local context. Additionally, this option would require a fairly complex formula, thus possibly making it less transparent. Thus, this option is deemed not optimal. 4. The second option is to base the allocation exclusively on the size of the population of ULGAs. This would result in each urban LGA receiving the same per-capita allocation. The exact size of the per- capita allocation would then depend on the size of the annual grant pool and the total population of all urban LGAs that are eligible for the UPG. A simulation was prepared for this basic scenario. For instance, every urban council might receive an allocation of the median vertical allocation value of US$ 18 per resident (at the earliest in FY2015/16). This will translate into the following approximate allocations per ULGA in the proposed UPG universe: Simulated approximate size of UPG per LGA if allocated according to population Size of annual UPG grant Number of Urban LGAs < $ 1.0 million 2 $ 1.0 -2.0 million 5 $ 2.0 - 3.0 million 3 > $ 3.0 million 8 Total 18 5. A third option is to base the allocation formula on the number of urban residents in each ULGA. To the extent that part of the population of the urban local authority lives outside the core 5 Total population of 18 ULGAs is estimated at 2,437,537. 74 urbanized area, it may be decided to give priority to the core urban areas. In this case, the allocation formula could either use data on the number of residents that live in neighborhoods that exceed a certain settlement density or census data on urban residents. While basing the formula on more detailed data on settlement patterns (such as population density) would be preferable, this data is not available. This means that currently, the simplest and commonly acceptable available option would be to prepare an allocation formula based on the number of urban residents. As noted below, to the extent that informal settlements and urban growth often take place outside the urban core, it would be appropriate to base the formula on the total population of the ULGA. 6. A fourth, and most appropriate option is for the UPG to follow the existing LGDG allocation formula. The advantage of this approach is that the LGDG formula is transparent and well-understood by all stakeholders in Tanzania. However, analysis showed two shortcomings of applying this formula for the UPG. First, the LGDG formula was developed to provide funding for cross-sectoral local infrastructure needs, including social infrastructure (and therefore allocates greater resources to LGAs with higher poverty rates and greater land area). In contrast, the objective of the UPG allocation formula is to fund urban infrastructure needs. As such, in line with the principle that "finance should follow function", it would be inappropriate to simply apply the LGDG allocation formula. In particular, including land area (so that geographically larger LGAs would receive greater allocations) would be counter-intuitive in the case of the UPG, which aims to provide greater funding to places with greater urban density. Likewise, the rationale for including poverty was very different for the LGDG. Second, there are significant data limitations in estimating the total and urban populations of eligible ULGA jurisdictions. The last population census was conducted in 2002, and therefore the preparations and initial allocations for the UPG will have to be made based on data that are 10 years old. The current LGDG allocations (as well as certain block grant allocations) are based on a population estimate that assumes that population growth is equal to 2.9% per year for every (urban and district) local government authority. Because in reality LGAs grow at a wide range of speeds, it is likely that the existing population estimates considerably under-estimate the population of some urban LGAs, while over-estimating (in relative terms) the population of other LGAs. 7. Thus, the analysis honed in on three possible scenarios: (i) distribute the UPG grant pool in proportion to each urban LGA's total population; (ii) distribute the UPG grant pool in proportion to each eligible LGA's urban population; and (iii) allocate the UPG grant pool in accordance with the LGDG formula (70% population; 20% poor residents; 10% capped land area). A simulation analyzing these scenarios is presented below: Each simulation allocates $35.5 million (expected UPG disbursement in FY2014/15) among the 18 ULGAs assuming the total UPG pool and a four year disbursement schedule:58 Descriptive Statistics for Simulated Per Capita Allocations (in US$) Simulation 1 Simulation 2 Simulation 3 (Total Pop) (Urban Pop) (LGDG Formula) Average (all) 14.65 13.29 16.17 Average, MCs 14.65 16.25 13.86 Average, TCs 14.65 8.45 20.00 Std Deviation 0.00 5.21 5.19 CoV -- 0.39 0.32 Minimum 14.65 3.74 12.37 Maximum 14.65 21.25 33.95 Simulations reflect assumptions which had to be made about the demographic composition of the newly formed Geita TC and Bariadi TC. 75 Simulation 1 shows every eligible LGA receiving exactly the same grant amount per person. Based on population estimates, this amount will be approximately US$14.65. Since every council receives the same per capita amount, there is no variation in per capita allocations. In contrast, Simulation 2 shows considerable variations in per capita allocations. Per capita allocations under this scenario range from USD 3.74 per person (Mpanda TC) to USD 21.25 Moshi MC. As expected, the simulation based on urban population produces results that favor the larger, more urban municipal councils. On average, Simulation 2 suggests that MCs receive USD 16.25 per capita, whereas TCs on average only receive USD 8.45 per capita. While this might reflect the smaller need for urban infrastructure in smaller towns/TCs, the allocation pattern might also result in TCs receiving allocations that are impractically small in order to fund sizeable urban infrastructure investments. Simulation 3 was prepared as a comparator, it is not recommended to apply the LGDG formula to the UPG. Indeed, the simulation provides support for this position: Simulation 3 suggests that TCs would receive a considerably larger per capita grant on average (US$20.00) then MCs (US$13.86). This is inconsistent with the notion that urban authorities that are more urban in nature (in terms of urban concentration or settlement density) should receive a greater allocation per person. 8. In summary, the use of basic total ULGA population figure as the main allocation criteria for the UPG allocation formula is the most optimal solution. This is in accordance with the Program intension that the UPG will fund urban infrastructure needs. It is also simple and transparent. Poverty and settlement patterns are also relevant criteria (as urban infrastructure needs tend to increases with poverty rates and urban density), but reliable data is not available for these variables. Strategic Relevance 9. The proposed Program is relevant to Tanzania's economic development priorities. Population growth in Tanzania, around three percent annually, is among the highest in the world and this rapid population growth undermines the impact of economic growth on poverty reduction. This is especially true for the urban areas where population growth happens at a much faster rate than the rest of the country. The rapid growth increases the stress on institutions already struggling to cope with delivery of basic services such as roads, drainage, sewerage, street lighting, solid waste management, clean water, schools, and basic health care. While urban areas of the country have been growing at twice the rate of growth in rural areas, investments in urban infrastructure have not kept pace with the population growth, resulting in poor or declining access to urban infrastructure and services in several sectors. Preliminary estimates suggest that US$ 880million or more are needed to be invested each year in Tanzania's cities just to service new residents. The current LG fiscal framework does not accommodate the needs to cover either the backlog of urban infrastructure investments or the constantly increasing demand for such financing. While most domestic revenues of the country are collected in urban areas (more than 80 percent in Dar es Salaam alone) more than 80 percent of transfers go to rural areas. Moreover, in per capita terms, transfers to rural LGAs are 21 percent higher than transfers to urban LGAs. As mentioned above, the Tanzania Strategic Cities Project (TSCP) supported by the Bank, which became effective in September 2010, is designed as an investment operation to provide finance for critical infrastructure in seven key large urban LGAs, but outside this project, there is no mechanism to address the quantitative funding needs or the specific characteristics of urban infrastructure investment which tends to be large in nature. 10. Against this context, with productivity of labor in urban areas at 2.3 times higher than in rural areas, Tanzania has embarked on a path of urbanization that will lead to a widening gap in productivity. Similar growth rates in population and urban productivity has powered the economies of most emerging economies but only when significant investments are made in urban institutional structures and infrastructure. Thus, as the proposed Program introduces a funding mechanism which simultaneously strengthens systems of urban management and governance, it will help urban areas in 76 Tanzania that are currently not supported by the Bank in fulfilling their vital roles in driving economic growth and delivery services to a rapidly increasing number of its citizens. 11. The proposed ULGSP is intended to address these challenges in the context of the overall evolution of the government's Program and intergovernmental fiscal system in Tanzania. It is fully in line with government's National Strategy for Growth and Poverty Reduction (MKUKUTA II) as well as two of the four key fundamentals of the Government's Vision 2025, namely: (a) strengthening and establishing well functioning institutions and markets; and (b) provision of infrastructure. The Program is consistent with the Government's January 2010 Letter of Sector Policy on Urban Development which recognizes the need to strengthen urban local governments and address the challenges of financing urban infrastructure. The Program also conforms with the World Bank's Country Assistance Strategy (CAS) 2012-15 and directly serves two of the four CAS strategic objectives: (a) promote accountability and governance; and (b) build infrastructure and develop services. The project will directly contribute to CAS outcome 2.4: improved management and delivery of urban services as well as the cross cutting CAS Outcome 4.1: improved accountability and efficiency of public financial management. Additionally, the proposed ULGSP will respond to World Bank's Africa Strategy's Pillar 1: Competitiveness and employment which recognizes the need for competitive cities because productive and sustainable urban development will be a key driver of wealth and jobs across Africa. Also, the Program's focus on institutional systems strengthening will contribute to the Africa Strategy's governance and public sector capacity foundation. 12. The proposed Program should be seen in the context of Bank support to the urban and local government sectors historically and contemporaneously - PMORALG is currently implementing the Bank supported Tanzania Strategic Cities Project (TSCP) which has begun to meet the backlog of urban investment requirements of the country's seven largest cities; a proposed Dar es Salaam Metropolitan Development Project (under preparation) will address the special requirements of the country's most important urban area; the Zanzibar Urban Services Project (ZUSP) is providing infrastructure investments and institutional strengthening to the four urban areas on the two Zanzibar islands. The proposed ULGSP aims to introduce a system of funding urban infrastructure across the rest of the country's system of cities. When the four operations are in place, the Bank's Tanzanian portfolio will contain a set of coherent and interlocking interventions designed to meet the key financing and institutional needs of urban areas across the country. Technical Soundness 13. The program development objective is to improve institutional performance for service delivery in the participating ULGAs. The proposed design and resulting activities are created to reach this objective and at the same time help address the challenges of the ongoing Government program, LGDG. These challenges in general are delays in disbursing the funds to LGAs, lack of sufficient incentives to local governments to affect systems improvement and inability to meet urban municipal infrastructure investment needs. The following Program features are designed to reach the program objective: a. Vertical allocation of resources. International good practice indicates that in order for any transfer that leverages financing for institutional capacity enhancement to work well, the size of the transfer pool needs to be adequate to address the need for infrastructure in the selected local authorities. This is to ensure the financing is attractive enough to bring about institutional change. Additionally, in Tanzania where there are large urban infrastructure gaps, the grant pool needs to be adequate enough to fund urban investments. On the other hand, the grant pool needs to be within the absorptive capacity of eligible ULGAs, and sustainable in terms of operation and maintenance. Finally, resource availability will also dictate the size of the UPG transfer pool. The technical analysis of these parameters produce the vertical allocation of the proposed program: (i) capital investments in ULGA 77 in Tanzania; and (ii) a significant contribution to funding investment needs related to population growth and marginally catching up with infrastructure backlog would require a median of USD 18/capita/year on average. b. Horizontal allocation of resources. In order to participate in the program, each ULGA will have to meet an enhanced version of the existing LGDG minimum conditions. The enhancement to the minimum access conditions of the current Government program will be on social and environmental systems management. Namely, ULGAs will agree to carry out the processes and procedures of the Program technical manual for Environmental and Social Management. As discussed in detail in the Program's environmental and social systems assessment, the Program's manual is consistent with Tanzanian systems and bridges the gaps between those systems and OP 9.00. Once eligible to participate in the program, each ULGA will have an annual allocation envelope. This amount will be determined by basic population figures. Poverty and settlement patterns are also relevant criteria, as urban infrastructure needs are correlated with poverty rates and urban density, but reliable data at the LGA level is not available for these variables. Thus, UPG allocation to each ULGA will be formula- based. The actual annual disbursement, on the other hand, will be performance-driven and will be a function of the ULGA's annual performance against criteria set in four main areas: 1. Enhanced ULGA revenue enhancement, 2. Increased efficiency in ULGA fiduciary systems management, 3. Improved service delivery systems and Enhanced accountability and oversight mechanisms. Performance of ULGAs will be assessed annually by a Program-financed outside entity as detailed in the verification protocol section of this document. c. Leveraging financing to increase local government capacity. This methodology is accepted as international good practice in improving institutional performance and it is supported by the Bank in Africa and other regions. The Program will implement this methodology through the proposed performance linked UPG. d. UPG will be added to the existing LGDG windows. Thus, it will be fully embedded into the larger Tanzanian national fiscal transfer system, rather than being implemented as a stand-alone project, running parallel to the government systems. Institutional capacity enhancement and physical infrastructure investments of urban local governments in Tanzania have so far been largely met through stand alone, donor funded projects. In contrast to this trend, the proposed program will introduce a predictable funding mechanism system which will flow through the government channels. e. Selection of local governments which will participate in the UPG. Only urban LGAs will be eligible for the grant. The selection of Urban LGAs as the target group of local governments is based on the following three factors: First, by limiting access to urban LGAs, the grant will not be fragmented. Secondly, urban LGAs have been assessed as having relatively higher capacity levels among all LGs in Tanzania. Therefore, this is the group which is most likely to respond best to the incentive structure. Third, limiting accessibility to urban LGAs will allow enhanced PMO-RALG supervision and management of the grant structure. Out of the country's 26 ULGAs, seven top-tier ULGAs are currently being supported through the Bank financed Tanzania Strategic Cities Project (TSCP) while the largest ULGA, Dar-es Salaam, will be supported through the proposed Dar-es Salaam Metropolitan Development Project (DMDP). Therefore, the remaining 18 ULGAs will be the focus of the proposed sub-program at the onset. According to the 2011 population estimates, these 18 cities have a combined population of 2.6 million people, which is roughly 6% of the country's total population (42 million people) and 25% of the country's urban population (11 million people). 78 Expenditure Framework 14. The expenditure framework of the Program will be a total of US$ 255 million. US$ 201 million will constitute the UPG and will go directly to Program ULGAs for investments specified under the investment menu (Annex 1). US$ 44 million will support and leverage PMO-RALG activities and results directly linked to the execution of the UPG. US$10 million will support the overall Government program strengthening, based on UPG experience. Program expenditure framework (US$, million) FY2012/ FY2013/1 FY2014/1 FY2015/1 FY2016/1 FY2017/1 Total @ 13 4 5 6 7 8 Program end Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Grant Flows to 0 9 35.5 52.2 52.2 52.2 201'9 ULGAs via UPG window Funds for PMO- 8.8 8.8 8.8 8.8 8.8 44 RALG results to execute the UPG Funds for improvements to 10 10 the Government program based on UPG experience Total ULGSP 0 17.7 44.3 71 61 61 255 budget Total IDA 0 17.7 44.3 71 61 61 255 financing 15. UPG funds will flow from the central to the local governments and will be disbursed on a bi- annual basis. The Government's program (LGDG) currently uses flow mechanisms to disburse funds to the local governments, and the Program funds will be channeled through these existing mechanisms that are well established within the Tanzanian budget system. 16. A line item in the national budget for FY2012/13 has been entered for the Program . Beyond FY2012/13, the Program's envelope will be entered into subsequent regular national budgets and the details of the Program's funds use will be captured in the national budget frameworks. Tanzania has a well developed budget classification where local governments classify expenditures in terms of capital expenditure, operating costs, goods and services. The current financial management reporting system as 59The amount disbursed annually against this expenditure item will be determined by the scores achieved by ULGAs on the annual assessment. The annual amounts for DLIs 1, 2 and 3 are fixed against expected targets for each FY. If ULGAs perform below the expected level, actual disbursement will be lower. If they perform higher than expected, actual disbursement will be higher than planned. If ULGA performance exceeds expected targets cumulatively, there will be potentially be a financing gap and additional financing will be needed. Any financing gap or surplus arising out of the difference between expected and actual performance (hence actual disbursement against this budget line item) will be assessed and addressed within the Program during mid-term review and throughout implementation. 6o As PMO-RALG has informed the team prior to appraisal. 79 explained in the LGDG and Medium Term Expenditure Framework (MTEF) manuals currently used will be used for the UPG funds will be to finance capital costs. 17. For the UPG at ULGA level, the annual grant allocation will be announced in synchronization with the annual budget process, in time for ULGAs to include these amounts in their annual budgeting and planning cycles (budget cycles are explained in detail in Annex 1). 18. Funding predictability will be integral to the Program as sustainability and scale of investments envisioned under the UPG will only be achieved by ensuring that ULGAs have adequate, predictable and stable sources. This technical principle has been at the center of UPG design and manifests itself in the creation of the horizontal and vertical formula. Participating ULGAs will know the precise amount of allocation they can receive each year, for the duration of the Program, if they fulfill the agreed upon performance criteria. The possible impact of exogenous shocks to the Program will be minimized as the funds for the Program will be ring-fenced and will be source-specific as determined under the DLI. 19. Expenditures at the ULGA level will be captured using the national standardized monitoring and reporting system which tracks transfers, own source revenues and expenditures by sector and activity. The system is composed of two main elements; first is the quarterly Council Financial Report (CFR) which was introduced in FY2006/07. The CFR tracks budget plan and execution, use of own source revenues, use of transfers from the central government (disaggregated by recurrent funds, block grants and development funds) and expenditures (disaggregated by recurrent expenditures and development expenditures). The second element of monitoring and reporting system at the LGA level is the quarterly Council Development Reports (CDR). The CDR was introduced in FY2008/09 and captures council development expenditures on all projects undertaken by the council. The UPG will become a distinct line item which the ULGAs will report against in the CFR. Also, each investment financed by the UPG will be captured in the CDR as a distinct development project and source of funding. These reports will be aggregated by PMO-RALG and captured in the Program report. 20. With respect to the activities undertaken by PMO-RALG incurred at the national level to support the UPG, expenditures will be incurred chiefly for capacity building, annual assessment and impact evaluation. Sufficient funding for these expenditures will be made available through the GoT budget system. This will form a covenant under the Program. 21. Disbursements for the Program will be made under a performance based modality. The exact annual UPG allocation to each ULGA will be a function of the performance of each local government. The maximum possible allocation is reflected below. For FY2013/14, if the participating ULGAs meet the Program's enhanced minimum access criteria, an initial US$ 9 million of UPG funds will be disbursed to ULGAs. Program disbursements from IDA to Government as well as from Government to ULGAs will be determined on the basis of progress made against Program's disbursement linked indicators and will be done bi-annually. 22. Financial and institutional sustainability is at the core of the Program. The Program will be fully embedded into the overall intergovernmental fiscal transfer architecture of Tanzania, as part of LGDG. Financial sustainability will be ensured through two main elements: First, as discussed in detail in Annex 4, the Program design is built on rigorous analysis undertaken for financial sustainability. Namely, the Program will require that municipalities prepare formal estimates of the long-term recurrent cost implications for any infrastructure to be funded by UPG. Further, ULGAs will prepare detailed revenue generation estimates and table them for discussion by the full Council. Councils will be required to discuss these estimates in a full council session prior to adoption of the annual budget plan (including 80 UPG investments) as a requirement to receive the UPG funds. Second way of ensuring financial sustainability will be though the performance incentive scheme. Namely, in addition to setting performance targets for revenue collection systems, the UPG performance framework will ensure that local revenues are well-collected and well-spent. At present there only is a tenuous link at best at the local level in Tanzania between revenues paid by local taxpayers and the benefits that they receive from their local authorities. The absence of this link is a major factor in the lack of sustainability of the local government sector in Tanzania. As long as local taxpayers are unable to see that their local taxes and fees are transformed into better local government services, local revenue collections will continue to be anemic in Tanzania. The only alternative to weak local revenues is to fund local government expenditures through transfers, which undermines the long-run discretion and downward accountability of local governments. 23. Institutional sustainability will be created through the incentive mechanism of the Program where mainstreaming of enhanced local government management systems will be rewarded. In the areas of: (i) public financial management and revenue administration; (ii) local planning and other crosscutting institutional governance capacities; and (iii) local service delivery in terms of urban infrastructure developed will be the pillars of institutional sustainability. The ULGAs will be well- positioned to become the first wave of high-performing local government authorities in Tanzania. As urban authorities, they tend to have a larger economic base and a more vibrant private sector, typically have more progressive and more capable political leadership and are in a better position to attract and retain more capable administrative staff. In addition, due to the higher population density of urban agglomerations, the shorter distances involved within the urban core and higher penetration of ICT based systems (data enabled cell phones, internet etc.), urban LGAs are in a better position to interact with the majority of their constituents, including individual residents, but also civil society organizations as well as the private sector. Economic Justification Rationale for public provision and financing 24. Under the proposed Program, financing will be provided to increase the institutional capacity and performance of ULGAs to deliver urban services. This will be achieved, to a large extent, through UPG which will be used by recipient ULGAs to meet their essential urban infrastructure needs. Due to this specific nature of the Program, where the objective of increasing urban local governance capacity and performance is expected to be reached by means of a grant, the rationale for public financing is evaluated at two levels; first at the level of the objective proposed by the Program and the second at the level of the means it will use to achieve the objective. 25. At the objective level, there is strong rationale for public provision of local government capacity. Good local governance is a combination of creating proper legal, political and institutional framework as well as of actively building local authority capacity. The framework of local governance systems cannot be established through private mechanisms and it must be done through public provision. Similarly, capacity can also be built through public provision. At the level of the UPG, which is the proposed means to achieve Program objective, financing will be used for critical urban infrastructure investments (see UPG Investment Menu in Annex 1). These investments are public goods and will provide both quantifiable and non-quantifiable financial and socio-economic benefits, thus making a public subsidy appropriate. If these investments were to be provided without a public subsidy, their use would be highly cost prohibitive and lead to the persistence of large scale problems, including public health. The benefits and externalities mentioned above include the following: 81 a. Strengthened capacity of participating ULGAs to provide services and fulfill service delivery mandates; b. Improved quality of life in the targeted areas, as a result of better living conditions and enhanced environmental management; c. Enhanced interaction between economic actors leading to increased agglomeration benefits; d. Lower vehicle operating costs, reduced transportation costs, fewer road accidents and reduced traffic congestion as a result of improved road conditions and improved access to public transport services; e. Reduced risk of flooding and soil erosion as a consequence of drainage improvements, resulting in avoided flood damage to economic property as well as lower road maintenance costs; f. Improved health outcomes and household incomes, owing to the reduction in water-borne diseases and reduced health costs. 26. Additionally, the Program will be structured to allow for the UPG to ensure full rationale for public financing at the level of each individual investments it supports. Namely, an ex-ante economic analysis including the consideration of cost recovery (including O&M and depreciation costs) will be required for each investment to be financed by the UPG, as part of selection criteria. Program's economic impact 27. The Program will provide various benefits as a result of the physical infrastructure projects that will be financed by the UPG. A comprehensive economic analysis undertaken in 2010 for the World Bank supported Tanzanian Strategic Cities Project (TSCP), has analyzed the same sets of urban infrastructure investments outlined in the investment menu of UPG. While the seven urban centers6 of the focus of that analysis are not the same 18 ULGAs selected for the Program, the infrastructure needs in ULGAs selected for ULGSP are similar to those under TSCP. Therefore, the findings from the analysis can be applied. The economic impact for these investments was measured as positive, with a high average economic internal rate of return (EIRR) of 22.1 percent. The average EIRR was calculated as 24.5 percent for urban roads, 13.8 percent for solid waste management investments and 18.4 percent for bus and truck stands. Given these returns and the large infrastructure gap in the 18 ULGAs, the investments supported by this Program will also produce a positive economic impact. 28. The Program will also produce benefits in deepening the decentralization by devolution reform and strengthening the institutional systems of central, regional local government entities. At the central government level, the proposed Program will enhance institutional capacities of PMO-RALG. At the ULGA level, the performance based UPG system will enhance the institutional capacities for revenue collection, fiduciary and environmental and social systems management, as well as service provision. These improvements will likely contribute to improved efficiency in delivery of key urban services and better management of ULGAs, including the management of GAC risks. As well, their ability to contribute to operations and maintenance of infrastructure and thus, sustainability of the project will also be enhanced. 29. An additional factor in determining the economic impact of ULGSP is considering the counterfactual scenario where the government's LGDG moves forward without the proposed Bank supported Program. Under this scenario, the existing grants of approximately US$ 2 per capita would continue to flow to the 18 ULGAs, without the proposed UPG. However the current LGDG system is not adequate to achieve the proposed Program's objective of building ULGA capacity and performance. This is evidenced by the fact that as of 2012, vast majority of LGAs meet the minimum access conditions laid 61 Mwanza, Arusha, Mbeya, Mtwara, Kigoma, Tanga and Dodoma. 82 out in the Government's LGDG program and all councils are expected to receive a 'very good' performance evaluation, the obvious capacity and performance challenges among ULGAs continue and urban service delivery remains weak. In sum, the current government program without the proposed Bank supported Program is deemed not adequate in achieving the proposed objective of increased ULGA performance in service delivery. Moreover, in the absence of the proposed UPG, the discretionary capital development fund of up to US$2 per capita/per annum given to LGAs for local infrastructure under the current government program does not provide the level of funding needed for the urban infrastructure which ULGAs are in dire need of. World Bank added value 30. The proposed Program is in response to a direct request from the Government of Tanzania to improve the fiscal and management capacity of LGAs for urban service delivery while at the same time financing critical infrastructure in select ULGAs, particularly in view of the strategic importance of urban areas and the magnitude and urgency of their investment requirements. 31. More importantly than providing financing, the Government's request for Bank's involvement in the creation of the proposed Program is due to the leverage that Bank can bring to improve the existing Government program. As discussed in detail above, the ongoing Government program (LGDG) has a number of weaknesses which collectively lead to the program's failure to incentivize good practice local government management. By enhancing the Government's program through an urban focused performance based grant system that is large enough to address urban infrastructure investments, the Program will be able to bring about the desired improved systems enhancement at participating local governments. Additionally, the Government sees the PforR modality and specifically its disbursement- linked indicator mechanism as a significant potential added value in enhancing its overall system. 32. World Bank's technical and institutional know-how in enhancing local government systems and designing and managing performance based grant systems are seen as significant potential areas where the Bank can add value. The Bank previously financed essential rehabilitation and expansion of urban infrastructure in ten project towns under the Urban Sector Rehabilitation Project (USRP), which closed in December 2004. USRP was followed by the Local Government Support Project (LGSP), which is currently under implementation (closing on June 30, 2012). The TSCP was introduced in 2010 to begin to meet the backlog of urban investment requirements of the country's seven largest cities while a proposed Dar es Salaam Metropolitan Development Project (under preparation) will address the special requirements of the country's most important metropolitan region and the Zanzibar Urban Services Project (ZUSP) will provide infrastructure investments and institutional strengthening to the four urban areas on the two Zanzibar islands. Government's request for Bank's involvement through ULGSP should be seen in this context, and with the aim to establish a system of funding for urban infrastructure across the rest of the country's system of cities. When all Bank supported operations will be in place, the Bank's Tanzanian portfolio will contain a set of coherent and interlocking interventions designed to meet the key financing and institutional needs of local governments and urban areas across the country. Importantly, similar to TSCP, the proposed Program reflects a shift in the Bank's approach in two significant ways. First, these two interventions recognize the strategic importance of Tanzania's urban centers as the nodes for the country's structural transformation, economic growth and nationwide improvements in welfare. Second, ULGSP, like TSCP, will decentralize implementation responsibilities to the participating cities including procurement and contract management. In this way, the projects seek to build capacity through "learning-by-doing" for urban infrastructure development. 83 Technical Risks 33. The Program is assessed as having substantial level of technical risk. This risk rating is a balance between on the one hand the Program being based on strong rationale and is technically sound, while on the other hand inherently containing important risks. Tanzania is fast urbanizing and its population is rapidly increasing. Inadequate local government systems and insufficient infrastructure financing lead to loss of potential of cities, which are the main drivers of economic growth. The current Government program (LGDG) has achieved progress in decentralizing decision making and financial resources, but faces challenges in bringing about solid governance systems. The Program will incentivize such systems and provide much needed financing for infrastructure. There is also strong potential for sustainability: Firstly, the objective of the Program is to enhance local government systems. Under enhanced local government systems investments are more sustainable as they are based on community's needs, properly accounted for and better maintained. On the other hand, less-than desirable institutional capacity at the ULGA level including potential governance issues raise the risk of the Program to fulfill its objective from low to medium. The capacity risks, including governance risk, are at the core of the design of the intervention, and constitute the majority of activities under the capacity building, technical assistance and grant management element of the Program 84 Annex 5: Summary Fiduciary Systems Assessment Program context Local Public Financial Management 1. Accounting, planning, budgeting and financial reporting processes of ULGAs in Tanzania are subject to the Finance Act (2010) and Local Government Finance Act (1982). This is supported by the Local Authority Financial Memorandum (LAFM, 2009), the Local Authority Accounting Manual (2009), and the Planning and Management Guide (PMG). These documents specify the financial procedures and management control of local government finances as well as relationships among various stakeholders from different levels of the local government structure. 2. Local Government spending currently accounts for around 23% of overall government spending in Tanzania. Education, Administration and Health sectors account for around 80% of local government budgets with own source revenues accounting for 2% of overall ULGA revenues. During the current year, own source revenues are expected to account for less than two percent of local government budgets. 3. Challenges at the national level stressed in the Public Expenditure and Financial Accountability (PEFA) 2009 report and more recent diagnostics include macro and fiscal forecasting, predictability of national budget execution, harmonization of debt systems, and the timely implementation of audit recommendations. All these increase the fiduciary risk that public funds are subjected to at the local government level. 4. At the local government level, the number of local governments that received a clean audit opinion reduced from 100 in FY 07 to 66 in FY10, though this was partly a result of the introduction of an enhanced audit process over this period which required that LGA financial statements accord with International Public Sector Accrual Accounting Standards. This is not surprising considering the fact that accrual accounting standards usually take time to be ingrained into local government practice. More recently, some signs of improvement are evident e.g. the number of clean audit opinions improved from 66 to 72 between FY10 and FY11. 5. Some key PFM challenges faced by LGAs in Tanzania are as follows: i. Planning and Budgeting: There are multiple bottom-up planning processes in LGAs. The Opportunities and Obstacles to Development (O&OD) is only one of many participatory planning processes. The others are program and sector specific. These do not connect well with top-down budget guidelines. The multiplicity of planning, budgeting and reporting requirements undermines the integrity of the whole budgeting/planning process, and raises the question as to whether funds are being efficiently and effectively directed to local needs. The integrity of the local government budget formulation process is often undermined by the central government changes to ceilings for block grant transfers, after the budget is approved by the local authority. ii. Accounting and Financial reporting: Since FY 2009 all LGAs are required to adhere to the IPSAS Accrual Accounting standards. There is weak capacity in LGAs and limited training has been provided to staff to implement accrual accounting standards. LGAs have struggled to achieve minimal standards and basic procedures such as bank reconciliation remains an area of concern. iii. Treasury Management and Fund Flows: Cash management challenges being faced by the Central Government have had an adverse impact at the Local Government level. Salaries are by and large paid on time, but other than that there has been a major increase in the unpredictability of resource flows to local governments. Budget execution of the development budget for LGA's reduced to 56% compared to 62% the previous year. 85 iv. There are multiple IT systems in Local Governments which do not exchange data in an effective manner and there are also multiple reporting requirements that strain weak LG capacity. For example, a large number of LGAs use IFMIS (Epicor) for financial management and Planrep for monitoring physical progress. These systems do not have a standardized interface for exchanging data. This results in duplication of data input into different software programs. Reporting is also a major challenge for Planning and Accounting Departments. While the Council Financial Report and the Council Development Report have reduced the burden somewhat, LGAs are still required to produce between 20 to 40 monthly reports for various projects and stakeholders. v. The roll out of the IFMIS has been underway in LGAs since 2000. It has been a challenge. Until 2010 around 86 LGAs were covered. The KPMG review of 2010 noted that the system was largely underutilized, was being used primarily as a voucher processing system, several sites had an outdated software version running that had not been upgraded to the version running at the Central Government, had a Chart of Accounts that had been revised at the Central Government level and there was inadequate training of staff. Data integrity had been compromised in some Epicor installations. Some of these issues are being addressed. A new web based Epicor Version (9.05) is being rolled out to all LGAs and the training issue is being addressed. The Bank will support this through a project under preparation and is expected to be approved in FY14. vi. Internal controls and internal audit: This is a major area of concern. CAGs audit report for FY 10 stated that the internal control environment is weak in 64% of LGAs, that there is no risk management framework in 68% LGAs, that audit committees are ineffective in 87% LGAs and that the internal audit function in ineffective in 910% LGAs. vii. Program Audit: This is governed by the Local Government Finances Act No.9 of 1982 (revised 2000). The Act stipulates that accounts of every ULGA shall be audited by the National Audit Office. The Auditor General is required to prepare and submit a report to the Parliament on the final accounts of each ULGA not later than nine months after the closure of the Financial Year. CAGs reports on LGAs have repeatedly pointed out that there is poor follow up of audit findings. 6. Reform efforts have been made in financial management systems in the last few years. The amendment to the Public Finance Act in 2010 brought Local Government fiduciary systems under the technical overview of the Accountant General for the first time and created the Office of the Internal Auditor General. This resulted in improved quality of the work of internal auditors across the country including in local governments, and the roll out of the new version of accounting software Epicor to all local governments, which along with improved training, is expected to improve the overall financial management environment in LGA's. 7. The Government is committed to further strengthening PFM systems and is developing a Public Finance Management Reform Program. Phase IV for a five-year period beginning 2012, in close coordination with DPs. A new government strategy for 2012 - 2017 is intended to respond to identified weaknesses with implementation is expected July 2012. Specifically, the strategy will focus on five Key Results Areas: (i) revenue management; (ii) planning and budgeting; (iii) budget execution, transparency, and accountability; (iv) budget control and oversight; and (v) change management and program management including capacity building and training, IFMS and electronic service delivery, PFM institutional and legal framework, program coordination, monitoring, and communication. The Poverty Reduction Support Credit series also supports the Government's PFM agenda. The roll-out of IFMIS (Epicor) to LGAs, including those that form the target of the ULGSP will be supported through a component of a separate World Bank operation which is due for FY 1013. Procurement 8. The current operating Legal and Regulatory Framework for procurement is the Public Procurement Act of 2004 (PPA 2004). Under the PPA 2004, the procurement function has been fully 86 decentralized to procuring entities including LGAs with establishment of PPRA as an oversight body. The PPRA has developed various instruments of implementing the Act including standard bidding documents, request for proposals, guidelines and manuals. The PPA 2004 complies with applicable obligations deriving from national and international requirements. All participating ULGAs and PMO-RALG have established organs to process procurement. The organs established by PPA 2004 are Tender Boards (TB), Accounting Officer (AO), Procurement Management Units (PMU), User Departments (UD) and Evaluation Committees (EC). 9. PPRA as an oversight body has powers to institute: (i) procurement audits during the tender preparatory process, (ii) contracts audits in the course of execution of an award tender and (iii) performance audit after the completion of the contract in respect of any procurement as may be required. 10. The Government has enacted a new Public Procurement Act (2011) to repeal the PPA 2004 but the Act is not yet effective because the Regulations are not ready. The new Act has strengthened some PPRA's functions including powers to cancel procurement proceedings after conducting an investigation and reasonably satisfied that there is a breach of the Act. Otherwise, the overall basic principles of the public procurement and general institutional arrangements have remained the same as in the PPA 2004. In addition, the new Act has enhanced the definition of Fraud and Corruption in a broader term by including definitions of coercive practice, collusive practices and obstructive practices that were missing in the PPA 2004. Furthermore, the new Act gives powers to PPRA to blacklist and debar a bidder who has been debarred by international organizations such as the World Bank in cases related or unrelated to fraud and corruption for such period as is debarred by the international organization plus a further period of ten years (for fraud and corruption cases) or five years (for non fraud and corruption cases). However, it is worth to note that the new Act has added one layer of the approval process at the local government level which may affect the efficiency of procurement under this program. The Finance and Planning Committee of a ULGA is now required to scrutinize the decision of the ULGA's tender board before award of contract. In the event that the Committee is dissatisfied with the decision of the tender board after its scrutiny, it shall request PPRA to conduct an investigation as part of their powers under the Law. As a result of this change in the law, procurement under this PforR operation may initially be carried out in accordance with PPA 2004 but later change to PPA 2011 as soon as it becomes effective. 11. Review of Procurement Decisions and Resolution of Complaints is provided by the Public Procurement Appeal Authority (PPAA) established under the PPA 2004. The PPA 2004 and its Regulations provides a three-tier of handling the procurement complaints which are: AO, PPRA and PPAA. Under the PPA 2004, it takes 161 days to complete a complaint handling cycle if all three levels are involved. Under the new Act, there will be two levels (AO and PPAA) and as a result this period will be reduced to 87 days. The complaints review system is centralized and therefore the complaints process at the local government level is the same as that at the central government level. In both cases complaints are first submitted to the AO (for ULGA in this case) and if the complainant is not satisfied with the decision of the AO an appeal may be made to the PPAA. If the complainant is still not satisfied with the PPAA's decision an appeal may be made to the High Court. Over the past five years, the average level of complaints from LGs was about 21 % of the total complaints. 12. At the moment ULGAs have the capacity to procure goods, works and services of low value and complexity. Only contracts within National Competitive Tendering (equivalent to NCB) threshold and below are handled by ULGAs. The yearly procurement volumes of the ULGAs under this program in the last five years are presented in table below. Most of the procurements have been done using the shopping procedure which for goods has now been replaced by framework contracts. Items procured include: stationary; office equipment; pharmaceuticals; textbooks; small works including construction and rehabilitation of buildings and roads; and small value consultant services. 87 Volume of Public Procurement Works # of Amount #of S/ ULGA Large Tshs Works Amount/ Size of largest Amount N Works (mil) Over Tshs(mil) public work procured Tshs(mil) (2011) (100mil) 1 Singida 14 1,287.3 1 663.8 1.02 kms of tarmac road 663.8 2 Tabora 25 1,190.8 6 1,357.7 maintenance work for 11kms 520.0 Upgrading kenyata road tarmac road 3 Shinyanga 55 1,769.3 2 323.1 1.75km - 4 Musoma 11 616.3 0 0 Construction of storm water drains 75.4 5 Moshi 10 1,128.5 2 878.3 Roads infrastructure 608.3 Periodic maintenance of road 0.7km 6 Bukoba 49 876.5 2 261.3 (tarmac) 125.9 7 Lindi 12 1,185.5 2 462 Tarmac road construction 1.42kms 247.0 8 Morogoro 9 996.0 2 581.4 2.1 km road to bitumen standard 414.8 9 Iringa 17 1,449.2 2 792.2 Constr. of maternity ward 564.2 10 Songea 9 998.6 3 767.8 Road maintenance 372.9 Sumbawan 11 ga 35 3,086.4 3 1,229.1 Construction of municipal head office 500.0 Construction of Babati TC 12 Babati 10 1,485.5 2 849.0 headquarters 676.8 13 Masasi 38 2,336.9 4 1,226.4 Construction of hall and offices 620.3 14 Kibaha 4 2,093.4 2 1,940.7 Construction council building 1,740.0 15 Njombe 4 1,563.6 2 2,263.6 Construction of admin. block 1,500.0 1 flat building construct. of council headquarter (started 2007, still in 16 Mpanda 27 1,180.6 1 3,100.0 progress) 3,100.0 17 Korogwe 14 657.7 2 416.0 Construction of council conf. hall 300.0 18 Geita 19 1,683.6 6 1010.6 Boreholes drilling for water 285 13. The thresholds for procurements allowed at ULGA level is presented in the Table below. The procuring entity may exceed the threshold, but must inform the PPRA at commencement of the procurement process. There is likelihood of these thresholds to be increased in the new Regulations under preparation as stakeholders consider the thresholds outlined in table below too low taking into account the prevailing inflation. Tanzania Public Procurement Regulations Methods of Selection and Limit of Application62 (US$ Equivalent) Goods, Works and Non-consulting Services Minimum Tendering Period Non-Consulting Method of Procurement Goods/US$ Works/US$ . Services/US$ National Competitive 1 UP to 1 Up to 1,875,000 Up to 312,500 Tendering 500,000 21 days - National Restricted Competitive Up to250,000 Up to 937,500 Up tol25,000 competitive Selection bidding & 30 days international 62 Currency conversion using 1 TZS = 0.000625 USD, The New PPA 2011 is expected to include substantially higher limits, but these have not yet been published 63 Limited to number of bidders who have already pre-qualified; specialized nature or can be obtained from a limited number of contractors, suppliers; the estimated contract values are within the limit and there is an urgent need goods, works or services such that there would be insufficient time to engage in open competition. 88 competitive bidding Single Source Selection64 Up to312,500 Up to 500,000 Up to 62,500 7 days - National Competitive Quotations Up to 50,000 Up to 62,500 Up to 31,250 shopping & 14 (Shopping) days - International shopping Minor Value procurement Up to6,250 Up to 12,500 Up to 6,250 Selection and Employment of Consultants National Competitive Selection Up to 625,000 Restricted Competitive Selection Up to 312,500 Single Source Selection Up to 187,500 Individual Selection Up to 93,750 Minor Value procurement Up to 4,687.5 Program fiduciary performance and significant fiduciary risks Financial Management 14. A financial management assessment has been carried out of PMO-RALG and the 18 Urban LGAs that are the beneficiaries of this program. Development spending only accounts for 21% of aggregate LGA expenditures, amounting to $23m in FY 10. Increasing this by over 100% p.a. as the Program intends (in the second year) will require substantial capacity building. On average, in FY 10 only 59% of the development budget was executed by these ULGAs although, like LGAs nationally, much of this is attributable to the late release of grants from the center (something the ULGSP will address). There is wide variability in the capacity of these ULGAs in executing their budget. The range is between 28% and 78%. 15. A major focus of this operation is on improving property tax collections. Currently property taxes only amount to 9% of own source revenues with large variability between the 18 ULGAs in collecting this source of revenue. 16. There is limited automation of the financial management function at the 18 LGA's. Six of them currently are not running on the IFMIS and of the 11 that are, seven are not using the system for making payments but mainly for processing vouchers. Accounting is largely manual in these 18 ULGAs. 17. There has been quite a bit of variability in the audit opinions that these 18 LGAs received over the last three years. The number of ULGAs that received a clean audit opinion over the last three years has been 14, 6 and 12 respectively. This variability is partly on account of the application of stricter reporting standards to accord with international practice applied by CAG to ensure compliance with the IPSAS Accrual accounting standard. Some of the LGA annual audited financial statements have been qualified on account of absence of documentation to support expenditures owing to lack of basic documentation systems at this level. Whilst this may have been observed in some of the 18 participating 64 Apply where goods or services are available only from a particular supplier or service provider; there is an urgent for the goods or services and engaging in tendering proceedings would be impractical; PE having procured good, equipment or technology, service or spare parts from a supplier following national or international competitive method and determines that additional suppliers are the same type as those procured under an existing contract are required. 89 LGAs, showing weaknesses in documentation maintenance, it is a clear indication that the affected LGAs have weak financial management systems that have difficulties in maintaining appropriate documentation to evidence expenditures incurred. CAG's Audit Opinions LGA 2008/09 2009/2010 2010/11 1 Singida Unqualified Qualified Qualified 2 Tabora Unqualified Unqualified Qualified 3 Shinyanga Unqualified Unqualified Unqualified 4 Musoma Unqualified Qualified Unqualified 5 Moshi Qualified Qualified Unqualified 6 Bukoba Unqualified Unqualified Unqualified 7 Lindi Unqualified Qualified Unqualified 8 Morogoro Unqualified Unqualified Qualified 9 Iringa Unqualified Qualified Unqualified 10 Songea Unqualified Qualified Qualified 11 Sumbawanga Qualified Qualified Unqualified 12 Babati Unqualified Qualified Unqualified 13 Masasi Unqualified Qualified Unqualified 14 Kibaha Qualified Unqualified Unqualified 15 Njombe Unqualified Qualified Unqualified 16 Mpanda Unqualified Qualified Qualified 17 Korogwe Qualified Qualified Qualified 18 Bariadi Unqualified Unqualified Unqualified 18. At the centre of the fiduciary challenges that the ULGAs face is the quality of the staff that they employ. In order to handle the increased funding that will flow via the UPG, it will be necessary for this capacity to grow substantially - though it should be remembered that the UPG is structured in such a manner as to ensure that if fiduciary performance does not improve, LGAs will receive lower amounts of UPG funding (as they will be marked lower in the annual assessment). 19. The systemic weaknesses that affect this Program and the target ULGAs are expected to be quite similar to those affecting LGAs under the Local Government Support Program (LGSP). The findings of the In Depth Supervision Report for that project that was done in FY 2011 raise concerns regarding poor release of funds, staff capacity, poor utilization of IFMIS, inadequate CoAs, weakness in bank reconciliation and other issues that have been raised in this assessment. Successful implementation of the ULGSP will require effectively addressing those issues and putting in place effective risk mitigation measures. Procurement 20. Procurement capacity assessment was carried out in 18 participating ULGAs and PMO-RALG. The assessment was based on the following methodology: (i) physical visits to four of the participating ULGAs namely; Morogoro Municipal Council, Singida Municipal Council, Shinyanga Municipal Council and Kibaha Town Council; (ii) written questionnaires sent to all participating Urban LGAs and PMO-RALG; and (iii) desk review of the Annual Performance Reports from FY 2007 to 2011 by PPRA 90 and data collected by the Public Procurement Appeal Authority (PPAA) on complaints cases. The procurement assessment reviewed the following aspects; legal and regulatory framework; institutional set-up; procurement processes and procedures; existing capacity; quality of and adequacy of control systems; contract management mechanism; procurement performance; and inherent risks in procurement process to ensure reasonably mitigation measures are proposed. 21. Annual Procurement Plans are prepared by PMO-RALG and each ULGAs based on the annual work plan of different departments within the ULGAs and linked with the budget. However, the Bank team observed that most of the plans are not comprehensively prepared. There is a mixing of the templates for works/goods and consultancy services; plans include non-procurable items; there is an excessive use of competitive quotations as a default method for most of procurement; and splitting of the contracts was observed. Procurement plans are not used as an instrument to monitor progress of implementation of procurement activities, but rather compliance with the law. Weaknesses noted were: none use of appropriate templates; processing times for different stages of procurement process not indicated; requirements from the user departments not aggregated; too many tender board meetings; extensive use of quotations under minor value procurements; and unrealistic plans. PMO-RALG itself scored 40 percent on preparation and adherence to its procurement plan in the audit carried out FY 2008/09. 22. Most of the goods/services of PMO-RALG and the ULGAs are procured through Common Used Items Systems (CUIS) under Framework Agreements introduced by the Government in February 2011 and are managed by the Government Procurement Services Agency (GPSA). This shift of paradigm has resulted in ULGAs and PMO-RALG preparing procurement plans for a few goods or services, which are not covered under common used items. Works contracts however are not subjected to this approach. The use of Framework Agreement has replaced the conventional shopping method that was often abused by PEs. This approach will in addition, minimize the small scale of fraud and corruption practices that was entrenched in the shopping procedures. 23. Most works packages procured through National Competitive Tendering (NCT) are advertised in the local newspaper and notice boards. The performance of the LGAs in advertising tender opportunities has increased from 73 % to 90% in FY10/ 11. Advertisements are published in the local newspapers of wider circulation and PPRA's website and Procurement Journal that is issued weekly. The minimum tendering period for International Competitive Bidding (ICB) and NCT is 45 days and 30 days respectively or more depending on the nature and complexity of the services or works. The bids are opened in public in the presence of the bidders who choose to attend. Minutes of bids opened are prepared and although in most cases are not sent to bidders who submitted bids. 24. For consultancy services, it was observed that ULGAs are not conversant with the selection process for employing of consultants as they do not engage consultants frequently. PMO-RALG staff however are familiar with selection and employment of consultants and currently is implementing projects such as Local Government Support Project, Tanzania Strategic Cities Project (Bank funded projects) and other donor funded projects whereby PMU staff are involved in the selection process. 25. Bidding Documents for NCT procedures are those developed by the PPRA including: (i) standard bidding documents for the procurement of goods, works, and non-consulting services as well as standard request for quotations; (ii) request for proposal for selection and employment of consultants; and (iii) guidelines for evaluation of bids and proposals. Generally, PMO-RALG and all the ULGAs are using these standard bidding documents issued by the PPRA. 26. Bids Evaluations are carried out by Evaluation Committees of a minimum of three members for works, goods, non-consulting services and financial proposals and a minimum of five for technical proposals. Generally, evaluations follow the evaluation/qualification criteria specified in the bidding documents although it has been noted that at times no reasons are recorded as to why particular bidders are disqualified. Evaluations are done in three stages; preliminary examination, detail evaluation and post- 91 qualification analysis and these stages are adhered to in most of the evaluation reports reviewed by the Bank, especially in the works contracts. Sometimes however, the provision in the PPA 2004 and its Regulations have not been abided to by the evaluation committees as well as Tender Board. 27. Significant delays have been noted in bid evaluations, in evaluation process, adjudication of evaluation reports and awards recommendations and getting necessary approvals, which lead to tenders being awarded after expiration of bids validity period. Unsuccessful bidders are informed on the decisions and publications of awards are placed at ULGAs notice board. The Law requires PPRA to publish contracts awards in its Journal and website including the names of those who have been awarded the contracts, contract amount, the date when the awards were made, contracts period and final contracts amount. Procuring entities are therefore required to notify PPRA on the awarded contracts so that can be published. However compliance on the publication of contract awards has been a problem with the average level of compliance for LGAs for FY10/ 11 at 54%. Two participating ULGAs in the program scored below average in this indicator, i.e., Kibaha Town Council (40%) and Njombe Town Council (30%). FY 2008/09 audit revealed that PMO-RALG scored 100% in publication of contract awards. 28. Procurement Oversight is done by the Internal Auditor of the ULGAs or of PMO-RALG, PPRA and Controller and Auditor General (CAG). ULGA Internal Auditors prepare quarterly audit reports, which cover procurement issues and provide recommendations. Procurement capacity in the internal audit department is weak. There is a need for building capacity of internal auditors to enable them perform the audit function satisfactorily. All visited ULGAs have been audited at least once by PPRA and in some ULGAs, PPRA has carried out performance (value for money) audits for selected contracts. However, PPRA does not carry out performance audits annually for every procuring entity. Results of procurement audits and VFM are published in the local newspapers and PPRA's website. Non-performing procuring entities (Accounting Officer) are summoned by PPRA's Board of Directors to discuss the findings and corrective measures to improve compliance in their entities. The CAG has the responsibilities of undertaking external financial and performance audit of all government entities, public authorities and other bodies at least once a year. The performance audit performed by CAG covers also expenditure of funds being used for procurement of goods and services by the government entities. The PPA 2004 has a provision that requires CAG to state in its annual report every year whether or not the provisions of PPA 2004 have been complied with by the public entities. 29. PPRA and CAG on May 31, 2011 signed a Memorandum of Understanding (MoU) in the effort of intensifying the oversight role and improve of public procurement system in the country through conducting procurement audits; special investigations in public procurement; performance and forensic audits by exchanging and sharing technical expertise and information; and co-operating in building the capacity of staff of the two institutions. As a result of this, now the procurement and VFM audits feed in the CAG annual report in the procurement chapter. 30. As part of auditing process, PPRA in its effort to prevent and combat corruption has established the Public Procurement Anti-corruption Strategy which started with the application of its Red Flags checklist across 307 tenders processed by 40 procuring entities. Overall the percentage of "YES" (red flags) for all the assessed PEs was low at 9.3% with five entities performing particularly poorly more than 20% flags. However none of the participating ULGAs nor PMO-RALG are among those five. 31. As part of annual performance assessment of the target ULGAs, the Program will adopt the 13 compliance indicators used by PPRA to measure the level of compliance of participating ULGAs and PMO-RALG. The tool used by PPRA measures: institutional set-up; procurement plan; process; quality assurance; and contract management. Currently, PPRA is revising the existing compliance indicators and the new indicators will be applied for the first time in FY 2012/13 audits after completing the first cycle of procurement audits of all the 393 procuring entities (PEs) countrywide. The compliance levels of the participating ULGAs have tended to fall in the middle of the performance curve for Tanzania's procuring entities although sample sizes have been low. 92 32. Assessment of procurement staffing indicates that most ULGAs have a very basic level of planning, and fiduciary capacity. Such capacity is a requirement of the LGDG system and as such it has been increasing consistently, albeit from a very low starting point. ULGAs also lack practical experiences with design, procurement and supervision of large infrastructure projects, which this Program addresses. The largest recent capital investments of the surveyed ULGAs would typically be constituted by 2 km of road rehabilitation (upgrading to bitumen standards) at a cost of around US$280,000. Existing capacity needs to be enhanced, and new capacity needs to be built in areas such as civil engineering and ICT. One noticeable exception is that Morogoro Municipal is constructing Mwere Bridge at an estimated cost of US$1 million using in-house expertise. 33. In all municipal and town councils there are procurement officers although the number of staff is inadequate to meet the procurement volumes. Existing experience of procurement officers also varies significantly. In many councils PMU members are drawn from different user departments to form ad-hoc committees to handle procurement issues contrary to the requirement of the Law. Some of the officers have attended procurement trainings conducted by PPRA. It was noted that still more trainings are required in areas of procurement planning, preparation of bidding documents and request for proposals, evaluation of bids/proposals and contract management. Of a total of 11 procurement staff surveyed in participating ULGAs, three had a master's degree, four had advanced diplomas and one had a diploma. 34. Assessment revealed that PMO-RALG's PMU is well staffed with adequate number of staff and experience in procurement processes required for the Program. PMO-RALG PMU has a total of 13 staff including the Head of the PMU and divided into four strategic sections: procurement section (four), store section (five), clearing and forwarding (one) and Local Government Loans Board (two). 35. In the effort to address the capacity issue, PPRA has put a proposal of categorization of procuring entities in accordance with the volume of procurement and has proposed manning levels for PMU for each category. It is envisaged that most of the participating ULGAs will fall under Class II with annual volume of procurement of up to US$ 3 million. According to the proposal the manning level proposed is one Senior Procurement Officer (Head of PMU), one Procurement Officer I, two Assistant Procurement Officers, one Personal Secretary II and one Office Attendant. As the volume of procurement in participating ULGAs will increase and there is need of capacitating the ULGAs in terms of number of staff and knowledge and skills to match with increased volume. 36. In works departments which combine civil works and building works are headed with qualified engineers. However, there is a shortage of number of staff and experience to assist the engineer in day to day supervision of works. Some participating ULGAs do have adequate qualified and experience staff. For instance, Morogoro Municipal Council has five civil engineers, two quantity surveyors, one architect and one technician while Singida Municipal Council has one civil engineer, one quantity surveyor, one architect and one road technician. 37. PMO-RALG has an established Infrastructure Development Unit staffed with 13 civil engineers and one economist. As part of its oversight duties the unit does also provide technical backup to the LGAs in all matters related to infrastructure. Assessment also revealed that PMO-RALG has established a dedicated Urban Program Unit which is under the Directorate of Urban Development. The unit is staffed with four engineers and two procurement specialists/engineers. The unit has a fully equipped office in Dar es Salaam with constant communication with the Headquarters offices in Dodoma where the Ministry is operating. The unit will oversee the implementation of activities of this program. 38. The ULGAs do not have adequate record keeping and filing system. Records in the ULGAs are scattered, incomplete and not easy to retrieve. Also, the 18 participating ULGAs do not have enough space to keep procurement file, thus likelihood of compromising the confidentiality of the procurement process. In all visited ULGAs, it was observed that maximum office space allocated for PMU is a room of approximately 16 square meters shared with three to five staff including storage documents. According to the PPRA Annual Performance Based on the report for FY10/ 11, the overall level of compliance on 93 records keeping is 51% and compliance at the LGAs level is 37%. PMO-RALG scored 52.5% on the audit of FY 2008/09. Major weaknesses noted during audits include lack of a comprehensive list of tenders, procurement records scattered in different departments, lack of records on contracts managements, inadequate space and inappropriate filing. 39. Contract management in the UGLAs has been observed to be weak due to limited capacity of human resources, knowledge, experience and logistical constraints. For works contract; contract documents normally mention the ULGAs districts engineers as a Project Manager. Due to lack of qualified and inexperience staff in ULGAs; engineers are unable to delegate their power given by the contract to their subordinate as a result most contracts suffer inadequate supervision. Fiduciary risk 40. Financial Management risk of the participating ULGAs is high. The mains areas for concern in designing financial management risk mitigation measures are: (i) Planning: The MTEF process is particularly weak in Tanzania with the forward looking dimension in budget preparation, budget ceilings and budget guidelines loosely connected with the previous year's MTEF; (ii) Chart of Accounts: Functional GFS 2001 classification was initiated in the FY 09 budget, but has only been partially implemented; (iii) Fund Flows and Budget Volatility: there are major challenges in fund flows and budget execution; (iv) Integrated Financial Management Information Systems: need to ensure that the system is rolled out to the target 18 ULGAs and that staff is adequately trained in the use of this system; (v) Internal Control and Internal Audit: are weak and adequately trained staff are needed; (vi) Arrears: given the weaknesses in fund flows to LGAs there is strong likelihood of the buildup of arrears in the system. 41. Procurement risk of the participating ULGAs and PMO-RALG is rated high. Main areas of significant risk to the program are: (i) procurement of works, goods and services due to inadequate qualified procurement staff; (ii) poor records keeping of procurement documents; (iii) possible delays in procurement process due to additional layer of the approval process embedded under the new Public Procurement Act (2011). The Law requires the Finance and Planning Committee of the ULGA to scrutinize the decision of the ULGA's tender board before award of contract is made; (iv) too many tender board meetings; and (v) delays in supervision and quality control; (vi) receipt of goods - weak stock verification and inventory records; and (vii) authorizing and effecting payments. These risks will need to be addressed, monitored and evaluated throughout the program. Some risks would be mitigated through capacity building initiative and strengthening of internal oversight function. The Government will ensure, for example, that core fiduciary staff are in place at the ULGA level for each year of the Program through DLI leveraged steps. 42. The Program will address fiduciary risk in various direct ways. It is important to note that these measures will complement a number of other interventions and reforms introduced or supported by the Government, Bank and development partners to improve central and local government fiduciary capacity. First, through the UPG incentive mechanism and the Program's annual performance assessment, namely through minimum access conditions and performance indicators. For example, the UPG will require that a grievance handling system is in place in each ULGA as a minimum access condition, and no ULGA which receives an adverse audit opinion in the previous year will be eligible for UPG funding. It will also adopt (as performance indicators) the 13 compliance indicators used by PPRA to assess PMO-RALG and participating ULGAs. Second, the Program will finance a set of capacity building activities at the PMO- RALG and ULGA level. These activities will include financial management and procurement areas. Third, Program DLIs, particularly those directed at leveraging central government actions (e.g. fulfillment of core staffing at each ULGA and timely disbursement of funds) will help reduce fiduciary risk. Fourth, PMO-RALG and PPRA will begin conducting performance (value for money) audits of the 18 target ULGAs during the Program (see below), which will cover all ULGAs from FY 2015/16 and results be incorporated in the annual performance assessments. 43. These measures are detailed in the table below: 94 Fiduciary risk key mitigation measures Cross Cuting! General (as pertains to fiduciary risk mitigation) Issue/risk Action/Completion Time Frame Responsible Instrument description Party Adequate staffing LGAs with core staffing levels65, including in Appointment of PMO-RALG DLI4 and at ULGAs procurement, financial management and social and staff before covenant environmental systems appointed and in place effectiveness according to national LGA staffing norms Staff in place throughout Program Sufficient PMO-RALG maintains Program unit as described Throughout PMO-RALG Covenant capacity in PMO- in implementation arrangement Program RALG Program Unit to manage UPG Effective PMO-RALG develops annual capacity building Annual PMO-RALG Covenant execution of plan (including all fiduciary, environmental and capacity building social management requirements) and submits to activities Bank at the latest in April 30 of each year Fiduciary Audit Quarterly Internal audit of funds conducted by Quarterly ULGA DLI1 and 2 ULGA internal auditors Record keeping Establish Records Keeping Management System During project PMO-RALG DLI 2 and 3 implementation and ULGAs PMO-RALG has Sufficient budgetary provision is made for all Annual PMO-RALG Covenant sufficient PMO-RALG Program activities related to annual and Ministry budgetary assessment, capacity building, impact evaluation of Finance resources to and value for money audits; and budgeted amounts undertake are released on a timely basis to PMO-RALG Program activities throughout the year. Open bidding procedures to be publicly advertised Annual ULGAs DLI 2 and 3 (procurement) Contract awards disclosed to the public Annual ULGAs DLI 2 and 3 (procurement) Consultative process for Performance Grant Annual ULGAs DLI 2 and 3 Utilization in place. Annual financial and physical progress report Annual ULGAs DLI 2 and 3 presented to and discussed by the Council Transparency Annual financial and physical progress report Annual ULGAs DLI 2 and 3 disseminated to the general public via suitable (newspapers, local radio stations, web pages etc.) commonly available media. Information on use of own source revenue publicly Annual ULGAs DLI 2 and 3 disclosed Quarterly Financial progress reports prepared Annual ULGAs DLI 2 and 3 timely and available and Progress reports presented and discussed in CMT & Full Council 44. The primary reference for monitoring fiduciary performance of the 18 ULGAs in the program will be the Annual Performance Assessment to be commissioned by PMO-RALG. The primary reference for monitoring fiduciary performance of PMO-RALG will be the biannual implementation support missions by the Bank team. The Bank team will also draw on a variety of regular and ad hoc assessments 65 ULGA core staffing comprises council director, council treasurer, council internal auditor, council engineer, council community development officer (in charge of environmental and social systems management), council supplies officer, council assistant supplies officer (in charge of procurement), council town planning officer, council planner and council human resources officer. Qualifications of core staff are specified in GoT Scheme of Service. 95 of relevance to the program in order to support its performance monitoring as well as the use of field visits by bank fiduciary teams. These include: (i) The annual assessment of LGA performance for the broader LGDG system; (ii) The Controller and Auditor General (CAG) annual financial audit reports; (iii) Procurement Compliance Audits provided by PPRA; and (iv) Performance (Value for Money) Audits to be carried out by the PPRA. Audit 45. The CAG undertakes the audit at central level and for all ULGAs. These audits are of a financial nature and primarily comprise transaction level testing, but internal controls are examined and reported on. Moreover, issuance of Value for Money (VfM) audit reports has been initiated recently. The CAG has the power to authorize professional accountants to conduct audits on its behalf. Outsourcing of the audits partly solves the challenge of staff constraints at the CAG office. Program Audit is governed by the Local Government Finances Act No.9 of 1982 (revised 2000) which stipulates that accounts of every ULGA shall be audited by the National Audit Office (NAO). NAO is required to prepare and submit a report to the Parliament on the final accounts of each ULGA not later than nine months after the closure of the Financial Year. The CAG audits of the target ULGAs will be taken into account in the Annual Performance Assessment. 46. In addition, in ULGA disbursement years one and two (FY2013/14 and FY2014/15), PPRA will conduct several value for money audits in at least two or three of the Program ULGAs, respectively, to determine performance in particular regards to management of contracts and quality of works. From FY2015/16 onwards, PMO-RALG will commission PPRA to conduct value for money audits for all Program funds in all 18 Program ULGAs and the results will be incorporated into the annual assessment. 47. The program audit will be carried out annually by the National Audit Office (NAO). The auditor will be required to express an opinion on the audited financial statements of in compliance with International Standards on Auditing (IFAC) or INTOSAI pronouncements and submit the audit report within nine months of the end of the financial year. In addition, the auditors will provide a detailed management letters containing the auditor's assessment of the internal controls, accounting system and compliance with financial covenants in the Financing Agreement. Fraud and corruption 48. The prevalence and public perception of corruption in Tanzania generally remains high. Some of the key problems observed at national level will also affect the program because it will be implemented in the same environment with the same public sector norms. Corruption within construction and civil works may affect the quantum of results to be achieved and may give rise to reputational risks to the Bank and government. Transparency International's Corruption Perception Index (CPI) of 183 countries ranked Tanzania at 100 indicating a high level of perception of corruption, although when benchmarked against its neighbors Kenya, Uganda, and Mozambique, the country is perceived to be performing better. 49. The recently completed Report (October 2011) on Value for Money Audits of 136 Constructions Projects by the Public Procurement Regulatory Authority has flagged fraud and corruption in local governments as a major area of concern. This study audited 91 projects of LGAs for a value of Tsh 91 bn. The main finding of the study was that 68% of the audited projects with a total value of Tsh 10,056,982,629 (53% by value) were assessed to be of unsatisfactory quality and that malpractices were noted in many LGAs. In assessing these LGAs PPRA applied its Red Flag Checklist for identifying corruption in construction contracts. Any entity scoring more than 20% on that checklist has a strong likelihood of fraud or corruption in its procurement. Seventeen LGA's were assessed as part of this exercise. Ten of them (60%) crossed the threshold of 20%. 50. The Government has established the Prevention and Control of Corruption Bureau (PCCB) as the primary anti corruption agency in Tanzania. The PCCB was established in its current form in 2007, but 96 has a number of predecessors going back to 1975. It is the primary government agency responsible for investigating and prosecuting corruption. It also investigates fraud, but the prosecution of fraud falls to the police. It has about 1700 employees, roughly half of which are directly involved in investigation work. It has 23 Regional Offices, which, among other things, cater for urban local governments, and 98 District Offices, which cater for rural local governments. A detailed breakdown of its case-load, conviction rate, assets recovered etc. - drawn for the PCCB annual reports - over the past 10 years is given in the table below. In 2010 it had 870 investigations underway with 587 cases in court, attained 64 convictions and recovered Tsh. 10. 1bn. Prevention and Control of Corruption Bureau statistics 2000-2011 Year Allegations Cases Administrative New Cases Total Cases Conviction Percent of Assets Received Investigated Actions Taken Into Courts Prosecuted Cases Conviction Recovered compared to (Bn. Sh.) cases investigated 2000 1,244 1,244 - 49 42 6 0% 11.1 2001 1,354 1,354 1 57 53 - 2.5 2002 1,383 1,383 42 52 191 12 1% 2.7 2003 2,285 1,796 21 51 178 9 1% 3.8 2004 2,223 1,149 126 60 202 6 1% 4 2005 3,121 677 111 50 218 6 1% 2.5 2006 6,320 1,528 209 71 251 18 1% 1.3 2007 8,235 1,266 280 196 352 35 3% 1.6 2008 6,137 928 74 147 416 37 4% 13.2 2009 5,930 870 40 222 463 46 5% 0.4 2010 5,685 870 29 224 587 64 7% 10.1 Source: PCCB, May 2011 51. The judicial system in general functions relatively independently although it suffers from a significant lack of resources. The Bertelsmann Foundation, in its 2012 Transformation Index report found the judiciary inefficient and with significant corruption, especially at lower administrative levels as well as among government officials, posing a serious problem. The Heritage foundation also found that the judicial system is subject to political interference and high levels of inefficiency. 52. The National Anti-Corruption Strategy and Action Plan (NACSAP) was introduced in 1999. A strategic evaluation of NACSAP in 2004 exposed several weaknesses in the anti-corruption strategy. Responding to these concerns the government introduced an enhanced NASCAP II for the period 2008 - 2011 and passed the 2007 Prevention and Combating of Corruption Act. The new Act transformed the Prevention of Corruption Bureau (PCB) (on the mainland only) into the Prevention and Combat of Corruption Bureau (PCCB), with extended investigation powers. 53. In the effort of preventing and combating corruption PPRA has established a Public Procurement Anti-corruption Strategy and in 2011 signed a Memorandum of Understanding with PCCB for implementing the anti-corruption strategy. 54. Complaints Handling Mechanisms are required at central and local government levels. Complaints may either be related to procurement process or to fraud and corruption misconduct. Complaints pertaining to fraud and corruption are received by the Council Integrity Committees. All 18 participating ULGAs have already established the integrity committees. Complaints related to procurement process are handled under the Public Procurement Act (PPA 2004) as illustrated in the flow chart at the end of this Annex. The flow chart shows three levels of handling complaints as outlined in the PPA of 2004 that is still applicable to date. However, these levels will be reduced to only two after the new PPA (2011) becomes effective any time from now. Under the new Act, Public Procurement Regulatory Authority (PPRA) will not be involved in handling complaints. Complaints related to fraud 97 and corruption, but of procurement nature, are handled in accordance with the Prevention and Combating of Corruption Act (PCCA) of 2007. However, investigation of offences and institution of proceedings for offences in procurement are done pursuant to the public procurement law (PPA 2004). 55. The PCCA established the Prevention and Combating of Corruption Bureau (PCCB) whose functions include investigation and prosecution of offences related to corrupt transactions. As outlined under Part III of the Act, corruption and related offences include general corrupt transactions (solicit, acceptance, giving etc), corruption transactions in contracts, corrupt transactions in procurement, corrupt transactions in auctions, corruption transactions in employment, etc. The Government has prepared and implements the National Anti-corruption Strategy and Action Plan (NACSAP II). The NACSAP II has 7 strategic goals. Goal 2 relates to the introduction of systems integrity, accountability and transparency in Local Government Administration (LGAs). To ensure compliance PCCB is directly involved in monitoring the implementation of NACSAP II. 56. Accountability and integrity measures include the introduction of Client Service Charters in Government Institutions and Institutional Integrity Committees at central and local government levels. These are aimed at enhancing transparency and accountability in public service delivery. The Charter specifies the services and goods that the clients are expected to receive from the institution, clients' rights and obligations and the feedback mechanisms available to enable the institution monitor and evaluate its performance. Institutional Integrity Committees are responsible for ensuring that staff in the relevant institutions adheres to ethical behavior and professional standards at work places. 57. In this context, and given the fiduciary weaknesses discussed above, fraud and corruption are considerable risks under the Program. These risks will be mitigated as follows: 58. First, the main factor conducive to F&C is a weak fiduciary environment. Improving this environment in the target ULGAs is a specific goal of the Program, and will be addressed directly through the various main modalities outlined elsewhere in this document. More specifically: * The UPG and annual assessment. The annual assessment will include, as minimum access conditions and performance indicators, steps such as having systems in place for handling grievances related to procurement and/or fraud and corruption, publicly advertising the bidding procedures, disclosing contract awards to the public, having a consultative process for the UPG and a variety of measures aimed at strengthening financial management. * Capacity building program to be managed at PMO-RALG and ULGAs levels. Elements of this program will specifically focus on accountability and monitoring at the ULGA levels to minimize the fraud and corruption risk. * DLI leveraged steps that central government will take to ensure, for example, that core fiduciary staff are in place at the ULGA level for each year of the Program; * Additional agreed measures e.g. in ULGA disbursement years one and two (FY2013/14 and FY2014/15), PPRA will conduct several value for money audits in at least two or three of the Program ULGAs, respectively, to determine performance in particular regards to management of contracts and quality of works. As Program ULGAs establish a record of execution of projects using Program funding, from FY2015/16 onwards, PMO-RALG will commission PPRA to conduct value for money audits for all Program funds in all 18 Program ULGAs and the results will be incorporated into the annual assessment relating to DLI 3, constituting 50% of the weighting of the DLI. 59. Second, implementation of the Program will be in accordance with the Bank's Anti-Corruption Guidelines (ACG) applicable to PforR operations. The Government of Tanzania has agreed to implement the Program in accordance with the Anti-Corruption Guidelines applicable to PforR operations (ACG) as follows: 98 a. Debarment list of firms and individuals. Companies and individuals debarred by the Bank and the PPRA will be posted and updated every six months on the PMO-RALG website. This will include the list of temporary suspended firms and individuals, which the PMO-RALG will obtain from the Bank. In general, the risk of having a debarred firm or individual in the Program is low, since most of the tenders will be small and carried out through National Competitive Bidding (NCB) process. Nevertheless, PMO-RALG will share this information with all Program ULGAs, instructing them to comply by appending the debarment list to the annual Grant Award announcement which will be made public - and go to all Program ULGAs. This list will also be used by procurement advisors working as part of the PMO- RALG capacity building program to monitor ULGA compliance. ULGA compliance with the debarment list will also be monitored through the Program annual assessment. b. Sharing information on fraud and corruption allegations and investigations with the Bank. In line with the ACGs, GoT will share with the Bank relevant information on fraud and corruption allegations, investigations and actions taken as needed. At the local level, each ULGA has an Integrity Committee (IC) to which fraud and corruption complaints are reported. Fraud and corruption complaints related specifically to procurement may also be made to the ULGA Accounting Officer. The Bank has been informed that under Tanzania's legal system, the primary agency for investigating corruption is the Prevention and Combating of Corruption Bureau (PCCB). Where PCCB investigations reveal that a given case is primarily one of fraud rather than corruption, the PCCB refers it to the police for further investigation and prosecution. The PCCB has 98 district offices including all the 18 Program ULGAs. The PCCB has a national workforce of about 1700 staff of which approximately half are involved in investigation. In this context, fraud and corruption allegations made in respect of Program funds to the LGAs via either the ICs or the Accounting Officer will be referred by these entities to the district offices of the PCCB. The PCCB will keep a record of such allegations, or allegations from any other source regarding Program funding, and the actions taken on them. Once annually, it will provide a national compilation of all fraud and corruption allegations, investigations and prosecutions throughout the Program to PMO-RALG. PMO-RALG will include this in the annual Program Report that will be submitted to the Bank. c. Investigation offraud and corruption allegations. GoT has advised that (i) the Prevention and Combating of Corruption Act permits the PCCB to cooperate and collaborate with the Bank in the fight against corruption, and permits the PCCB and the Bank to undertake joint investigations of sanctionable practices if and when the parties so agree; (ii) the Bank may also undertake its own investigations of F&C allegations under the Program. In this context, the investigation of F&C allegations under the Program will be handled through three possible modalities, depending on circumstances. o The PCCB will undertake its own independent corruption investigations arising from allegations reported to it as per sub-paragraph b above. o The PCCB and INT will undertake joint corruption investigations. The initiation, scope and operational procedures will be decided on a case-by-case basis by PCCB and INT. o INT will undertake its own F&C investigations. To this extend, the Program Participation Agreements to be entered into between PMO-RALG and ULGAs will ensure that PMO- RALG and the INT are able to acquire all records and documentation that they may reasonably request from Program ULGAs regarding the use of Program funding. 99 60. Third, and more broadly, PMO-RALG has developed a Local Government Anti-Corruption Strategy and Action Plan Phase III 2010 - 2015 which it will implement on an LGA-wide basis throughout the country. The plan builds on two phases corresponding to NASCAP I and NASCAP II and seeks to strengthen: i) registry management of information; ii) procurement procedures; iii) capacity building of human resources; iv) sensitization of public rights and duties; v) storage and safeguarding of data; vi) public service complaints handling. 61. It should also be noted here that the implementing entity PMO-RALG has been implementing the ongoing LGSP since 2005. For the past seven years of implementing Bank projects, there have been no GAC issues at the PMO-RALG level and the most recent Tanzania financial management regional in- depth supervision review commissioned by the World Bank has found no incidence of fraud. 100 Flow Chart of Procurement Complaints Handling Mechanism 1st Level 2"d Level 3 d Level Complaint should be A complaint should be All complaints that contracts submitted within 28 days submitted to PPRA within 14 have entered into force should from the date the bidder days from the date of be submitted within 14 days became aware of communication of the from the date the bidder circumstances. decision of the Accounting became aware or should have Officer. become aware of circumstances Accounting Officer will not PPRA will not entertain a All complaints not handled in entertain a complaint after complaint after the time with PPRA provided that procurement contract has procurement contract has submitted within 14 days been entered into force been entered into force. Accounting Officer should PPRA shall deliver a written PPAA is required to issue a deliver a written decision decision within 30 days after written decision within 30 within 30 days after receipt of receipt of the complaint. days stating the reasons for the complaint. the decision and the remedies grated, if any. The decision of PPAA is final, Where Accounting Officer The decision of PPRA is final unless a Judicial Review does not issue decision within unless a bidder decides to commences for review of 30 days or bidder dissatisfied appeal to Public Procurement such decisions. with the decision, a bidder Appeals Authority (PPAA). may submit a complaint to PPRA. 101 Annex 6: Summary Environmental and Social Systems Assessment Introduction 1. The following annex summarizes the findings of the Environmental and Social Systems Assessment (ESSA) undertaken for the Urban Local Government Strengthening Program (ULGSP). The following sections will (i) describe the Program context relevant for environmental and social management, (ii) describe the ESSA process, (iii) outline the main environmental and social effects of the Program activities, (iv) discuss the assessment of the Program's legal and regulatory framework for environmental and social management vis-A-vis World Bank requirements for Program-for-Results financing, and assesses capacity and performance of Program institutions to meet those performance requirements; and (v) outline actions to strengthen system performance. 2. The ESSA examines the Program's systems for environmental and social management for consistency with the standards outlined in OP/BP 9.00 (Program-for-Results Financing), with an aim to manage Program risks and promote sustainable development. Paragraph 8 of OP 9.00 outlines what the ESSA should consider in terms of environmental and social management principles in its analysis. Those core principles are: Environmental Management Systems: * Promote environmental and social sustainability in the Program design; avoid, minimize, or mitigate adverse impacts, and promote informed decision-making relating to the Program's environmental and social impacts * Avoid, minimize, or mitigate adverse impacts on natural habitats and physical cultural resources resulting from the Program * Protect public and worker safety against the potential risks associated with: (i) construction and/or operations of facilities or other operational practices under the Program; (ii) exposure to toxic chemicals, hazardous wastes, and other dangerous materials under the Program; and (iii) reconstruction or rehabilitation of infrastructure located in areas prone to natural hazards Social Management Systems: * Manage land acquisition and loss of access to natural resources in a way that avoids or minimizes displacement, and assist the affected people in improving, or at the minimum restoring, their livelihoods and living standards * Give due consideration to the cultural appropriateness of, and equitable access to, Program benefits, giving special attention to the rights and interests of the Indigenous Peoples and to the needs or concerns of vulnerable groups * Avoid exacerbating social conflict, especially in fragile states, post-conflict areas, or areas subject to territorial disputes. 3. The ESSA considers the consistency of the Program systems with these principles on two levels: (i) as systems are defined in laws, regulation, procedures, etc, and (ii) the capacity of Program institutions to effectively implement the Program environmental and social management systems. Environmental and Social Context 4. From the outset of preparing ULGSP, environmental and social management has been considered an integral part of strengthening urban local government systems - the overall objective of the Program. To that end, the ESSA provides an assessment of systems in Tanzania for environmental and social 102 management of small- to medium-scale urban infrastructure investments that are planned and implemented at the ULGA level, and recommends actions to strengthen performance. ESSA Process 5. In order to assess the existing systems as well as analyze how this system is implemented, the ESSA is presented in two volumes: * Systems Analysis and Action Plan (Volume 1): The ESSA Analysis builds on the baseline data collected in Volume 2, and presents an analysis of these systems vis-A-vis the core principles of OP/BP 9.00. The Analysis employs a SWOT approach (Strengths-Weaknesses-Opportunities- Threats) in order to examine the policy and performance gaps and formulate actions. The Action Plan in Volume 1 outlines measures agreed between the Government and Bank to strengthen environmental and social management systems and fill the gaps. These actions were then embedded in the overall Program Action Plan found in PAD Annex 8. * Baseline Data (Volume 2): The Baseline Data volume presents a comprehensive outline of systems for environmental and social management in Tanzania that are applicable to ULGSP, and management of impacts typical to small- to medium-scale urban infrastructure projects. This includes the legal and regulatory frameworks, institutional roles and responsibilities, and gap analyses between these and OP/BP 9.00. 6. The ESSA process has benefitted from a broad range of inputs, including: A legal and regulatory analysis of policies, laws, regulations, and sector-specific guidelines related to environmental and social impact assessment, participatory planning, decentralization, resettlement and compensation, and social inclusion. A desk review including: * Aide Memoires and technical documents (including Environmental and Social Management Frameworks, Resettlement Policy Frameworks, Environmental and Social Impact Assessments, and Resettlement Action Plans) from the Local Government Support Project (LGSP), Tanzania Strategic Cities Project (TSCP), and Tanzania Social Action Fund (TASAF) - all projects that include municipal infrastructure works implemented by LGAs; * Literature including reports and journal articles on land issues, environmental assessment, poverty and participatory planning specific to Tanzania; and * Annual Assessments of the LGDG program. Field visits to 13 of 18 ULGAs by technical consultants procured by PMO-RALG, which included collection of baseline information on existing conditions of the natural and built environments, and consultations with ULGA technical staff as an input to the capacity and performance assessment. A representative sample of ULGAs to visit was selected to take into account population, geographic variation (e.g. coastal, highland, lake zone, semi-arid zones) and economy (e.g. commercial, agriculture, fishing, tourism). Survey data were collected from the remaining ULGAs not included in the field visits, to complete information on human and financial resources and management practices. Meetings, interviews, and workshop sessions were conducted with government agencies, ULGAs, Development Partners, consultants, NGOs, and technical practitioners in environmental and social impact assessment. 103 7. The ESSA process includes comprehensive stakeholder consultations and disclosure of the ESSA Report (Volumes 1 and 2) following the guidelines of the World Bank's Access to Information Policy. A full summary can be found in ESSA Volume 2, Annex 6.4. At present, the ESSA consultation process is embedded in the Program consultation process and includes the following activities: Document Dissemination and Public Comment Period: Starting in June 2012, the draft ESSA (Volumes 1 and 2) was publicly disclosed and distributed to a range of stakeholders involved with environmental and social management issues in Tanzania. PMO-RALG has disclosed the ESSA and technical documents on their website and the World Bank collected public comments; Consultation Event: A one-day public consultation event was held on June 20, 2012, where the ESSA was presented and stakeholders were invited to offer inputs on the findings and recommended actions in an interactive format. The ESSA was disclosed and distributed two weeks in advance of the event, and the comment period was extended until mid-July 2012; Technical Workshop: A workshop for technical staff in ULGAs (including Environmental Management Officers, Community Development Officers, and other staff tasked with environmental and social management) was held on June 21, 2012 to gain inputs on the technical manual for Environmental and Social Management; ULGSP Workshop: A workshop for officials from all ULGAs was held on July 26, 2012 as part of overall Program Appraisal. Environmental and social management (including system enhancements built into the program and the criteria used to assess ULGA performance) were included in this workshop. Feedback from stakeholders has been instrumental in designing and revising the program Action Plan, indicators, and technical manual. Program environmental and social effects 8. The investments under ULGSP, financed through the Urban Performance Grant (UPG), are intended to have substantial sustainability outcomes through improved municipal service delivery. Generally speaking, investments are intended to reduce the negative externalities of rapid urbanization and population density experienced in the participating ULGAs. The benefits will vary by ULGA depending on the context and investment choices, but community benefits are likely to include reduced environmental degradation and sanitary conditions through improved waste management systems; lower vehicle operating costs, reduced transportation costs, fewer road accidents and reduced traffic congestion as a result of improved road conditions and improved access to public transport services; and reduced risk of flooding and soil erosion as a consequence of drainage improvements. 9. While the UPG is discretionary based on community priorities, the UPG does have limitations. ULGAs can choose from an "investment menu" of small- to medium-scale civil works includes upgrading of existing roads, solid waste management, transportation infrastructure such as bus and truck stands, markets, drains, and city parks (see Urban Performance Grant Investment Menu table in Annex 1). 10. Based on the scope and scale of projects to be financed under ULGSP, environmental and social impacts are expected to be minimal to moderate in scale, with most adverse impacts limited to the construction phase and being site-specific and temporary. All investments will undergo an environmental and social impact assessment process per Tanzanian environmental systems. These procedures are outlined in the Program Environmental and Social Management Manual (discussed in detail below), which is currently under preparation by PMO-RALG with technical guidance from the Bank, and 104 consultations with technical staff at the national and ULGA levels. Most adverse effects associated with the types of works funded by the UPG are associated with the construction phase, as well as the possibility of land acquisition, resettlement, and livelihood impacts. 11. Potential adverse environmental effects include air pollution from dust and exhaust; nuisances such as noise, traffic interruptions, and blocking access paths; water and soil pollution from the accidental spillage of fuels or other materials associated with construction works, as well as solid and liquid wastes from construction sites and worker campsites; traffic interruptions and accidents; and accidental damage to infrastructure such as electric, wastewater, and water facilities. These types of impacts, however, are generally site-specific and temporary. Experience from implementation of similar types of urban works in Tanzania indicates that short-term construction impacts for the most part can be prevented or mitigated with standard operational procedures and good construction management practices. These procedures will be included in the technical manual, and be a standard part of environmental management plans included in bidding documents for contractors. 12. While no large-scale or high-risk projects are expected, the screening process in the ESMM will include criteria to exclude certain categories of projects as well as projects of a scale that would include significant negative impacts that are sensitive, diverse, or unprecedented on the environment and/or affected people. Such types of investments are excluded from the Program (per OP/BP 9.00). In addition to screening for significant impacts, the following exclusionary criteria apply to works financed with the UPG, which will be included in the manual's screening criteria and has been agreed with PMO-RALG - these parameters will be communicated to participating ULGAs: * Road works outside of existing rights-of-way; * Works involving relocation of more than 20 households; * New landfills; * Activities that would significantly convert natural habitats or significantly alter potentially important biodiversity and/or cultural resource areas. Assessment of Environmental Management Systems 13. Projects currently implemented by LGAs under LGDG primarily employ Tanzanian systems for environmental and social management, which were assessed through the ESSA. The ESSA conducted an analysis of existing systems for environmental and social management for consistency with the core principles of OP/BP 9.00. The complete list of findings is outlined in detail in the ESSA, with the main gaps summarized below. 14. Gaps in the system as written: The principles pertaining to environmental systems under OP/BP 9.00 are considered in terms of environmental and social management for urban municipal infrastructure projects that are implemented at the LGA level. Because there is no specific system already in place as there would be for a phased World Bank project (e.g. an Environmental and Social Management Framework), the assessment focuses on the national systems and how they relate and function at the LGA level: namely the Environmental Management Act (EMA 2004) and associated regulations. 15. A gap analysis was undertaken, which found that the Environmental Management Act (EMA) and Regulations (2005) as written, which are the overarching framework for environmental and social impact management, are largely consistent with OP/BP 9.00 - processes are designed to promote sustainability, address environmental and social impacts, and serve as a decision-making tool. However, 105 there are several gaps in the system, outlined below, which were identified in the ESSA and will be included in the ESMM: * Gaps in ESIA Content: While the content of the screening and analysis for EIAs under EMA are comprehensive and cover most of the elements of OP/BP 9.00, there are gaps present in the content of ESIA requirements in three areas: (i) The screening process requires additional criteria (i.e. resettlement, potential natural hazards), (ii) the analysis of alternatives requires the "without project" alternative, and (iii) the EIA process needs to explicitly analyze induced impacts. * Impact Categorization Differences: There is a notable mismatch between what the Bank and the EMA consider projects with "significant" impacts. For the Bank, "significant" refers to projects with adverse impacts that are sensitive, diverse, or unprecedented, and where impacts may affect an area broader than the site of physical works. In Tanzania, the threshold for "significant" is much lower, so more projects fall in the requirement for a full ESIA and consider on the "Type A" list in the EMA though they would not be considered as having significant impacts by World Bank standards. While the projects to be financed and implemented by ULGAs are highly unlikely to cause Category A-level impacts by World Bank standards, as these are ineligible for financing under the Program there will need to be clearer criteria included in project screening that more closely aligns the two definitions. * Oversight of Non-EJA Projects: For those projects requiring a full ESIA per the criteria in the EMA, which, given the low threshold for projects requiring one as outlined in the regulations, would likely be most of the projects financed by the UPG, there are requirements for environmental management plans (including mitigation measures), environmental audits, public participation and disclosure. Those projects not requiring a full ESIA are subject to less requirements and much less oversight - there are no requirements that these projects are audited, that the public is involved nor that documents are disclosed. * Public Participation and Accountability: Public participation and disclosure requirements for ESIA in Tanzania are fairly weak. For those projects requiring a full ESIA, public availability of the documents is required. However, the actual process of public review and comment outlined in the law could be onerous and result in EIAs being relatively inaccessible (e.g. requiring paying a fee to access ESIAs). While consultations are required during the preparation of the ESIA between communities and the project proponent, public hearings are at the government's discretion during the ESIA review and approval process. 16. Gaps in the system as applied in practice: With 18 ULGAs of varied size included under ULGSP, capacity varies widely between them - some have well-functioning committees for environmental and social management that work as a team and coordinate with other committees on these issues, as well as promote overall sustainability in their communities. Others have low levels of staff that may be missing expertise and coordination systems to manage impacts and contribute to development planning in their districts. 17. The overarching finding is that, while impacts are generally managed and there have been few major issues, most ULGAs do not have systems in place for the ESIA process, collecting and managing environmental and social data, nor a clear mandate for environmental and social management. Many donor projects have attempted to bridge this gap with Environmental and Social Management Frameworks, and the shortcomings outlined below underpin the main challenges that have been found in implementing safeguards in other projects implemented at the local level: screening checklists are not commonly used, LGAs do not systematically monitor impacts, and environmental and social management usually remains outside of the planning and decision-making process. The reasons are largely structural difficulties - despite these, impacts from projects have been managed fairly well, and that in the ULGAs and PMO-RALG there is recognition of environmental sustainability and the desire for projects to 106 contribute to better sanitation, reduced pollution and a better quality of life, as well as strengthened institutions. Findings during field studies and consultations with national counterparts suggest that on both levels there is a strong willingness to work through the issues described below, and recognition of the opportunities of the Program to address issues that are compromising environmental and social management (ESM) in urban local governments. 18. The main issues are summarized below, which are addressed in the Program through measures included in the Action Plan, Program indicators and World Bank implementation support: * Centralized management: Once a project is identified, environmental and social management is largely out of the LGA's hands and handled by national authorities (e.g. contracting ESIA consultants, the ESIA review process, consultations and auditing implementation). This break in delegation from the beginning sets projects on a trajectory where, though the direct impacts and risks are modest, implementation is not systematically monitored as the central agency does not have the capacity to monitor all projects and the ULGA has no direct authority to do so either. Another finding from the fieldwork and interviews is that the highly centralized nature of ESIA can slow the project cycle. As even projects with minimal impacts require an environmental screening by NEMC (the National Environmental Management Council) in order to obtain an environmental certificate (required of all projects), there can be long delays in obtaining certificates. It was observed that in light of delays projects have gone forward without the required certificate - because ULGA environmental management staff do not have clear role for monitoring, this leaves some projects with little oversight from NEMC nor the ULGA. * Human Resource Capacity: Most ULGAs have different staff who are involved in ESM: all have a Community Development Officer, Health Management Officer, planners, engineers and other sector staff. Most ULGAs had an Environmental Management Officer on staff as well. However, despite the presence of staff, overall capacity for ESM and ESIA is generally quite low (though it varies across ULGAs). Field visits reported that most environmental staff are not trained to handle a technical task such as the ESIA process. Additionally, ULGAs are not able to hire their own staff, which is done at the central level. Field visits also noted a lack of coordination between ULGA staff for ESM processes. This is where the lack of a well-defined system at the local level is problematic as well, as ESIA is a multi-disciplinary process rather than a task done by one technical officer (as is typically described in ESMFs). * Budget Resources and Tools: Budget has been a common constraint to optimal ESM. There has been pressure from the donor community to include a line item in LGA budgets for environmental management and EMA implementation, which is also included as a PAF indicator, but a Joint Technical Review of the EMA Implementation Support Program in 2011 showed that funds rarely flow or that they are inadequate for staff to actually carry out EMA requirements. This was confirmed by the field study conducted as part of this analysis, where technical staff had limited resources to conduct their field tasks, lacking vehicles and environmental monitoring equipment as well. * Performance Incentives: Many of the issues identified and the lack of effective action to date on all of the aforementioned issues reflect the incentive structure of how development funds are transferred to LGAs through LGDG. As mentioned above and described in more detail in the Program Appraisal Document, LGDG's performance-based council grant system links LGA performance in key areas of local governance with compliance with national policies, legal and regulatory frameworks. Despite the key role local governments play in environmental and social management and compliance with relevant laws, these elements are neither included in LGDG's minimum conditions to access the grant nor in indicators that incentivize good performance. Environment is 107 included as a cross-cutting issue along with poverty, gender, governance, and HIV/AIDS issues, but the performance indicator is an aggregate of all of these issues together, and only requires that LGAs undertake an analysis of these issues to be included in their development planning process. The minimum conditions and performance indicators have important implications for where LGAs direct budget resources and staff priorities. Without any performance measurements or sanctions for low performance (that is, if there are no consequences for poor performance), budgetary resources are in most cases not directed in these areas. Other efforts have attempted to address this gap and there is good precedence that ULGSP can draw from, especially since performance assessment of the Program will rely on the existing structures under LGDG. 19. System Strengths: Despite the gaps in the system, there are many positive practices in ULGAs and at the national level that are important to consider, as these can be both capitalized upon as well as strengthened through the performance incentives under ULGSP as well as support for capacity building. * First, despite clear roles and responsibilities, environmental and social impacts in urban projects implemented by LGAs have been managed fairly well. Supervision reports and field visits have noted no major impacts that have gone unmitigated, both in small-scale infrastructure (e.g. Local Government Support Project) and larger urban works (e.g. Tanzania Strategic Cities Project). * Second, the field visits noted that some ULGAs have made very effective use of by-laws related to ESM, for example in Moshi, where by-laws have vastly improved solid waste management and enforcement of fines for littering. Considering by-laws for ESM could be useful on a few levels, including capacity building with ULGAs to develop and enforce by-laws as well as draw from good practices examples as an inter-ULGA learning experience. * Third, there are lessons in previous initiatives such as the Urban Development and Environmental Management program (2006 - 2008, with support from DANIDA) and the Sustainable Cities program (with support from DANIDA and UN-HABITAT) that have recognized the unique environmental and social challenges faced by ULGAs that are rapidly urbanizing, and constrained to provide basic services to their residents. ULGAs included under ULGSP such as Morogoro, Iringa and Moshi have been participants, but have been challenged in establishing a sustainable ESM system. * Last, both ULGAs and PMO-RALG are supportive of measures to strengthen systems, and are familiar with programs that have attempted to do so in the past (mentioned in the previous point). While these systems have had some lasting impact but have not managed to fully mainstream a system of environmental and social management in ULGAs, it is important to note these aspects are strengthened by a new policy which will be spearheaded by PMO-RALG. The Urban Development Management Policy (UDMP) links environmental management and urban development to address urbanization challenges in part through building better systems for ESM at the ULGA level. Resettlement 20. Systems for resettlement and compensation are based on the Land Act (1999) and several other laws, regulations and guidelines. On the legal side, Tanzania has a well-developed framework for land acquisition that is handled at the ULGA level with defined coordination between the Ministry of Lands, Housing and Human Settlements Development (MLHHSD). 21. Gaps in the system as written: While there is a clear legal framework, there are substantial gaps between Tanzanian systems and the principles on land acquisition in OP/BP 9.00. The main gaps identified in the analysis applicable to the ULGSP include: 108 * Tenure Tanzanian law has clear procedures for landholders and generally extends eligibility for compensation to recognized or customary land users or occupiers lacking full title, but does not recognize tenants, squatters or encroachers as being entitled to compensation. * Market value Tanzania law does provide for the calculation of compensation on the basis of the market value of the lost land and unexhausted improvements, plus a disturbance, movement, and accommodation allowance, and loss of profits where applicable. However, the depreciated replacement cost approach is used, meaning that project affected people (PAPs) are not awarded the full replacement cost of the lost assets which is inconsistent with OP/BP 9.00. Additionally, market values and valuation procedures tend to be outdated and there is little baseline data for land values, which risks the valuation being discretionary. * Lost Assets and Livelihood Restoration "Replacement assets" under the Land Act in Tanzania are restricted to land and developments on land, and where relevant, loss of profits. OP/BP 9.00 goes beyond physical assets and includes livelihoods and standard of living, seeking to improve them or at least to restore them to pre-displacement levels. While profit losses are included in Tanzanian law, this is more narrowly defined as formal business profits and compensation for crops. While the Land Act does entitle compensation for business losses, there are no legal provisions requiring the government to restore livelihoods or to provide assistance towards the restoration of such livelihoods. Land users such as tenant farmers are not entitled to compensation for land, but are entitled to compensation for crops. The valuation method is outlined in the 2001 Regulations. Projects (e.g. TASAF, LGSP) have also included valuation methods in entitlement matrices. * Payment of Compensation Legally, compensation for the acquired land is to be paid "promptly," but does not have to be paid before possession of land can be taken. Cash compensation is the most-used method of compensation in Tanzania - while there are no restrictions on cash compensation in OP/BP 9.00, there is a policy in the Africa region not to pay cash compensation for land acquisition. * Consultation and Disclosure There are no requirements for consultation and disclosure in Tanzanian law that are specific to resettlement and compensation. As resettlement in practice is done as part of the ESIA process, consultation and disclosure generally follow this process. However, the consultation and especially disclosure requirements under EMA are weak; and, in the case of projects implemented by LGA, the resettlement process does involve consultation with PAPs during the land valuation process. PAPs are also publicly informed toward the end of the process when they can collect their compensation payments. Community Development Officers have a role during this process as well, as do Ward Officers. However, this process is geared only toward the land valuation process, and may not include tenants, informal land users, and other types of resettlement and compensation that are not covered by Tanzanian law. 22. Gaps in the system as applied in practice: In practice, there are clear roles for technical staff in ULGAs to handle resettlement and compensation, as well as coordination mechanisms along a long chain of approvals for compensation that channel between the ULGA, regional and national government. There are notable gaps in how the system works in practice, outlined below: * Identifying PAPs: It has occurred in some urban projects that PAPs who should have been covered under a Resettlement Action Plan were disregarded because of their tenure status (e.g. landowners had been compensated while their tenants had not) - this was due to a lack of understanding of the gaps between Bank policy and Tanzanian law. It has also happened where the land/resettlement valuation was done before final survey and design work (specifically roads projects) - this resulted in delays because the valuation had to be re-done and caused budget issues because additional PAPs required compensation. * Cash Compensation Most resettlement in Tanzania is handled by cash compensation - this can cause issues with capacity of PAPs to spend the money they receive. While there are no 109 requirements in Tanzanian law, resettlement guidance in Tanzania recommends measures to offer counselling and information to PAPs on how to handle compensation payments. * Timing of Compensation: While the Tanzanian legal structure promotes timely delivery of compensation, regulations allow for payment after land or other assets are taken (with a requirement that interest be paid, in addition to compensation, if the period between taking and payment exceeds six months), which is inconsistent with the requirement in OP/BP 9.00 that compensation be paid prior to taking of land. Delayed payments are also a chronic issue. * Human Resources: In some ULGAs there are insufficient technical staff that handle resettlement and compensation, causing delays in implementation and cost implications. In general, technical staff do know the law and the procedures. What is lacking in some cases is that staff has not handled resettlement and compensation for the World Bank. Indigenous Peoples and Vulnerable Groups 23. OP/BP 9.00 requires that due consideration is given to cultural appropriateness of, and equitable access to, program benefits giving special attention to rights and interests of Indigenous Peoples and to the needs or concerns of vulnerable groups. In the ESSA, these aspects are treated as cross-cutting issues within the ESIA process and resettlement, as there is no legal or regulatory framework for Indigenous Peoples nor vulnerable groups. 24. For Indigenous Peoples, the ESSA confirmed that, at present, there is currently no specific legislation or policy in place in Tanzania on or for Indigenous Peoples. The determination of which ethnic groups in Tanzania are recognized as Indigenous remains in the initial stage of analysis by the Bank. It is important to note, however, that the Hadzabe66 and Barabaig ethnic groups were classified as Indigenous Peoples for the Bank's TASAF-Ill Project, which also developed an Indigenous Peoples Policy Framework. But, to date, the Framework has not been implemented and there is no precedent or track record to assess with regards to the institutional capacity to undertake free, prior, informed consultations with Indigenous Peoples in Tanzania. As part of the ULGSP ESSA, a Tanzanian Social Specialist conducted a screening to determine if either the Hadzabe or Barabaig groups were present in any of the Program ULGAs. This screening, which included a literature review and consultations with national and local experts, found no evidence of either group in the Program area. 25. The Bank is currently undertaking analytical work related to Indigenous Peoples in Tanzania as a separate initiative, which will be the basis for the engagement with the government of Tanzania regarding the groups who, based on the World Bank OP 4.10, could be considered indigenous. However, this study is in its initial stages. As the ESSA and technical manual are intended to be living documents, findings from this work will be incorporated once completed. 26. For marginalized and vulnerable groups, there are several policies that promote inclusion and prevention of discrimination on the basis of gender and HIV/AIDS, for example, and Tanzania's framework for participatory planning at the LGA level offers specific guidance for involving vulnerable groups. However, the systems in place for environmental and social management described above have no explicit provisions for addressing the needs of vulnerable groups. Especially with respect to resettlement, which can be an impoverishing force, where past project experience indicates a high proportion of PAPs have some degree of vulnerability, and vulnerable groups often have special considerations for relocation and compensation, this is a noted gap that will be filled in the technical manual as well as the comprehensive capacity building program on environment and social management. 66 Hunter-gatherers with a total population numbering less than 1,000 110 Measures to Strengthen Systems for Environmental and Social Management 27. While the environmental and social risks of the activities under ULGSP are low- to moderate- impact, the PforR modality offers an opportunity to strengthen both the gaps in procedures identified above in order to identify and mitigate impacts, but also to strengthen the overall system through emphasizing environmental and social due diligence as a core function of government and service delivery. A more detailed outline of measures to strengthen Program environmental and social management systems can be found in ESSA Vol. 1, Section 7 and in the Manual. ULGSP builds on the existing systems and incentive structures for LGDG, and, based on findings from the ESSA, proposes measures to strengthen systems via three main areas for action in order to ensure that the Program interventions are aligned with the Core Principles of OP/BP 9.00: 28. Defining the System for Environmental and Social Management: Under ULGSP, ULGAs must demonstrate that they have established a functional system for environmental and social management as a minimum condition to access the UPG. After the first year, ULGAs will be required to demonstrate that all projects are screened for impacts and have mitigation measures, and that all projects have environmental approvals from the national authorities prior to initiating works, for example. One of the primary issues impacting performance is the lack of a clear framework for environmental and social management at the ULGA level. This area will, for example, include measures to seek agreement with PMO-RALG and other agencies on roles and responsibilities for environmental and social management, coordination, technical tools, ensuring adequate staffing, and consultation processes as regard to the implementation of urban projects. 29. Technical Guidance and Implementation Capacity: In order to provide clear guidelines to technical staff in the ULGAs, PMO-RALG has developed an Environmental and Social Management Manual, which will be the guiding framework for Environmental and Social Impact Assessment and preparing Resettlement Action Plans by ULGAs. This tool will provide technical guidance for ULGAs consistent with the Tanzanian system as well as bridge the gaps between the existing system and OP/BP 9.00; Addressing Resource Constraints: This area will include measures to overcome constraints with respect to human resources and budgetary resources, through both the Program incentive structure as well as capacity building and training. A capacity building and training program will be key to ensure that staff within ULGAs understand their roles, have the capacity to fulfill them, and clearly understand how they will be evaluated through the Annual Performance Assessment. The measures outlined under each of these areas are addressed and integrated into the overall Program through three mechanisms: 1. Inputs to the Program design, which include measures to be undertaken during Program preparation, agreements and areas for further study, development of technical tools, and design of performance indicators (see Annex 1 for details on specific indicators related to environmental and social management); 2. Inputs to the Program Action Plan, which are actions agreed with the Government that will be carried out after the Program is effective; and 3. Inputs to the Program Implementation Support Plan, which is the structure of the Bank implementation support to be provided to PMO-RALG and the 18 ULGAs during implementation. This includes: Reviewing implementation progress and achievement of program results; helping to resolve implementation issues and to carry out institutional capacity building; monitoring the performance of Program systems, including the implementation of the Program action plan; and monitoring and evaluating changes in Program risks as well as compliance with the provisions of legal covenants. 111 Annex 7: Integrated Risk Assessment Operational Risk Assessment Framework TANZANIA: URBAN LOCAL GOVERNMENT STRENGTHENING PROGRAM 1. PROGRAM RISKS 1.1 Technical Risk Rating: Substantial Description: Risk Management: (i) UPG incentive structure might be found to be too difficult to i. To mitigate this risk, task team has carried out extensive consultations with and attain by ULGAs. If the ULGAs perceive of the UPG assessments of ULGAs and has determined that the proposed performance indicators are performance indicators as being too tough and difficult to of good balance. Government and Bank team will continuously monitor progress and attain, they will not be incentivized to enhance performance. refine the performance indicators according to annual performance assessment outcomes. (ii) UPG financed investments can be captured by the local elite to ii. Program design takes this risk seriously and requires that well established participatory their benefit. selection processes at the local level be used to select the activities to be financed by UPG. The Program minimum access conditions and performance indicators contain a high number of requirements to reduce the risk of elite capture. Namely, minimum access conditions #3, 5, 7, 8, and 9 as well as performance indicators # 13, 14, 15 and 16, among others, require that all activities to be financed by UPG be selected through participatory approaches, and then presented to and discussed by (a) District Consultative Committee; (b) relevant Ward Committees; and (c) the respective Regional Secretariat and then be made public. Further, the activities then need to be presented to and be endorsed by the municipal council upfront each year following the initial year. The Program also requires that the annual financial and physical progress report of the activities to be financed by UPG be presented to and discussed by the Council annually. This is built into the performance indicators, which feeds into Program DLIs. (iii) Government continues to disburse funds late. iii. Program design mitigates this in two ways; first by reducing the frequency of disbursement from quarterly - under LGDG - to bi-annual under UPG. This will reduce the probability of delays taking place. Secondly, the Program has a DLI (see DLI 1 verification protocol) built in to ensure timely disbursements to the ULGAs. If delays take place, then Program funds allocated for this DLI will not be disbursed from the Bank to the Government. (iv) The Program and its activities are not sustained beyond the iv. In line with the experience gained in implementing the LGDG Core and other sector ULGSP windows, it is expected that, if successful, funding will be made available from the government and other partners to sustain the Program in the medium to long term. Urbanization pressures, and the consequential need for dedicated funding to assist ULGAs deal with these (i.e. the UPG) are unlikely to abate for the foreseeable future. In general, Government policy is becoming increasingly urban focused as evidenced in the 112 Government's Letter of Sector Policy on Urban Development prepared for the Tanzania Strategic Cities Project which recognizes significant challenges faced by urban areas, and stresses the need for enhanced support to the country's urban areas and for long term financing of the significant investment requirements in urban infrastructure. There is thus a reasonable expectation that the UPG will be fully integrated into GoT's intergovernmental fiscal architecture, supported increasingly by GoT own source funding, beyond the life of the Program. Resp: Stage: WB/Govemmen Preparation and Due Date : N/A Status: Ongoing t implementation Resp: Stage: WB/Govemmen Preparation and Due Date : N/A Status: Ongoing t implementation 1.2 Fiduciary Risk Rating: High Description : Risk Management: i. Inadequate staffing in ULGAs in procurement, financial i. Recruit/appoint and maintain qualified staff to fill the gap in these departments (as per management and engineering departments Program Action Plan and DLI 4) ii. Staff with inadequate knowledge of procurement planning, ii. Conduct trainings tailored specific to address weakness in these areas to procurement bidding documents & request for proposals preparation, officers and engineers - under the PMO-RALG capacity building activity plan (DLI 3), evaluation of bids/proposals.. PPRA will conduct tailor made courses. iii. Weak controls and risk of fraud and corruption iii. As per Program Action Plan, in addition to Program activities aimed at reducing fraud & corruption risk (see below), in ULGA disbursement years one and two (FY2013/14 and FY2014/15), PPRA will conduct several value for money audits in at least two or three of the Program ULGAs, respectively, to determine performance in particular regards to management of contracts and quality of works. From FY2015/16 onwards, PMO-RALG will commission PPRA to conduct value for money audits for all Program funds in all 18 Program ULGAs and the results will be incorporated into the annual assessment. iv. Inadequate knowledge and skills in contract managements iv. Conduct trainings tailored specific to address weakness in these areas to procurement officers and engineers - under the PMO-RALG capacity building activity plan (DLI 3), PPRA will conduct tailor made courses. v. late approval of budgets and slow release of adequate program v. MoF to release UPG funds on time. As part of the verification protocol for DLI 1, the funds hampers ULGA level planning and budgeting timely transfer from MoF to ULGAs for the previous period will be verified. vi. Low execution of LGA development budget vi. Targets for execution of development budget are included as part of the performance grant criteria vii. Delays in the funds transfer from the central level to vii. In addition to DLIs dedicated to reducing this risk specifically for UPG funds (DLIs 1, 2 18ULGAs affecting implementation of annual work plans and 3), bottlenecks leading to slow disbursements will be identified and addressed through regular ULGSP sector technical meetings/reviews. viii. A majority of the ULGAs visited have inadequate staff, viii. Capacity will be enhanced through the Program's capacity building activities to resources and inadequate skills in modern internal auditing strengthen internal control functions. techniques. ix. The internal audit departments may not review the activities of ix. Submitting internal audit reports will be a minimum access condition in order for the program due to lack of adequate staff, skills and recourses. ULGAs to access the Program funds. 113 x. In some cases, there may be lack of follow up on x. Audit committee will be strengthened in terms of training and ensuring they follow up on implementation of audit recommendations. measures taken by the respective ULGAs in implementation of the audit queries. Every six months, audit recommendations undertaken and implemented as recommended by audit committee will count towards performance assessment (PI # 8). xi. Audit ToRs will be agreed by negotiations and should include comments on release of xi. The CAG will be in charge of auditing all program funds funds, execution of development of budget, progress in financial reporting, strengthening including covering the 18 ULGAS. There is a risk that the controls, maintenance of fixed assets amongst others in defining the quality of the audit audit reports may be received after the due date and that audit expected. Also included in the NAO's audit plan well in advance. Program Audit sub- recommendations may not be implemented committee will meet on quarterly basis to review these reports and follow up on measures taken by the respective implementing agencies in implementation of the audit queries. Resp: Stage: Due Date: Status: 1.3 Environmental and Social Risk Rating: Moderate Description : Risk Management : (i) Potential environmental and social impacts of (i) Environmental and Social Management Manual prepared by PMO-RALG to infrastructure projects are not identified, mitigated, and provide technical guidance to ULGAs that is consistent with Tanzanian systems and monitored bridges gaps with OP/BP 9.00 principles. Technical staff in ULGAs will be required to have training on the manual. Adoption of the technical manual by ULGAs is a Minimum Access Condition for the Program and several Performance Indicators monitor its implementation. Monitoring will be part of WB supervision. (ii) Eligibility criteria for resettlement and compensation consistent with OP/BP 9.00 (ii) Resettlement actions do not include all Project Affected will be included in the technical manual and included in training for ULGAs. People that should be identified per the Bank's definition of eligibility. (iii) Bottlenecks in the approvals process will be further defined during program preparation. PMO-RALG will consult with relevant authorities (MLHHD, NEMC, (iii) Environmental and resettlement compensation approvals and ULGAs) to accelerate existing national approvals processes while maintaining processes delay project implementation. oversight. (iv) PMO-RALG will assess capacity needs for environmental and social management in ULGAs and ensure that all ULGAs have adequate staff. ULGAs will appoint the (iv) Staffing and skills mix in ULGAs is inadequate to handle Community Development Officer as the focal point for Environmental & Social environmental and social management of scope and scale Impact Assessment and Resettlement & Compensation in each ULGA. A roster will of investments. be kept by PMO-RALG. (v) ULGAs will be incentivized to prioritize and provide adequate resources to environmental and social management as performance is a minimum condition to (v) Inadequate budget allocated to environmental and social access the UPG. Training on costing ESIA and resettlement compensation will be management, including compensation payments. included in capacity building program. (vi) Terms of Reference for auditors will ensure that adequate skills are present to assess (vi) Annual Performance Audit does not include technical environmental and social management systems. 114 expertise to assess environmental and social management performance Resp: PMO- Stage: RALG/WB Preparation and Due Date: Ongoing Status: implementation Resp: Stage: Due Date: Status: 1.4 Disbursement linked indicator risks Rating: Substantial Description : Risk Management: PMORALG has experience in managing the current LGDG performance (i) Timely availability and quality of the Annual Performance assessment and the Program will build on that expertise and on the lessons leamt. The Performance Assessment (APA) not as expected. If the APA is done late or if the Assessment manual and the TORs for the independent APA will be available by effectiveness. quality of the assessment is not good enough the whole disbursement Also, during implementation a review of the Performance indicators and the linked scale will be logic and schedule could be affected. done at MTR to make any needed adjustments to keep the incentive structure meaningful for ULGAs Resp: R G Stage: a Due Date : Effectiveness and PM/ORALG/ Preparation and MTR iStatus: WB Implementation Risk Management: Early discussion with Treasury have taken place to involve them in the (ii) Disbursements to ULGAs could be delayed by issues beyond the disbursement process. DLI 1 will ensure that Program funds for the current year will not be control of PMO-RALG (i.e. by Treasury) released unless funds for the preceding period have been disbursed on time. Resp: PMORALG/ Stage: Impl. Due Date Ongoing WB 2. Fraud and corruption risk Rating: Substantial Description Risk Management: Main fraud and corruption risk management strategy of the Program is to improve the overall Overall fiduciary weaknesses at ULGA level, capacity at the central fiduciary environment in the target ULGAs. This will be done through; (1) the UPG annual government entity in charge of coordinating the Program (PMO-RALG) assessment; (2) capacity building program to be managed at PMO-RALG and ULGAs levels; (3) and lack of citizen, media and suppliers pressure to eliminate collusive DLI leveraged steps that central government will take to ensure, for example, that core fiduciary practices due to lack of information. staff are in place at the ULGA level for each year of the Program; and (4) Additional agreed measures e.g. in ULGA disbursement years one and two (FY2013/14 and FY2014/15), PPRA will conduct several value for money audits in at least two or three of the Program ULGAs, respectively, to determine performance in particular regards to management of contracts and quality of works. From FY2015/16 onwards, PMO-RALG will commission PPRA to conduct value for money audits for all Program funds in all 18 Program ULGAs and the results will be incorporated into the annual assessment. Additionally, the Government of Tanzania will implement the Program in accordance with the Anti-Corruption Guidelines applicable to PforR operations (ACG) The central government entity which will coordinate the Program, PMO-RALG, has developed a Local Government Anti-Corruption Strategy and Action Plan Phase III 2010 - 2015 which it will implement on an LGA-wide basis throughout the country, as well as in the ULGAs within the Program. Also, PMO-RALG has been implementing the ongoing LGSP since 2005. For the past 115 seven years of implementing Bank projects, there have been no GAC issues at the PMO-RALG level and the most recent Tanzania financial management regional in-depth supervision review commissioned by the World Bank has found no incidence of fraud. To reduce the risk of lack of citizen feedback, as part of Program minimum access conditions, all 18 participating ULGAs will have a complaints handling mechanism established and running starting in Program year 2. Responsible: Stage: Implementation Due Date: ongoing Status: 3. OVERALL RISK RATING: SUBSTANTIAL In view of the moderate level of country, technical and environmental and social risks, and the low stakeholder risk, risk ratings outside of fiduciary are currently assessed as moderate. The overarching measures to mitigate these risks will be firstly the series of institutional enhancement activities which will be financed by the two elements of the Program, and secondly the incentive mechanism under the UPG mechanism. The Program's overall risk is thus rated as substantial. Legend: Low, Moderate, Substantial, High 116 Annex 8: Program Action Plan Cross Cutting/ General Issue/risk Action/Completion Time Frame Responsible Party Instrument description Adequate LGAs with core staffing levels7, Appointment of PMO-RALG DLI 4 staffing at including in procurement, financial staff before ULGAs management and social and effectiveness environmental systems appointed and Staff in place in place according to national LGA throughout staffing norms Program Sufficient PMO-RALG maintains Program unit Throughout PMO-RALG Covenant capacity in as described in implementation Program PMO-RALG arrangement Program Unit to manage UPG Effective PMO-RALG develops annual Annual PMO-RALG Covenant execution of capacity building plan (including all capacity fiduciary, environmental and social building management requirements) and activities submits to Bank at the latest in April 30 of each year Overall PMO-RALG will produce an annual Annual PMORALG Covenant Program Program Report and convene an progress annual Program stakeholder review meeting, which will be attended by PMORALG, ULGAs, World Bank and other development partners. Fiduciary Quarterly Internal audit of funds Quarterly ULGA DLI1 Audit conducted by ULGA internal auditors Record Establish Records Keeping During project PMO-RALG and DLI 2 and 3 keeping Management System implementation ULGAs PMO-RALG Sufficient budgetary provision is Annual PMO-RALG and Covenant has sufficient made for all PMO-RALG Program Ministry of Finance budgetary activities related to annual resources to assessment, capacity building, impact undertake evaluation and value for money Program audits; and budgeted amounts are activities released on a timely basis to PMO- RALG throughout the year. Open bidding procedures to be Annual ULGAs DLI 2 and 3 publicly advertised (procurement) Transparency Contract awards disclosed to the Annual ULGAs DLI 2 and 3 public (procurement) Consultative process for Performance Annual ULGAs DLI 2 and 3 67 ULGA core staffing comprises council director, council treasurer, council internal auditor, council engineer, council community development officer (in charge of environmental and social systems management), council supplies officer, council assistant supplies officer (in charge of procurement), council town planning officer, council planner and council human resources officer. Qualifications of core staff are specified in GoT Scheme of Service. 117 Grant Utilization in place. Annual financial and physical Annual ULGAs DLI 2 and 3 progress report presented to and discussed by the Council Annual financial and physical Annual ULGAs DLI 2 and 3 progress report disseminated to the general public via suitable (newspapers, local radio stations, web pages etc.) commonly available media. Information on use of own source Annual ULGAs DLI 2 and 3 revenue publicly disclosed Quarterly Financial progress reports Annual ULGAs DLI 2 and 3 prepared timely and available and Progress reports presented and discussed in CMT & Full Council Technical Issue/risk Action Time Frame Responsible Party Instrument description Quality of Annual value for money audits will Starting in PMO-RALG will Covenant infrastructure be phased in to all Program ULGAs, Program year 3. commission PPRA to which will be and incorporated into the annual carry out the audits. built by assessment. By FY2015/16, ULGAs using all ULGAs will UPG fSnds be covered annually and the VFM audit will be incorporated into the annual assessment. Independent The annual assessment is procured. (i) For PMO-RALG Covenant annual FY2013/14: By assessment February 28, undertaken on 2013 (ii) For a timely basis. following years by July 31 each year Program Program will be entered into the March of every PMO-RALG and Covenant entered into Government budget as a distinct line year Ministry of Finance national item budget Impact Evaluation of impact of Program will Starts FY13/14 PMO-RALG Covenant evaluation be undertaken and ends in the final Program year Environmental, Social and Resettlement Environmental, A technical manual for Before PMO-RALG Covenant Social and Environmental and Social effectiveness Resettlement Management developed consistent technical with Tanzanian systems and bridges 118 guidance gaps between those systems and OP/BP 9.00. 119 Annex 9: Implementation Support Plan 1. The implementation support plan (ISP) is based on the implementation support guidelines for Program-for-Results operations, adapted to the design and risk profile of ULGSP. The borrower is responsible for the Program's overall implementation, including its technical aspects. The basic mandate for Bank implementation support under Program-for-Results is to: * Review implementation progress and achievement of Program results and DLIs; * Provide support for resolving emerging Program implementation issues; * Provide technical support to the client for implementation of the Program Action Plan, the achievement of DLIs and other results, and for institutional development and capacity building; * Monitor systems' performance to ensure their continuing adequacy through Program monitoring reports, audit reports and field visits; * Monitor changes in risks to Program-for-Results and compliance with legal agreements and, as needed, the Program's action plan. 2. Further to the above, due to the complex nature of the Program, there will be focused implementation support that will be provided by the Bank in a number of areas. This will focus on the implementation of the Program Action Plan, providing the necessary World Bank support and monitoring progress towards the achievement of the PDO. This support will include; * Due diligence for DLIs: For DLIs 1, 2 and 3, the Bank will commission a sample quality assurance audit of the annual performance assessment to check for accuracy and robustness; * Monitoring and Evaluation: Review APA, verification protocol and provide technical input; * Environmental and social: Provide the necessary support on the implementation of the manual which is currently being produced by the Government for the Program; * Fraud and corruption: Supervise the implementation of the agreed fraud and anti-corruption measures under the program and provide guidance in resolving any issues identified; * Procurement: (i) review of procurement performance on the basis of annual performance assessments; and (ii) provide guidance to capacity building for procurement; * Financial Management: Review the UIFRs and the assessment results reports as the basis for disbursements, audit reports, and agreement on measures to address any audit observation and monitoring their implementation. 3. Bank's implementation support will leverage the implementation support being provided under other ongoing Bank-funded projects. Bank task team leader and the core Bank task team (fiduciary, environmental and social systems, and fraud and anti-corruption), are located in the Tanzania country office, or in other country offices in the region, so that emerging issues can be identified and resolved in a timely manner. This will ensure timely, efficient and effective implementation support to PMO-RALG and the ULGAs. Formal implementation support missions and field visits will be carried out semi- annually, or as deemed necessary. The task team will make use of reports from the Program and evidence from implementation support visits to the field to prioritize areas for additional task team support. 4. A multi-disciplinary Bank team will be deployed during the Program's mid-term review (MTR). They will join the GoT team and other development partners. Program's progress with a particular focus on the performance mechanism and associated disbursement, as well as the capacity building activities will be reviewed and necessary adjustments will be made to the Program structure. 120 5. Skillmix needed: Skill Number of Travel Frequency Location Staff Weeks (annual) (annual) Task Team Leader 10 2-3 Country Office based Procurement 10 2 and field trips as Country Office based required Financial Management Specialist 6 2 and field trips as Country Office based required Environment Specialist 4 2 and field trips as Country Office based required Social Specialist 4 2 and field trips as Country Office based required Urban Economist 5 2 and field trips as HQ based required 121