FOR OFFICIAL USE ONLY Report No: PAD2610 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED IDA CREDIT IN THE AMOUNT OF US$70 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A LOCAL DEVELOPMENT SUPPORT PROJECT February 8, 2019 Social, Urban, Rural and Resilience Global Practice South Asia 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 31 December 2018) Currency Unit = Sri Lankan Rupee (LKR) LKR 182.75 = US$1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ACLG Assistant Commissioner of Local LG Local Government Government LGA Local Government Authority BT Basic Transfer BTT Business Turnover Tax LKR Sri Lankan Rupees CBO Community Based Organization MC Municipal Council CDO Community Development Officer MDTU Management Development Training Unit CEA Central Environmental Authority MIS Management Information System CERC Contingent Emergency Response M&E Monitoring and Evaluation Component CLG Commissioner of Local Government MOFMM Ministry of Finance & Mass Media CPF Country Partnership Framework MIHAPCLG Ministry of Internal and Home Affairs and Provincial Councils and Local Government DA Designated Account MTR Mid Term Review DPC Divisional Planning Committee NCB National Competitive Bidding DPMM Department of Project Management and Monitoring DPS Designated Procurement Specialist NELSIP North East Local Services Improvement Project DS Divisional Secretariat NPD Department of National Planning EA Environmental Assessment NPSC National Project Steering Committee EMP Environmental Management Plan PC Provincial Council ESMF Environmental and Social PDO Project Development Objective Management Framework EC European Commission PCU Project Coordination Unit ERD External Resources Department EU European Union PIU Project Implementation Unit FC Finance Commission POM Project Operations Manual FM Financial Management PPA Project Preparation Advance FR Financial Reports PS Pradeshiya Sabha GDP Gross Domestic Product PT Performance Transfers GIS Geographical Information System PSDG Province-Specific Development Grants GN Gram Niladhari QBS Quality-Based Selection GoSL Government of Sri Lanka QCBS Quality and Cost Based Selection GRM Grievance Redress Mechanism RFP Request for Proposal GRS Grievance Redress Service RPF Resettlement Policy Framework IBRD International Bank for Reconstruction SAC Social Audit Committee and Development ICB International Competitive Bidding SAI Supreme Audit Institution ICBIC International Competitive Bidding SBD Standard Bidding Document Individual Consultants IDA International Development SLILG Sri Lanka Institute of Local Association Governance IOT Indian Origin Tamil SSS Single-Source Selection IPF Investment Project Financing TO Technical Officer ISDS Integrated Safeguards Data Sheet TOT Training of Trainers IUFR Interim Unaudited Financial Reports UC Urban Council LA Local Authority UNDP United Nations Development Programme LAPDP Local Authority Participatory WA Withdrawal Application Development Plan LDSP Local Development Support Project WB World Bank LEC Lowest Evaluated Cost WDP Ward Development Plans Regional Vice President: Hartwig Schafer Country Director: Idah Z. Pswarayi-Riddihough Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Managers: Catalina Marulanda, David Seth Warren Task Team Leader(s): Yarissa Lyngdoh Sommer, Sonya M. Sultan The World Bank Local Development Support Project (P163305) TABLE OF CONTENTS DATASHEET ........................................................................................................................... 1 I. STRATEGIC CONTEXT ...................................................................................................... 8 A. Country Context................................................................................................................................ 8 B. Sectoral and Institutional Context .................................................................................................... 9 C. Higher Level Objectives to which the Project Contributes ............................................................. 10 II. PROJECT DESCRIPTION.................................................................................................. 10 A. Project Development Objective ..................................................................................................... 10 B. Project Beneficiaries ....................................................................................................................... 10 C. PDO-Level Results Indicators .......................................................................................................... 10 III. PROJECT DESCRIPTION.................................................................................................. 11 A. Project Components ....................................................................................................................... 11 B. Project Cost and Financing ............................................................................................................. 13 C. Lessons Learned and Reflected in the Project Design .................................................................... 14 IV. IMPLEMENTATION........................................................................................................ 15 A. Institutional and Implementation Arrangements) ......................................................................... 15 B. Fiduciary.......................................................................................................................................... 15 C. Sustainability................................................................................................................................... 16 D. Role of Partners .............................................................................................................................. 17 V. KEY RISKS ..................................................................................................................... 17 A. Overall Risk Rating and Explanation of Key Risks ........................................................................... 17 VI. APPRAISAL SUMMARY .................................................................................................. 18 A. Economic and Financial Analysis .................................................................................................... 18 B. Technical ......................................................................................................................................... 18 C. Financial Management ................................................................................................................... 19 D. Procurement................................................................................................................................... 20 E. Social (including Safeguards) .......................................................................................................... 20 Gender ................................................................................................................................................ 21 Citizen Engagement ............................................................................................................................ 22 F. Environment (including Safeguards) ............................................................................................... 22 G. Other Safeguard Policies (if applicable) ......................................................................................... 22 H. World Bank Grievance Redress ...................................................................................................... 22 VII. RESULTS FRAMEWORK AND MONITORING ................................................................... 23 The World Bank Local Development Support Project (P163305) ANNEX 1: DETAILED PROJECT DESCRIPTION .................................................................. 32 ANNEX 2: IMPLEMENTATION ARRANGEMENTS ............................................................. 42 ANNEX 3: IMPLEMENTATION SUPPORT PLAN ................................................................ 53 ANNEX 4: ECONOMIC AND FINANCIAL ANALYSIS ........................................................... 55 ANNEX 5: Map .............................................................................................................. 58 The World Bank Local Development Support Project (P163305) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Sri Lanka Local Development Support Project Project ID Financing Instrument Environmental Assessment Category Investment Project P163305 B-Partial Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 14-Mar-2019 30-Dec-2022 Bank/IFC Collaboration No Proposed Development Objective(s) To strengthen local government authorities' capabilities to deliver services to communities in a responsive and accountable manner, and to support economic infrastructure development in participating provinces. Page 1 of 58 The World Bank Local Development Support Project (P163305) Components Component Name Cost (US$, millions) Strengthening Local Government Planning Systems 1.50 Improving Local Services and Economic Infrastructure 86.65 Institutional Development 3.69 Project Management 8.23 Contingent Emergency Response Component 0.00 Organizations Borrower: Democratic Socialist Republic of Sri Lanka Implementing Agency: Ministry of Internal and Home Affairs and Provincial Councils and Local Government PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 100.65 Total Financing 100.65 of which IBRD/IDA 70.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 70.00 IDA Credit 70.00 Non-World Bank Group Financing Counterpart Funding 7.00 Borrower/Recipient 7.00 Page 2 of 58 The World Bank Local Development Support Project (P163305) Other Sources 23.65 EC: European Commission 23.65 IDA Resources (in US$, Millions) Credit Amount Grant Amount Guarantee Amount Total Amount Transitional Support 70.00 0.00 0.00 70.00 Total 70.00 0.00 0.00 70.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2019 2020 2021 2022 2023 Annual 6.17 18.13 22.49 23.16 0.05 Cumulative 6.17 24.30 46.79 69.95 70.00 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Social, Urban, Rural and Resilience Global Agriculture, Environment & Natural Resources, Governance Practice Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or Yes men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes Page 3 of 58 The World Bank Local Development Support Project (P163305) SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  Substantial 2. Macroeconomic  Moderate 3. Sector Strategies and Policies  Moderate 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  Substantial 6. Fiduciary  Substantial 7. Environment and Social  Moderate 8. Stakeholders  Moderate 9. Other 10. Overall  Substantial COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Page 4 of 58 The World Bank Local Development Support Project (P163305) Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Institutional Arrangements: Financing Agreement: Schedule 2, Sections I.A.1, 2 and 3 Due Date: 1 month after the Effective Date and Recurrent, Continuous Obligation of the Recipient to establish, not later than one (1) month after the Effective Date, the Project Implementation Units; and thereafter maintain the said Units; the National Project Steering Committee; and the Project Coordination Unit with composition, powers, functions, staffing, facilities and other resources satisfactory to the Association. Sections and Description Financing Agreement: Schedule 2, Section I.A.4 Due Date: 6 months after the Effective Date and Recurrent, Continuous Obligation of the Recipient to recruit an independent performance assessment agency on terms of references and qualifications acceptable to the Association and thereafter maintain the said agency during the implementation of Part 2.1 of the Project. Sections and Description Project Operations Manual Financing Agreement: Schedule 2, Section I.B Due Date: Recurrent, Continuous Obligations of the Recipient to carry out the Project in accordance with the Project Operations Manual; and not amend, waive or abrogate any provisions of the said manual unless the Association agrees otherwise in writing. Sections and Description Sub-projects; Basic and Performance Transfers Financing Agreement: Schedule 2, Section I.D Recurrent, Continuous Obligation of the Recipient to: (a) provide Basic and Performance Transfers to Eligible LAs for the implementation of Sub-projects in accordance with eligibility criteria and procedures in terms and conditions acceptable to the Page 5 of 58 The World Bank Local Development Support Project (P163305) Association and as set out in the Project Operations Manual; (b) exercise its rights in such manner as to protect the interests of the Recipient and the Association and to accomplish the purposes of the Credit. Sections and Description Annual Work Plans and Budgets Financing Agreement: Schedule 2, Section I.E. Annual, Continuous Obligation of the Recipient to finalize and furnish to the Association not later than November 30 in each year, an annual work plan and budget; and not later than two (2) months after furnishing each annual work plan and budget, finalize and adopt, and thereafter ensure that the Project iscarried out in accordance with, such plan and budget as agreed in writing with the Association. Sections and Description Safeguards Financing Agreement: Schedule 2, Section I.F Recurrent, Continuous Obligation of the Recipient to ensure that the Project is carried out in accordance with the safeguards instruments (as defined in the Financing Agreement); and not amend, abrogate, or waive any of the safeguard instruments unless the Association agrees otherwise, and report on their status of implementation as part of the semiannual progress reports. Sections and Description Contingent Emergency Response Financing Agreement: Schedule 2, Section I.G In case of an Eligible Crisis or Emergency Obligation of the Recipient to adopt a satisfactory Emergency Response Manual for Part 5 of the Project and, in the event of an eligible crisis or emergency, ensure that the activities under said part are carried out in accordance with such manual and all relevant safeguard requirements. Sections and Description Mid-Term Review Financing Agreement: Schedule 2, Section II.B Due Date: 24 months after the Effective Date Obligation of the Recipient, to carry out jointly with the Association a midterm review to assess the status of Project implementation, as measures against the performance indicators set forth in the Project Operations Manual. Conditions Page 6 of 58 The World Bank Local Development Support Project (P163305) Type Description Disbursement Financing Agreement: Schedule 2, Section III.B.1 The Recipient may not withdraw the proceeds of the Financing as allocated under Category (3), unless and until the Recipient has furnished to the Association evidence acceptable to the Association that the sub-manual governing Performance Transfers under Part 2.1 of the Project has been duly adopted by the Recipient. The Recipient may not withdraw the proceeds of the Financing as may be allocated to Part 5 unless an Eligible Crisis or Emergency has occurred, all related safeguards instruments and requirements have been completed, the emergency response implementing entities have adequate staff and resources, and the Recipient has adopted the Emergency Response Manual, acceptable to the Association. Page 7 of 58 The World Bank Local Development Support Project (P163305) I. STRATEGIC CONTEXT A. Country Context 1. Sri Lanka is a lower middle-income country with a GDP per capita of USD 4,065 (2017) and a total population of 21.4 million people. Following 30 years of civil war that ended in 2009, Sri Lanka’s economy grew at an average 5.8 percent during the period of 2010-2017, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth; although there were some signs of a slowdown in the last few years. The economy is transitioning from a predominantly rural-based economy towards a more urbanized economy oriented around manufacturing and services. Economic growth has contributed to the decline in the national poverty headcount ratio from 15.3 percent in 2006/07 to 4.1 percent in 2016. Extreme poverty is rare and concentrated in some geographical pockets. The Government has indicated keenness to undertake reforms in the areas of public finance, competitiveness, governance, and education sectors. 2. Despite a strong track record in poverty reduction, pockets of poverty and inequality prevail in certain geographical areas. This proposed project targets four provinces, namely Northern, Eastern, Uva and North Central Provinces, because together they account for one-third of the nation's poor1. Compared to the national poverty rate of 4.1% in 2016, poverty is highly concentrated in specific districts in the Northern and Eastern Provinces, and well above average in Uva Province (6.5%). The poorest districts in the country are in the Northern and Eastern Provinces: Mullaitivu (12.7%), Killinochchi (18.2%), Batticaloa (11.3%), Trincomalee (10%) and Jaffna (7.7%). Two districts in Uva province have a poverty rate of 6.5%. In particular, Moneragala district is characterized by high poverty, low population density and an overwhelmingly rural population. Additionally, the North Central province experienced spillover impacts of the conflict that have contributed to increased poverty. 3. Local development in the Northern, Eastern and North Central Provinces was hampered in varying degrees by Sri Lanka’s civil war, with spill-over effects in the North Central Province. A recent Socio- Economic Diagnostic of the Northern and Eastern Provinces, conducted by the World Bank, showed that local development continues to be challenged by a set of social and economic issues, namely: (i) weak community institutions and social support mechanisms; (ii) significant gender vulnerabilities, particularly among female headed households; and (iii) continuing prevalence of trauma symptoms and increased high-risk behaviors among youth and affected populations. Uva, a plantation and agriculture-dependent economy, is hindered by its remote location and weak links with the growth and commercial centers of Sri Lanka. The Province has a sizable population of Indian-origin Tamils (IOT) working in plantations who are now Sri Lankan citizens, but who in the past did not have citizenship for many decades, precluding them from government provided social benefits. Finally, the North Central Province is the largest province in the country, covering 16% of the Sri Lanka’s land area. It has suffered the spillover effects of the conflict, since it shares borders with Northern and Eastern Provinces. 4. Sri Lanka is also affected by climactic hazards and extreme events, which are projected to worsen and, in turn, affect livelihoods. Between 2010-2015, Sri Lanka suffered from a cycle of hydro-meteorological disasters. Droughts and flood incidents, within a few months of each other, alternated within the same districts, affecting the same vulnerable communities and eroding their capacity to cope. Many of these districts were in the Northern and Eastern Provinces, that were also the affected by the conflict. In 2014, 1 Source: DCS, and WB staff calculations using HIES 2016 Page 8 of 58 The World Bank Local Development Support Project (P163305) drought affected over 1.8 million people in the Northern and Eastern Provinces. The same districts were subsequently impacted by heavy floods during November-January of the same year, affecting 1.1 million people. The North Central Province is also extremely vulnerable to climatic shocks. B. Sectoral and Institutional Context 5. Sri Lanka has an institutionally bifurcated local administration and service delivery system. The devolved local government system comprises of 341 elected Local Government Authorities (LGA), including 276 Pradeshiya Sabhas (PS), 41 Urban Councils (UC) and 24 Municipal Councils (MC). These fall institutionally and legally under the Provincial government. The decentralized system of public administration comprises a three-tier structure of vertically integrated, deconcentrated national government administrations at the District, Division and Grama Niladhari (GN) levels. This system falls under the Ministry of Home Affairs and is headed by officers appointed by the central government. The dual system of government impedes effective and equitable local service delivery in Sri Lanka. Though the 13th Constitutional Amendment has demarcated the role of the Province, unclear and overlapping service delivery functions and structures between the decentralized administrative units and the devolved governance units, continue to restrict the activities of local governments in Sri Lanka. The deconcentrated system of service delivery, which runs through Divisional Secretariats (DS) has inadequate incentives to respond to local needs. They are financed by annual development plans, allocated by the central ministries. 6. Local Government Authorities (LGAs), although closer to the communities they serve, have less capacity and limited funding to respond to the needs of their constituents. They are characterized by low levels of fiscal transfers to LGAs and own source revenues. Although NELSIP contributed towards strengthening LGA governance systems in participating provinces, they continue to be constrained by weak technical capacities. These constraints limit the ability of LGAs to provide the services and socioeconomic opportunities sought by their constituents. Nonetheless, LGAs have comparably more discretion in expenditures than the DSs. This means that, potentially, LGAs can be more responsive to community needs, compared to the line ministries and their District and Divisional arms. Programs delivered by the DS are based on sectoral planning that is done at the central level. This often results in lack of synergies and/or overlaps with investments identified by LGAs. 7. While citizens have historically had limited influence on service delivery or infrastructure provision, there is potential for greater accountability through elected LGAs. Accountability of the LGAs to local constituents has been reinforced after the local elections in February 2018, which reintroduced direct representation in local governments as well as legally expanded women’s representation in local councils significantly. LGAs now have a greater incentive to prioritize their expenditures based on community needs. Although LGAs have a broad mandate under the 13th Amendment, they provide only select services due to de facto functional mandates and limited resources. With greater resources and capacities, it would be possible for LGAs to expand the scope of their activities. 8. The World Bank has been supporting the Government of Sri Lanka (GoSL) in poverty reduction and local development in the Northern, North Central, Eastern and Uva Provinces . Specifically, the World Bank supported restoration of critical infrastructure and service delivery through the North-East Housing Reconstruction Program (PAD No. 30436-LK) and the North East Local Service Improvement Project (PAD No. 50028 - LK). NELSIP supported LGAs in the Northern, Eastern, and selected LGAs in North Central, Page 9 of 58 The World Bank Local Development Support Project (P163305) North Western and Uva Provinces in improving the delivery of local services. The project also successfully introduced participatory planning and budgeting, as well as strengthened project management, financial reporting and monitoring. Under NELSIP, investments in key services included roads and markets as well as the restoration of basic services to the conflict-affected populations. C Higher Level Objectives to which the Project Contributes 9. The proposed Local Development Support Project (LDSP) contributes to the World Bank Group’s Country Partnership Framework (CPF) for the period FY2017-2020. The project contributes to Pillar 2 “Promoting Inclusion and Opportunities for all” to support the Government’s objective to enhance the inclusiveness of the country’s growth and development model. The project directly contributes to Objective 2.3 Improving living standards in the lagging areas under Pillar 2, by supporting socio-economic development and service delivery by LGAs in Northern, North Central, Eastern and Uva. The proposed project also contributes to two crosscutting objectives of the CPF, namely (i) strengthening governance and accountability; and (ii) improving gender equality. II. PROJECT DESCRIPTION A. Project Development Objective 10. To strengthen local government authorities’ capabilities to deliver services to communities in a responsive and accountable manner, and to support economic infrastructure development in participating provinces. Economic Infrastructure is defined as infrastructure investments that support or advance local economic activity in select economic clusters of participating provinces. Local government authorities are herein referred to as LGAs. B. Project Beneficiaries 11. The project is expected to benefit around 1 million people approximately, in the Northern, North Central, Eastern and Uva Provinces. By strengthening the accountability, responsiveness and effectiveness of LGAs, the project will target the more vulnerable sections of the population, such as the extreme poor, women, women-headed households, war widows, unemployed youth, people with disabilities and the elderly. The project will also benefit key local governance institutions as well as MIHAPCLG and FC at the central government level. C. PDO-Level Results Indicators 12. Progress towards the PDO will be measured by the following key indicators that reflect the overall results areas of the project: i. Number of Basic Transfers disbursed on a timely basis2 to eligible LGAs (measured by province) ii. Share of LGAs that increase their overall performance scores in deliverying improved services. iii. Percentage of LGAs implementing participatory planning processes at the ward and LGA levels 2This indicator measures the number of BT tranches (out of a total of 8 expected tranches during the project duration) disbursed semi- annually in March and September of every year. Page 10 of 58 The World Bank Local Development Support Project (P163305) iv. Percentage of planned LGA spending aligned with community needs and priorities as indicated in the Local Authority Participatory Development Plans (LAPDPs) v. Number of economic infrastructure sub-projects benefiting multiple LGAs which meet selection criteria vi. Number of beneficiaries benefiting from project investments (core indicator) - Number of female beneficiaries benefiting from project investments in participating provinces III. PROJECT DESCRIPTION A. Project Components The project has the following components (for more detail refer to Annex 1): 13. Component 1: Strengthening Local Government Planning Systems (IDA US$1.5 million). This component will finance preparation and updating of LAPDPs by LGAs with the active engagement of communities. Consultations will be undertaken at the ward Levels to identify the needs and priorities of communities. Community plans will be aggregated at the LGA-level and synergized with sector plans of ministries to inform the formulation of the LAPDPs. Final updated LAPDPs will be approved by the LGA Councils. They will include infrastructure as well as social and economic services prioritized by the community. LAPDPs will also provide the basis for selecting sub-projects to be implemented by LGAs under Component 2.1 of the project. Formulation of LAPDPs are expected to enhance the accountability of LGAs to their constituents and strengthen the public expenditure planning process. 14. Component 2: Improving Local Services and Economic Infrastructure (USD$86.65 million (IDA USD$63.0 million, EU USD$23.65 million). This Component will finance delivery of local services and economic infrastructure by LGAs and provinces in an accountable, equitable and effective manner. This will be achieved through two sub-components. Sub-Component 2.1 Improving Local Service Delivery (IDA US$54.5 million, EU USD$23.65 million). This subcomponent will finance fiscal transfers to qualifying LAs. These transfers will complement and expand prevailing GoSL transfers to LGAs. It will include Basic and Performance Transfers. Basic Transfers (BT, IDA US$39.5 million): BTs are based on the principle of equalization considering economic lag and poverty rates and aimed at ensuring equitable distribution of fiscal resources across provinces and LGAs. A two-step process of determining the amounts, based on agreed formulas, will be employed for distribution of BTs, first at the provincial level and then at the LGA level. BTs will be channeled as grants through the Provincial Treasury to LGAs in two tranches, in March and September of each year. Allocations per LGA will be based on (i) a floor allocation to ensure that all LGAs get a minimum amount; and (ii) a fiscal formula that considers the needs, costs and potential across LGAs. To qualify for BTs, LGAs will have to meet a set of criteria, including timely reporting on expenditures, clearing pending annual audits, and ensuring participation of citizens. BTs will support LGA discretionary expenditure towards improving delivery of services such as, roads and drains, markets, water supply, minor irrigation, sanitation, rural electrification, and support social and economic services/infrastructure. Page 11 of 58 The World Bank Local Development Support Project (P163305) Performance Transfers (PTs, US$38.65 million (IDA US$15.0million, EU US$23.65million3): PTs will be provided to qualifying LGAs to incentivize them to improve their institutional performance and service delivery outcomes. PTs will be channeled through the Provincial Treasury and distributed in September of each year based on the performance assessments undertaken for the previous year. PTs will start from year two, while year one of the project will be used to benchmark LGA capacity and performance standards and put in place a performance monitoring and assessment system. LGAs have been categorized into three capacity tiers based on institutional assessments. LGA performance will be assessed annually based on achievement of indicators relevant to each tier. The project will build LGA capacity under Component 1 and 2 giving LGAs an opportunity to graduate to the next capacity level upon good performance. In addition, LGAs performance in adopting climate resilience measures will be supported and assessed. Co-financing grant from the European Union in the amount of approximately US$ 23.65 million equivalent is anticipated to finance the PTs in 3 provinces4. PTs like BTs, will support LGA discretionary expenditure towards improving delivery of services such as, roads and drains, markets, water supply, minor irrigation, sanitation, rural electrification, and support social and economic services/infrastructure Sub-Component 2.2 Economic Cluster Support (IDA US$8.5 million). This sub-component will finance identification and provision of infrastructure that supports local economic development such as roads, minor irrigation, markets, IT connectivity, rural electricity etc. MIHAPCLG will allocate funds to participating provinces to implement this component. The provinces will work with LGAs, businesses and other stakeholders to analyze potential economic clusters or value chains that can benefit from infrastructure investments that cut across administrative boundaries of multiple LGAs. Investments will be selected based on three compulsory basic criteria: (i) support or advance economic activity in a selected cluster or value chain; (ii) boost or catalyze economic activities of local residents; and (iii) activities that result in greater climate resilience, e.g. reduced flooding, improved accessibility, reliable water supply, ensuring continued economic and livelihood activities, preserving perishable food item etc., to help project beneficiaries adapt to climate change impacts. 15. Component 3: Institutional Development (IDA US$3.69 million) This component will finance: (i) information and awareness campaigns; (ii) institutional development and capacity building of LGAs; (iii) training of trainer’s (TOT) program for SLILG, MDTU and newly elected ward councilors in participatory approaches, resource and asset mapping, local and area based planning, public expenditure and financial management; (iv) development of an M&E/MIS system5 using smart mobile technology; (v) technical assistance, training and capacity development of the MIHAPCLG, the Finance Commission (FC) and other relevant institutions; (vi) improve and strengthen the capacity and facilities of SLILG; and (vii) computerization of accounting software, training, capacity building and rollout of the new accounting system in LGAs. 16. Component 4: Project Management (US$ 8.23 million (IDA US$1.23million, GoSL US$7.0million). This component will finance two sub-components: (i) Project Management and (ii) Audits. Sub-Component 4.1: Project Management. This sub-component will finance project management and 3 August 31, 2018 conversion rate 4 North, Eastern and Uva 5The introduction of a web-based monitoring system would replace the existing manual system of book keeping and accounting, asset mapping and management, data accumulation and preparation of analytical reports required at various levels of Provincial and Local Authority administration. Page 12 of 58 The World Bank Local Development Support Project (P163305) implementation activities of the Project Coordination Unit (PCU) established in MIHAPCLG and Project Implementation Units (PIU) established in the office of the Commissioner of Local Governments (CLGs) in participating PCs. Sub-Component 4.2: Audits. This subcomponent will finance independent performance assessment and any other capacity building interventions that are required to strengthen the project’s external audit, LGA statutory audit and internal audit that will monitor LGA fiduciary compliance and performance. 17. Component 5: Contingent Emergency Response Component (CERC, US$0.0 million): This component will allow for rapid reallocation of project proceeds in the event of a natural or man-made disaster or crisis that has caused or is likely to imminently cause a major adverse economic and/or social impact. To trigger this component, the GoSL would need to declare an emergency, a state of a disaster or provide a statement of fact justifying the request for the activation of the use of emergency funding. The detailed criteria and process for triggering and utilizing the CERC will be outlined in the Project Operations Manual (POM). B. Project Cost and Financing 18. The total project cost is estimated at US$100.65 million, which will be financed by an IDA Credit, GoSL counterpart funds, and an expected grant from the European Union (EU). The EU has expressed its intent to provide up to EUR 20 million (US$23.65million) to support the project, and this funding was approved by the EU Commission in November 2018. It is anticipated that the EU grant resources will be available for the project by June 30, 2019 as joint co-financing for the Performance Transfers under component 2.1. If the EU co-financing does not materialize, the project will be restructured to adjust the targets. GoSL is providing counterpart financing in the amount of US$7million that will cover staff salaries. 19. Project Preparation Advance (PPA): A PPA in the amount of $410,0006 was used to carry out project preparatory activities, namely finalize the detailed POM, start preparations for the participatory planning processes to be undertaken at the ward levels, and begin the economic cluster assessments to identify infrastructure needs in the participating provinces under Component 2.2. 20. Detailed project costs are provided in Annex 2. Table 2: Project Cost Table (US Dollars Million) Anticipated Co- Total Project Counterpart Project Components IDA Financing financing from EU cost 7 Funding Strengthening Local Governance 1.50 1.50 0.00 Planning Processes Improving Local Services and 86.65 63.00 23.65 0.00 Economic Infrastructure Support 6This includes interest 7The amount US$23.65 million is equivalent to EUR 20 million as of the exchange rate on August 31, 2018. This amount may change depending on exchange rate fluctuations. Page 13 of 58 The World Bank Local Development Support Project (P163305) Institutional development 3.69 3.69 0.00 Project Management 8.23 1.23 7.00 Contingent Emergency Response 0.00 0.00 Project Preparation Advance8 (PPA) 0.41 0.41 Total Costs 100.48 69.83 23.65 7.00 EU Joint Co-financing 23.65 Front End Fees9 0.175 0.175 Total Project Financing required 100.65 Total IDA Financing Required 70.00 C. Lessons Learned and Reflected in the Project Design 21. The proposed LDSP builds on NELSIP experience, as well as global experience with local government and service delivery projects, particularly in Bangladesh and India. Key lessons learned and reflected in the project design are summarized below. • Reform of fiscal transfer systems have led to demonstrable impact on local government performance in South Asia. Projects in Bangladesh and India have shown that rational and predictable fiscal transfers to local governments along with enhanced discretion and improved accountability of local governments often lead to improved services and better-quality infrastructure at lower costs. When combined with strong forms of community participation and oversight, this can catalyze improved own- revenue mobilization and reduce leakage of funds. However, local government projects in South Asia and elsewhere also highlight the challenges of weak institutional capacity on the supply side and the importance of effective mobilization and engagement of communities on the demand side. A single project is often not adequate to address the two sides of local governance equation. Lessons from Bangladesh, India and elsewhere indicate that providing support over a period of 10-15 years through a series of incremental engagements bears more sustainable results. • Transparency, rationality and predictability of fiscal transfers constitute a major step in fiscal decentralization. LDSP transfers will build on capital grants introduced under NELSIP. The amount of the NELSIP individual capital grant allocation was based on a formula of population size, land area, and number of displaced people. BTs under LDSP will consider broader needs-costs-potential criteria to establish a proper equalization system that is embedded within the country’s fiscal architecture. Further, local public financial management systems established under NELSIP will be strengthened and, additionally, a system of performance management will be introduced under LDSP. • Importance of strengthening social accountability to build trust between citizens and local government. The socio-economic assessment of the North and East highlighted the importance of 8 PPA Plus interest 9 Calculated as 0.25% of IDA credit $70,000,000. Page 14 of 58 The World Bank Local Development Support Project (P163305) having community engagement since the legacy of the war resulted in low levels of trust in public institutions, including local government. NELSIP initiated social accountability through the LAPDP process. However, the participation of vulnerable groups was not systematically enforced. The LADPDP process and consultation with various groups has been strengthened in this project. In addition, providing Social Audit Committees (SACs) an ongoing role in sub-project post-implementation life cycle will reinforce ties between the community and LGAs beyond LDSP. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 22. The MIHAPCLG is the project implementing entity. MIHAPCLG will establish a Project Coordination Unit (PCU) with the overall responsibility for project implementation. The project will be implemented at the provincial level through PIUs in the Provincial Councils (PCs) and LGAs that are recipients of BTs and PTs. Implementation responsibility will be as follows: (i) Component 1 - will be implemented by PCs (through PIUs) and will ensure that communities are consulted by their LGAs to prepare Ward Development Plans and/or update LAPDPs; (ii) Component 2 – BTs and PTs will be allocated to eligible LGAs by the PCs through their PIUs, based on criteria and procedures set out in the POM, which includes a manual on how to utilize the transfers. LGAs will be responsible for carrying out activities/sub-projects under sub- component 2.1. The PCU through PIUs will be responsible for implementing economic infrastructure under sub-component 2.2; (iii) Component 3 – will be implemented and managed by the PCU in coordination with the PIU and LGAs; and (iv) Component 4 - will be implemented by the PCU. This is to provide oversight of all project activities and ensure timely implementation by the relevant agencies to meet the project objectives. 23. A National Project Steering Committee (NPSC) will be formed under MIHAPCLG, with representation from major line ministries, FC and participating provinces, to provide policy guidance, review institutional performance, and oversee project progress. In addition, the POM will be reviewed and endorsed by the NPSC. A Provincial Project Steering Committee (PPSC) will be established in each participating Province and will report to the NPSC periodically on progress achieved. It will be Chaired by the Provincial Chief Secretary. B. Fiduciary 24. The MIHAPCLG will be responsible for monitoring the results of project activities, which will be undertaken at three levels: (i) routine monitoring and reporting of project progress, covering physical, institutional, fiduciary and safeguards aspects. Six-monthly LGA reports, annual performance audits and field visit reports by the PIU and the PCU teams will generate data for tracking of project funds and monitoring of results (ii) monitoring of LGA performance and outputs through annual audits and independent performance audits; and (iii) monitoring of project processes, outcomes and results through beneficiary surveys, as needed. Intermediate indicators for sub-project identified and implemented as part of LAPDP process will be added during project implementation. A baseline survey will be carried out at the onset of project implementation to evaluate and assess results at the end of the project period. At the PCU level, reports will be generated using the MIS and M&E system to track the planned and actual release of basic transfers to LGAs, the establishment and operationalization of the performance transfer system, and grievance receipt and redressal reports, included as part of project progress reports. These data will be used as complementary inputs to support results monitoring of project activities. At the Page 15 of 58 The World Bank Local Development Support Project (P163305) national level, the Department of Project Management and Monitoring (DPMM) will continue to monitor project implementation progress and results. 25. A mid-term review (MTR) of the project will be conducted jointly by GoSL and the Bank, to assess overall implementation progress towards meeting the PDO, and to take any necessary corrective measures. The MTR is expected to be conducted no later than December 30, 2020. Prior to the MTR, the PCU will prepare a detailed report describing implementation progress and progress towards meeting the PDO, validated through data, as well as remedial measures to address challenges faced. C Sustainability 26. Economic and institutional sustainability: Smaller subprojects (<$200,000) will be subject to standard cost effectiveness analysis, while larger ones (>$200,000) will undergo cost-benefit analysis for a sample of sub-projects to ensure financial and economic sustainability. The project has strong institutional buy- in from the central, provincial and local levels of government, especially from stakeholders that have previous experience with NELSIP. The project takes a systemic approach to addressing service delivery needs of target communities. Institutional foundations established under NELSIP will be further reinforced and enhanced through institutional development and capacity building activities under Components 1 and 3. Pilot economic infrastructure investments under Component 2.2 will undergo cost- benefit and institutional analyses to ensure financial and economic viability and institutional sustainability. Monitoring and evaluation will be carried out for these economic infrastructure investments. 27. Social sustainability. LAPDPs will be used to identify, engage and solicit local community needs through well-established participatory tools. Practices such as Social Audit Committees (SACs), established under NELSIP, will be deepened and expanded to post-implementation operations and maintenance of sub- projects. 28. Disaster and Climate Screening. The project has been screened for short and long-term climate change and disaster risks, and the overall risk level to the outcome is substantial. The proposed project area is highly exposed to drought, floods, and landslides, which have high potential impact on the planned activities. LDSP’s service delivery components will have important climate co-benefits and enable the communities to adapt to the impacts of climate change. LGAs will be assessed on their overall performance in using climate resilience measures in improving their institutional capacity and service delivery efforts which will be customized according to their assessed capacity levels. Climate change adaptation will be a selection criterion in prioritizing and selecting service delivery and infrastructure investments (Sub-component 2.1). These investments are expected to help project beneficiaries better adapt to climate change impacts through reduced flooding and improved accessibility with all season roads with drainage, stand-alone flood management drains and irrigation investments; improved availability of food and water for agriculture/livelihoods during droughts (through irrigation, water supply and storage facility investments); provision of market structures/buildings for shelter and to ensure continuous economic activity during storms, and development of public parks which may include planting of trees. LDSP will also invest USD$8.5 million in larger-scale, provincial level economic infrastructure that reduces flooding and improves accessibility, such as all-season roads, drainage and irrigation canals (Sub-component 2.2); climate resilience will be a requirement for all investments under this Sub-component. In addition, LDSP will provide climate and resilience awareness training to LGA staff Page 16 of 58 The World Bank Local Development Support Project (P163305) and beneficiary communities (Component 3) which will be monitored and assessed as part of LGA performance. D. Role of Partners 29. The EU intends to support GoSL with a contribution of EUR 40 million under its 'Strengthening Transformation, Reconciliation and Inclusive Democratic Engagement (STRIDE) Programme’. The Programme includes a planned contribution of EUR 20 million10 towards PTs under Component 2.1 of LDSP. The overall objective of the Programme is “to support the process of decentralization in the targeted provinces contributing to the resolution of critical underlying causes of conflict and avoid escalation of local disputes is strengthened”. 30. The EU grant will be allocated to GoSL as a Recipient Executed Trust Fund (RETF) to be administered by the World Bank. The EU has expressed its intent to provide up to EUR 20 million (US$23.65million) to support the project, and this funding was approved by the EU Commission in November 2018. It is anticipated that the EU grant resources will be available for the project by June 30, 2019 as joint co- financing for the Performance Transfers under component 2.1. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 31. The overall project risk is rated as Substantial. The main risks related to the achievement of the PDO are: i. Institutional — the risk related to the weak capacity of PCs and LGAs will be mitigated by providing targeted and customized support to LGAs in all the participating provinces based on their capacity tier. Overall, this will cover areas such as project management, strengthening of local PFM systems, technical capacities in service delivery areas and citizen-LGA interfaces, including efforts to strengthen provincial CLGs to manage, monitor and support the LGAs. Finally, the project will also strengthen the SLILG, which is the training arm for LGAs and PCs. ii. Fiduciary - risk related to weak fiduciary systems at the provincial and LGA levels to ensure proper tracking of BT and PT expenditures will be mitigated by providing qualified support staff to LGAs, participating PCs and the MIHAPCLG, as well as relevant training to audit and procurement staff. A GIS enhanced MIS and M&E system using mobile technology will be established in the PCU and LGAs to allow better tracking of both procurement and financial management transactions. iii. Political and Governance — Risk related to political economy because of recent local level elections will be mitigated at two levels: first, via provision of training and capacity building to newly elected ward councilors and second, by providing project support to MIHAPCLG and CLGs to advance regularization of the SACs to ensure better community engagement with the LGAs. Risk related to the ambiguity surrounding governance, government policies and actions on decentralization and local government strengthening will be mitigated by providing capacity building to the FC, continuing the dialogue with GoSL on a coherent decentralization policy and strengthening LGA systems. iv. Financial – risk related to the potential unavailability of EU financing to top-up PTs will be mitigated by ensuring that there is IDA allocation of $15 million for PTs at the onset, which will be reallocated across BT and PT once the EU grant is available. 10 This amount is only the GoSL recipient executed portion and does not include the WB fees and other costs. Page 17 of 58 The World Bank Local Development Support Project (P163305) VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 32. The poverty rates in the selected provinces and their vulnerability to climatic shocks suggest that investments in the targeted areas are likely to have far-reaching impacts. The unique circumstances prevailing in these provinces justify robust institutional and investment interventions to reduce poverty and vulnerability. The project will contribute to several areas of GoSL‘s fiscal and economic reforms, by (i) improving efficiency and effectiveness of public expenditures at the local level through better planning, (ii) strengthening a rational and predictable fiscal transfer system to LGAs that emphasizes equalization at the provincial level and strengthens poverty targeting at the LGA level, (iii) rolling out a robust performance grant system for LGAs focusing on improved public expenditure outputs and outcomes and incentivizing local revenue mobilization, and (iv) introducing a technology-enabled M&E system that allows improved tracking of investments. The project will also examine if LGAs are making allocative choices which respond to their constituent priorities by tracking citizen satisfaction with LGA services. 33. The project builds on the achievements of NELSIP but, additionally, aims to be more closely embedded in the country’s fiscal system by co-mingling project funds with other fiscal transfers to LGAs via Provinces through the Treasury system. The grant system established under NELSIP ensured predictable, rational and transparent capital grant transfers to LGAs which supported timely implementation of the sub- projects and allowed for efficient and timely utilization of Bank resources maintaining a steady disbursement rate. In addition, around 70% of eligible LGAs received performance grants. The PT system under LDSP will build on the advances made under NELSIP. The results of the economic and financial analysis of NELSIP at completion showed positive economic returns for water supply (between 5 and 29 percent), electricity (55 percent), markets (between 9 and 36 percent), and drainage (9 percent). LDSP expects to see similar positive economic returns as the LGA level investments are expected to remain largely the same. B. Technical 34. Preparation of LAPDPs and Community Engagement: LAPDPs introduced under NELSIP will be extended to new LGAs and updated where they exist, to strengthen a bottom-up community planning process. Communities and Community Based Organizations (CBOs) will be consulted during the formulation of LAPDPs and the prioritization of sub-projects. They will also be provided relevant information regarding LGA activities and priorities. It is expected that the newly elected Ward Councilors, especially the women Councilors, will play a critical role in ensuring regular and systematic information sharing with local communities. To help track whether women’s service and infrastructure needs are being addressed, a very simple form of gender budgeting will be undertaken, to track the percentage of LGA funds going to activities prioritized by women’s groups/women led CBOs. Appropriate training and support will be provided to Community Development Officers to implement participatory planning approaches and ensure meaningful engagement with vulnerable groups. 35. Basic and Performance Transfers: The allocation of transfers will be based on agreed formulas. BTs and PTs will enable LGAs to finance specific priorities identified in the LAPDP that fall under their mandate. Page 18 of 58 The World Bank Local Development Support Project (P163305) The formula-based BTs will, (i) at the provincial level, consider the province’s capacity to generate own revenue and demand for public services, and, at the LGA level, consider the demand for public services and poverty, (ii) ensure predictable transfers to allow LGAs to better link planning and budgeting with actual resource envelop; and (iii) will be disbursed twice a year to LGAs that meet eligibility criteria. PTs, which will start in the second year of the project will be allocated with the second tranche of the BTs in a two-step process: (i) across the four project provinces; and (ii) across eligible LGAs within the provinces. 36. Transfer allocations: The total provincial level allocation will be distributed across the four provinces based on four indicators further explained in Annex 2. At the LGA level each province will further distribute 100% of its allocation to the LGAs in the form of a BT and a PT in the following manner- (i) BTs - each LGA receives a minimum floor allocation plus a top up amount derived from the formula; (ii) PTs - the project will incentivize LGAs to ensure public expenditures translate into actual service delivery, social and economic gains on the ground. 37. LGA capacity assessment for PTs: The LGAs will be divided into three tiers based on their capacity and potential, to ensure that each LGA is benchmarked to other LGAs of similar capacity levels when performance assessments are undertaken. The assessments will cover three areas of performance, namely: (i) Institutional; (ii) Infrastructure and service delivery; and (iii) Socioeconomic. From a long list of performance indicators across the three performance areas, LGAs can choose a shortlist of performance indicators based on their capacity which will need to be reviewed and approved by PCU and the FC. 38. LDSP will use existing GOSL procedures for the technical design, costing and procurement of investment sub-projects at the LGA level. In most instances, standard designs will be used, adapted to local circumstances. Requirements for disclosure and community participation are included in the project framework. Local-level service delivery priorities will be determined through LAPDPs, subject to social and environmental screenings and implemented by the LGAs. C. Financial Management 39. A financial management assessment of the MIHAPCLG, PC CLGs and LGAs was undertaken, focusing on the capacity of the LGAs in the areas of budgeting, funds flow, accounting and financial reporting, internal controls and auditing. If the LGAs continue to use the existing financial management systems, follow applicable financial regulations & circulars and have assigned FM staff LGAs are considered capable of handling project funds, particularly Component 2 funds, and maintaining reasonable fiduciary oversight and control over these. The capacity of MIHAPCLG and PC CLGs were also found to be satisfactory to handle project funds relevant to each of their levels. The proposed Financial Management (FM) procedures are in line with fiduciary requirements of Bank Policy on Investment Project Financing (IPF). The PCU will be responsible for overall FM arrangements of the project and must have qualified FM staff. The FM arrangements at the PC level & LGA level will also be managed by assigned FM staff. Detailed FM arrangements will be reflected in the Operations Manual. 40. There are no overdue audit reports and ineligible expenditures outstanding by MIHAPCLG. The external audit of the project will be carried out by the National Audit Office of Sri Lanka, which will be supported under the project. The audit report should be submitted to the WB within 6 months of the end of each financial year. Page 19 of 58 The World Bank Local Development Support Project (P163305) 41. BTs and PTs under Component 2 will form two disbursement categories for the project. The EU funds will also flow to Component 2. The existing country system of transferring block/performance grants to LGAs through the treasury at the PC level, will be used for releasing project funds to LGAs by the PCU. LGAs will maintain appropriate records and documentation of the work done and the expenditure incurred. The control and use of component 2 funds by LGAs will be subject to the overall fiduciary and reporting arrangements of the LGAs, as well as the requirements specified by the POM. The LGAs planning to be part of the project will be required to undergo the annual audit of their financial statements by the National Audit Office and obtain an audit opinion that is not adverse/disclaimed. 42. Disbursements from the Credit will be made based on Interim Unaudited Financial Reports (IUFRs) to be submitted to the WB on a quarterly basis. A Designated Account (DA) will be opened at the Central Bank of Sri Lanka and will be operated by the PCU of MIHAPCLG. The initial advance into the Designated Account will be equal to the projections made by the PCU for the first two quarters. The EU funds would also follow the similar processes and procedures applicable for World Bank funds. D. Procurement 43. A procurement assessment of the PCU was undertaken. The PCU has hired a Procurement Specialist who has previous experience on the NELSIP project. A Project Procurement Strategy for Development was also prepared. The Strategy identifies key contracts and proposes strategies and where necessary mitigations for high risk procurements. It draws on experience with smaller sub projects under NELSIP to devise a simplified manual for implementation of procurement under the Performance Grants. A Procurement Plan has been prepared for the first 18 months of implementation of the project. Procurement under the project will be carried out under the World Bank’s Procurement Regulations for Investment Project Financing (IPF) Borrowers of July 2016 revised November 2017. The PCU the MIHAPCLG will be responsible for most of the procurements, while some procurements, consisting mainly of Consulting Services, will be carried out at CLG level. There is adequate experience of carrying out procurement at this level, under the GoSL Procurement Guidelines which are well understood. The POM includes procurement information that is adequate to guide the procurement at this level and a similar document was used for NELSIP. E. Social (including Safeguards) 44. Social Safeguards. The project is expected to have significant social benefits at the community level with its focus on strengthening the responsiveness of local governance systems to community demands and needs, improvements in local services delivery, and support to community-based economic infrastructure. As sub-projects funded under BTs, PTs and Economic infrastructure under Component 2 could include small-scale community infrastructure and other schemes that may require land acquisition, albeit expected to be minimum, the World Bank’s safeguard policy, OP 4.12 on Involuntary Resettlement has been triggered. Any land acquisition costs will be financed by GOSL. Accordingly, an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) have been prepared to identify and assess potential impacts and prepare and implement appropriate mitigation measures. These will guide the preparation of site-specific Social Impact Mitigation Plans (SIMP), Abbreviated Resettlement Action Plans (ARAP), or Resettlement Action Plans (RAP), depending on the nature and scope of impacts. In addition to addressing project-specific risks and impacts, the ESMF and Page 20 of 58 The World Bank Local Development Support Project (P163305) the RPF also seek to strengthen the overall capacity of local governance systems to manage social risks and impacts. 45. The ESMF and the RPF were cleared by the World Bank and disclosed in-country and on World Bank’s external website on March 7, 2018, re-disclosed on MIHAPCLG website (http://www.lgpc.gov.lk), and on the World Bank’s external website on September 13, 2018. Translation of the executive summary of the ESMF and RPF to Sinhalese and Tamil languages were completed and hard copies have been disseminated to the provinces and consultations held. Gender 46. Gender Gap Identified: A key gender gap identified is limited voice and representation of women, compared to men, in elected posts and citizen engagement forums. Lack of voice and agency for women has been identified as a key issue in the Sri Lanka WB Country Gender Action Brief (2017) and the recently completed Sri Lanka Gender Portfolio Review (2018). Women represent 52% of Sri Lanka’s population, yet they account for less than 6.5% of parliamentary seats, 6% of seats in provincial councils, and 2% of seats in local government bodies. Recent local elections increased women’s representation at the Local Government Council level from 2% to 29%, as there was a minimum requirement to have 25% women on the Councils. Barriers to women’s election and effective participation in political bodies have included lack of funding, limited skills and experience in public office, gender norms and values that restrict women’s public roles and emphasize women’s care-giving roles. After concerted efforts for gender inclusion under NELSIP and through government interventions, was it possible to ensure women took up at least 30 percent of decision-making roles, made up 50 percent of participants at village assemblies; and 31 percent of the Social Audits Committees. This project plans to build further on such gains to address this gap. 47. Activities proposed to address gender gap: (i) elected women ward councilors (a total of 560 in the 4 provinces) will be provided with leadership training and mentoring to give them greater voice; (ii) at least 30% of LAPDP consultation meetings at the ward level have to be chaired by elected women ward members; (iii) LAPDP consultations at the Ward level will require participation by Women’s Community Based Organizations; (iv) 30% of the SACs are to be led by women; (v) gender-sensitization training to LGA officials will be provided; and (vi) at least 30% of the BTs should be directed towards financing sub- projects or schemes prioritized by women’s groups. 48. Monitoring and evaluation of gender-focused activities: The impact of these activities in narrowing the gap in women’s participation in local government processes, and particularly in leadership roles, will be measured using the following indicators: i) 30% of all social audit committees are led by women; ii) Number of elected women ward representatives trained under the project; iii) 30% of ward level consultation meetings on the LAPDP Chaired by Women Ward Councilors. Many of the results framework indicators are gender disaggregated to assess whether women are benefitting equally from the services and infrastructure provided by LGAs and PCs, and whether they are satisfied with the services. 49. The corporate requirements for gender tagging have been met by identifying a relevant gender gap, designing activities to address this gap and including indicators to measure progress in reducing the gap. Page 21 of 58 The World Bank Local Development Support Project (P163305) Citizen Engagement 50. The project includes a variety of measures to support mainstreaming of community-level citizen engagement and social accountability. The preparation of LAPDPs is intended to facilitate greater community engagement in local planning. It also provides an instrument to hold local governments, newly elected ward councilors and provincial authorities to account. Specific interventions planned to mainstream citizen engagement include the use of social audit committees to assess work that has been completed, and citizen feedback surveys to monitor the performance of LGAs. The Grievance Redressal Mechanism (GRM) system established under NELSIP will be enhanced and strengthened using MIS and mobile technology. An APP using mobile technology will give access to citizens whereby they can track progress of LAPDP implementation, responses to their grievances, view results of feedback surveys etc. Progress will be monitored using indicators listed in the Results Framework. F. Environment (including Safeguards) 51. The project will finance physical interventions associated with improvements to existing LGA owned infrastructure and new infrastructure that will support LGA service delivery. The implementation of the project is not likely to have large-scale, significant or other irreversible impacts if proper screening and assessments are undertaken and mitigation measures are put in place. The following environmental safeguard policies are triggered: Environmental Assessment OP/BP 4.01; Natural Habitats OP/BP 4.04; and Physical Cultural Resources OP/BP 4.11. Given the exact locations and types of works financed by the project will only be known during the project implementation, the environmental impacts will be managed and mitigated following the guidelines set out under the ESMF and site-specific environmental assessments (EAs) and environmental management plans (EMPs). The implementation of the EAs/EMPs will be the responsibility of the contractors selected. The supervisory consultants and PCU Environmental Specialist will ensure compliance through continuous monitoring and will take appropriate and timely remedial actions to address any shortcomings. They will be responsible for reporting on the progress of implementing EMPs and any other safeguards requirements. G. Other Safeguard Policies (if applicable) 52. No other safeguard policies are triggered. H. World Bank Grievance Redress 53. Communities and individuals who believe that they are adversely affected by a WB supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. . Page 22 of 58 The World Bank Local Development Support Project (P163305) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Sri Lanka Local Development Support Project Project Development Objectives(s) To strengthen local government authorities' capabilities to deliver services to communities in a responsive and accountable manner, and to support economic infrastructure development in participating provinces. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Strengthened local government capabilities Number of basic transfers disbursed on a timely basis to eligible LGAs (measured 0.00 2.00 4.00 5.00 by Province) (Number) Share of LGAs that increase their overall performance scores in deliverying 0.00 15.00 25.00 35.00 improved services (Percentage) Improved LGA responsiveness and accountability Percentage of LGAs implementing participatory planning processes at the 0.00 25.00 40.00 67.00 ward and LGA levels (Percentage) Percentage of planned LGA spending aligned with community needs and 0.00 25.00 33.00 50.00 priorities as indicated in the Local Page 23 of 58 The World Bank Local Development Support Project (P163305) RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Authority Participatory Development Plans (LAPDPs) (Percentage) Improved services Number of economic infrastructure sub- projects benefiting multiple LGAs which 0.00 2.00 3.00 4.00 meet selection criteria (Number) Number of beneficiaries benefiting from 0.00 600,000.00 800,000.00 1,000,000.00 project investments (Number) Number of female beneficiaries benefiting from project investments 0.00 250,000.00 300,000.00 500,000.00 (Number) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Strengthening local government planning systems Number of LAPDPs updated at least twice during project implementation, with 0.00 20.00 40.00 77.00 consultations at the village and ward level (Number) Number of elected ward representatives trained under the project (measured by 0.00 500.00 1,100.00 1,500.00 Province) (Number) Number of elected women ward representatives trained under the 0.00 100.00 250.00 560.00 project (Number) Page 24 of 58 The World Bank Local Development Support Project (P163305) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Percentage increase of ward-level consultation meetings on the LAPDP, 0.00 10.00 20.00 30.00 which are chaired by women ward councilors (Percentage) Number of LGAs that implement new citizen engagement and social 0.00 25.00 40.00 80.00 accountability tools (Number) Regularization of Social Audit Committees, with at least 30% women as No No No Yes chairpersons, to ensure community engagement with LGAs (Yes/No) Improving local services Percentage of respondents satisfied with LGA sub-projects (measured by Province) 0.00 25.00 40.00 50.00 (Percentage) Percentage of female respondents satisfied with LGA sub-projects 0.00 15.00 25.00 50.00 (Percentage) Number of beneficiaries benefitting from economic infrastructure sub-projects 0.00 20,000.00 60,000.00 150,000.00 disaggregated by gender (Number) Percentage of female beneficiaries benefitting from economic 0.00 10.00 20.00 30.00 infrstructure sub-projects (Percentage) Institutional development Establishment of a citizen centric geo- referenced smart M&E system in No Yes Yes Yes MPCLGS and LGAs (Yes/No) Performance Transfer system established No Yes Yes Yes and operationalized (Yes/No) Page 25 of 58 The World Bank Local Development Support Project (P163305) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Number of LGAs preparing annual financial statements within three months 101.00 110.00 120.00 134.00 after close of the financial year (Number) Project management Share of grievances received by the PCU in MPCLGS and the PIUs in the participating provinces that are 0.00 25.00 50.00 75.00 addressed within a quarter (Percentage) Number of Project Progress Reports submittted on time by the PCU (Number) 0.00 2.00 4.00 8.00 IO Table SPACE UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection This indicator measures the number of BTs disbursed on a timely basis to eligible Surveys, aide LGAs out of 8 total semi- memoires, The indicator Number of basic transfers disbursed on a annual tranches during the Annual semi-annual Methodology is further CLGs, PCU, MIHAPCLG timely basis to eligible LGAs (measured by life of the project. The progress elaborated in POM. Province) deadline ahead of the reports tranche release will determine the "timely basis" criteria. The BT access criteria is outlined in the Page 26 of 58 The World Bank Local Development Support Project (P163305) PAD and POM. Indicator measures the To be assessed by the Surveys, share of LGAs that increase progress Share of LGAs that increase their overall semi-annual LGAs, CLGs, PCU, their overall performance Annual reports. Methodology performance scores in deliverying progress MIHAPCLG scores of improved service will be further improved services reports delivery and fulfill eligibility elaborated in the POM. criteria for PTs. Indicator measures the percentage of LGAs who implement a participatory Annual Methodology is planning process and performance outlined in the successfully adopt 4 of the 5 audits, semi- POM. Meeting minutes Percentage of LGAs implementing measures: communicate annual LGAs, CLGs, PCU, Annual are mandatory, participatory planning processes at the ward-level public planning progress MIHAPCLG attendance records, ward and LGA levels meeting announcements, reports, and dissemination of invite women-led CBOs, meeting information. record attendance, record minutes. meeting minutes, and disseminate meeting decisions. Methodology is further elaborated in POM. Indicator measures the Percentage of planned LGA spending Beneficiary Satisfaction percentage of LGA-funded aligned with community needs and Progress surveys of LGAs that projects that were identified Annual MIHAPCLG, CLG, LGA priorities as indicated in the Local reports, MIS directly benefited through the LAPDP and Authority Participatory Development under the project will prioritized by community Plans (LAPDPs) further support this needs. indicator. Number of economic infrastructure sub- The number of LGAs Annual MIS, semi- Selection criteria and LGAs, CLGs, PCU projects benefiting multiple LGAs which benefiting from the project's annual and methodology is Page 27 of 58 The World Bank Local Development Support Project (P163305) meet selection criteria larger economic annual detailed in the POM. infrastructure sub-projects. progress Economic infrastructure reports implemented under the project will report on number of total beneficiaries and female beneficiaries captured in the MIS and georeferenced. Surveys A catchment area will This indicator measures the (including be agreed and number of project mobile georeferenced for each LGAs, CLGs, PCU, Number of beneficiaries benefiting from Annual beneficiaries in the sub- surveys), sub-project to MIHAPCLG project investments project pre-defined semi-annual determine the direct catchment area. progress beneficiaries. reports Same as Same as Same as parent Same as parent Number of female beneficiaries parent parent Same as parent indicator indicator indicator benefiting from project investments indicator indicator ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection This indicator measures the Annual Performance Number of LAPDPs updated at least twice number of LAPDPs updated Progress audits, LGAs, CLGs, PCU, during project implementation, with under the project in a Reports in annual MIHAPCLG consultations at the village and ward level participatory manner at Years 1 and progress least two times during the 4 3 reports Page 28 of 58 The World Bank Local Development Support Project (P163305) year implementation period. Indicator measures the Performance number of elected ward Project Reports, audits, Number of elected ward representatives representatives trained minutes of LGAs, CLGs, PCU, Annual annual trained under the project (measured by under LDSP. A total of 2828 consultations, Aide MIHAPCLG progress Province) ward councilors are in the Memoire. reports LDSP project area of which 560 are women. The target is to ensure that as many of the newly elected women ward Number of elected women ward councilors as possible are representatives trained under the provided training under the project project, and thus ensure that the gap between men and women in leadership roles is gradually reduced. Counting the number of Indicator will measure the elected female ward incremental increase in the Progress councilors who chair Percentage increase of ward-level percentage of elected reports, stakeholder MIHAPCLG, CLGs and consultation meetings on the LAPDP, women ward councilors Annual minutes on consultations against LGAs which are chaired by women ward who chair the consultation consultations the total number of councilors process and the increased . ward level leadership role of women in consultations the local planning process. organized. Indicator measures the Performance Counting number of Number of LGAs that implement new LGAs, CLGs, PCU, number of LGAs that Annual audits, citizen engagement and citizen engagement and social MIHAPCLG implement citizen annual social accountability accountability tools engagement and social progress tools successfully Page 29 of 58 The World Bank Local Development Support Project (P163305) accountability tools. The reports, MIS implemented. tools include information campaigns, Social Audit Committees, geotagging, and public consultations. Annual and Indicator measures the semi-annual Regularization of Social Audit institutionalization of SACs, progress Committees, with at least 30% women as Annual PCU, MIHAPCLG, that are currently voluntary reports, sub- chairpersons, to ensure community committees and introduced project engagement with LGAs under NELSIP. reports Indicator measures the Percentage of total Annual responsiveness of the LGAs respondents progress LGAs, CLGs, PCU, Percentage of respondents satisfied with to communities as reflected Annual responding positively to reports, MIHAPCLG LGA sub-projects (measured by Province) by the percentage of LA service delivery and phone survey residents satisfied with LGA- performance. implemented sub-projects. Same as Same as Same as parent Percentage of female respondents parent parent Same as parent indicator Same as parent indicator indicator satisfied with LGA sub-projects indicator indicator MIS, semi- Indicator measures number annual and Number of beneficiaries benefitting from of beneficiaries of the Annual annual LGAs, CLGs, PCU economic infrastructure sub-projects economic infrastructure progress disaggregated by gender sub-projects. reports Same as Percentage of female beneficiaries Same as parent Same as parent indicator benefitting from economic Same as parent indicator parent indicator infrstructure sub-projects indicator Page 30 of 58 The World Bank Local Development Support Project (P163305) Indicator monitors the Progress Establishment of a citizen centric geo- development of a citizen Annual reports, audit MIHAPCLG referenced smart M&E system in MPCLGS centric geo-referenced M&E reports and LGAs system. Progress Indicator measures whether reports, Performance Transfer system established the PT system is Annual MIHAPCLG performance and operationalized operationalized under the audit reports project. Progress Number of LGAs preparing annual Indicator measures LGAs reports, Annual MIHAPCLG and CLG PIU financial statements within three months transparency and performance after close of the financial year institutional capacity. audits Indicator measures the Share of grievances received by the PCU annual percentage of grievances semi in MPCLGS and the PIUs in the progress MIHAPCLG, CLG PIU, LGA received by the PCU and annual participating provinces that are addressed reports, MIS PIUs that are addressed within a quarter within a quarter. Indicator measures PCU project management aide performance and timely semi memoires, Number of Project Progress Reports submission of project MIHAPCLG, WB annual mid-term submittted on time by the PCU progress reports semi- review annually prior to disbursement of each BT tranche. ME IO Table SPACE Page 31 of 58 The World Bank Local Development Support Project (P163305) ANNEX 1: DETAILED PROJECT DESCRIPTION COUNTRY: Sri Lanka Local Development Support Project 1. Addressing poverty in Sri Lanka. While significant progress has been made in reducing poverty in Sri Lanka, several pockets of high poverty remain. Many of these pockets are in the Northern and Eastern Provinces, which were affected by a protracted sub-national conflict over three decades, and in Uva and North-Central Provinces. While not the sole driver of poverty in these areas, the socio-economic standings of many poor households can be linked to the legacy of the conflict. At the same time, inaccessibility of Uva province and the climatic vulnerability of North Central province, Sri Lanka’s ‘bread basket’, would make targeted investments have multiplier effects within these provinces and beyond. The proposed project seeks to address emerging challenges in the provinces by (i) integrating a bottom up and participatory planning process to empower communities and rebuild the social fabric; (ii) improving service delivery between local levels of government and to make these more sensitive to local needs, including being more responsive to social service and economic needs; and (iii) and supporting the development of economic clusters and related infrastructure that would contribute towards economic opportunities. Geographical Scope: The project will cover 134 LGAs under 12 districts in four provinces of Sri Lanka. Table 1: Project Area for the LDSP Location S/N Province District Division 1 Northern Province All 5 Districts All 34 LGAs 2 Eastern Province All 3 Districts All 45 LGAs 3 Uva Province All 2 Districts All 28 LGAs Sub-projects will be selected 4 North Central All 2 Districts All 27 LGAs through the updated LAPDPs Province 5 4 Provinces 12 Districts 134 LGAs Project Components. The proposed project is divided into five components: 2. Component 1: Strengthening Local Government Planning Systems (IDA US$1.5 million). This Component will aim to strengthen social mobilization and local planning processes: 3. Planning Process: The sub-component will build-off the participatory planning approaches undertaken in NELSIP. The project will engage the community development cadre of LGAs to extend their outreach and community mobilization by encouraging them to work directly with village level organizations (e.g. women’s rural development societies and other CBOs) to ensure participation of various groups within the community, including vulnerable groups such as women, youth, people with disabilities, the elderly. Specific incentives will be introduced through the PTs to LGAs to promote inclusion of socially and economically vulnerable community members in the participatory planning process and as beneficiaries of the services and infrastructure provided by LGAs. Page 32 of 58 The World Bank Local Development Support Project (P163305) 4. Institutional authority: The LGA Council will be responsible for approving the updated LAPDPs. Annual updates of the LAPDP will be carried out to ensure inclusion of non-planned expenditures. At least every two years, including at the start of the project, the process of updating the LAPDP will involve community consultations at the Ward Level. The plans will also be informed by inputs from and consultations with divisional secretariats, so that community identified priorities can be reconciled with sectoral plans and priorities identified by the representatives of the line ministries. Allocations of LGA funding received under Component 2 of the project, and other LGA funding sources will be done on the basis of these plans. 5. LAPDP Prioritization Process: The LAPDPs will guide the preparation of LGA budgets and thus ensure that public expenditures are broadly in line with the key priorities of the communities and localities. Given limited LGA resources, prioritization of sub-projects to be financed will be carried out in a transparent manner based on a list of criteria. Table 2: Tentative11 List of Criteria for prioritization of sub-projects to be financed by LGA Evaluation Criteria The sub-project supports achievement of GoSL service level standards Number of beneficiaries directly reached by sub-project Number of female beneficiaries directly reached by sub-project Does the investment rehabilitate or improve the productivity of an existing public asset or improve the delivery of public services by the LGA? Does the investment directly benefit: a) specific vulnerable groups of people or communities; or b) multiple settlements/villages or wards Is the implementation period < 2 years from the date of approval of the investment? Is the procurement/supervision and financing plan feasible? Is the sub-project revenue-generating for the LGA? Will the costs be partly covered by other identified sources of funds - including existing government programs and donor funds? The investment has a detailed O&M plan and funds identified in the LGA annual budget? Environment and or Social Safeguards impacts/risks are either nil/negligible and can be addressed during implementation. Is the sub-project a priority for women in the community, as indicated by women’s CBOs during community consultations? Poverty rate at GN level 6. Component 2: Improving Local Services and Economic Infrastructure (US$86.65 million (IDA USD$63.0 million, EU USD$23.65 million)). This Component will support LGAs in delivering local services in an accountable, equitable and effective manner to foster local socioeconomic development. The project has collaborated with the FC of Sri Lanka to ensure that the design of the transfers is informed by national level objectives of GoSL regarding meeting the needs of socioeconomically lagging regions and is also able to inform GoSL’s own reforms in these areas. This will be achieved through two sub-components. 11 To be updated, finalized and inserted in the Project Operations Manual Page 33 of 58 The World Bank Local Development Support Project (P163305) • Sub-Component 2.1 Improving Local Service Delivery (IDA $54.5million, EU $23.65million). The objective of this sub-component is to establish reliable and predictable flow of resources to qualifying LGAs via Provincial Governments. This will be done through two grant transfer mechanisms, namely BTs and PTs, enabling LGAs to finance priorities identified in the LAPDPs. This component will support improving delivery of services including, but not limited to, roads with drainage, stand-alone flood management drains, markets, storage facilities, water supply, irrigation canals, sanitation, rural electrification, and social and economic services/infrastructure including community halls and public parks.12 7. The following are the key principles of the transfers: • Rational: Allocation of transfers will be based on clear and objective formulas. At the provincial level, it will be determined by the Province’s capacity to generate own revenue and demand for public services, while at the LGA level, it will be based on the demand for public services and poverty. The specific variables determining the allocation of the BTs and PTs are noted below under the respective sections. • Predictable: The amounts and timing of funds will be predictable so that LGAs can link planning and budgeting with actual resource envelopes. This provides stability and enables LGAs to plan programmatically. The BTs are expected to be allocated to LGAs that meet the eligibility criteria in semi-annual tranches in March and September, while the PTs, which will start in the second year, will be allocated in September of each year along with the second tranche of the BT. • Transparent: The rules governing allocation of BTs and PTs and their use will be transparent to the LGAs and their constituents. To be eligible for BTs, LGAs must meet agreed upon criteria. The eligibility criteria for PTs will be laid out in the Grant Manual included in the POM that will be developed and field tested in the first two years of the project. The Transfers will be used for investments that are prioritized in the LAPDPs. A negative list of expenditures will be provided in the Grant Manual. Table 3: Funding for Transfers Total Envelope under Sub Comp. 2.1 $78,150,000 Basic Transfers $39,500,000 $38,650,000 Performance Transfers IDA EU $54.5mil $23.65mil 8. Basic Transfers: will build on the capital grants introduced under NELSIP but will be embedded further in the fiscal system of the country, co-mingled with other fiscal transfers and funds received by LGAs. An amount of US$39.5million will be made available for BTs. The allocation per LGA will be based on an agreed formula that addresses equalization across participating Provinces and the LGAs within these Provinces. LGAs will have to meet a set of agreed criteria (see Table 4) on a bi- annual basis to qualify for BTs under the project. 12The investments supported are anticipated to mirror those prioritized by LGAs under NELSIP, which included roads with drainage (71% of sub-project funds), stand-alone flood management drains (9%), markets (1.8%), water supply (1.7%), electricity (0.3%) and other investments including public parks as well as community halls which are used as flood/storm shelters (16.2%). Page 34 of 58 The World Bank Local Development Support Project (P163305) 9. Provincial allocation: The total envelope of BTs is $39.5 million over four years. Of this, all LGAs (134) will receive a minimum allocation of US$100,000 over four years for a total of $ 13.4 million (134 x $100,000). This is to ensure that all participating LGAs receive at least a minimum of $25,000 annually for investments. The remaining $ 26.1 million has been distributed across the four provinces based on four indicators: (i) share of area, weighted 20 % in the formula; (ii) share of population aged 65+, weighted 20%; (iii) share of the school aged population corrected for the presence of national school. Thus, the school aged population (5-19) of each province is multiplied by the share of students in provincial schools in each province (2016). This corrected share of the school aged population is weighted 40%; and (iv) relative tax capacity, which is calculated as the difference between national per capita GDP and per capita GDP for each province multiplied by the population of the province. Each of these provincial amount is then divided by the sum of these amounts to obtain a share. This is weighted 20% in the formula. The Allocations per Province based on the formula is listed in Table 5. Table 4: Basic Transfers Access Criteria Criteria for access to grants in 2019-2020 Criteria for access to grants from 2020 onwards For release of 1st Tranche For release of 1st Tranche Establishment of sub committees and their functions 1) Submission of annual progress report, accounts and board detailed of Survey of fixed assets report to the Auditor General Have sufficient/ minimum technical human resources before due date i.e. March 31st each year for all funds LAPDP informed by citizen engagement and approved by received by the LGAs LGA Council in place 2) Utilization of at least 80% of funds13 disbursed in the LAPDP preceding FY 3) Consolidation and dissemination of Social audit reports for activities completed in the preceding FY Specific for year 3 first tranche 4) Completion of a full asset registry of all fixed and movable assets in approved formats (one time) Specific for year 4 (onwards) first tranche 5) Updated LAPDP informed by citizen engagement in place (one time) For release of 2nd Tranche For release of 2nd Tranche 1) Clean annual audits of LGAs for the preceding FY without1) Clean annual audits of LGAs for preceding year without adverse opinions/ disclaimers adverse opinions/disclaimers 2) Social audit committees with minimum 50% women 2) Utilization of remaining 20% funds carried forward from the members should be formed with details of its functions, preceding FY approved by the LGA Council 3) Submission of half yearly financial and progress statement 3) Submission of half yearly financial and progress in approved format statement in approved format. 4) GRM in place and functional Table 5: Provincial shares of total allocations Basic Provinces transfers No. of LGAs Base payment 13 Funds include both funds received from other sources/programs and project funds Page 35 of 58 The World Bank Local Development Support Project (P163305) Provincial Basic transfers No. of LGAs 134 x + Base Allocation Per Pr. Alloc. %s $100,000 Payments Northern 25.22% $6,582,420 34 $3,400,000 $9,982,420 Eastern 29.94% $7,814,340 45 $4,500,000 $12,314,340 Uva 23.55% $6,146,550 28 $2,800,000 $8,946,550 North Central 21.29% $5,556,690 27 $2,700,000 $8,256,690 Total $26,100,000 134 $13,400,000 $39,500,000 10. LGA-level allocation: Each province will distribute 100% of its allocation to the LGAs in the form of a Basic Transfer. This second LGA-level allocation considers the demand for public services and poverty and enables the project to focus on spatially and socially deprived areas and groups. All LGAs will receive a minimum allocation of US$100,000, which will be topped up with funds distributed on the basis of an agreed Basic Transfer formula, which considers the following issues: • Share of LGA population in provincial population as an indicator of needs for public services, weighted 40%; • Share of LGA roads (km) as an indicator of infrastructure spending needs, weighted 30%; and • Share of poor population as an indicator of needs and of lack of capacity to pay local taxes of the province, weighted 30%. 11. Performance Transfers: Financing in the amount of IDA US$38.65million14 will be made available for PTs. The project will incentivize LGAs to ensure resources translate into institutional, service delivery, social and economic gains. LGAs will be divided into three categories based on their capacity, namely high, medium and low. Performance assessments will cover three areas of performance, namely (i) institutional (e.g. own source revenue generation etc.); (ii) service delivery (e.g. condition of local roads, minor irrigation, water supply etc.); and (iii) socioeconomic (e.g. provision of skill training to youth, social services etc.). From a longlist of fifteen objective indicators across the three performance areas, LGAs can choose a shortlist of three, six or nine indicators, based on their self-assessed capacity and shall progressively add indicators to increase their performance and graduate to the next capacity Tier. LGAs will also be assessed on their overall performance in using climate resilience measures in improving their institutional capacity and service delivery efforts which will be customized according to their assessed capacity levels. The list must be approved by the PCU and the FC. Performance assessments will be undertaken annually by independent third-party auditors. PTs will start from year two, while year one will be used to benchmark LGA capacities and performance standards, training performance auditors, LGAs and other stakeholders, and put in place performance monitoring, assessment and appeals systems that will be financed under Component 3. 12. An intended EU grant of EUR 20 million (US$23.65million) will support the project initially in of North, Eastern and Uva provinces only. The EU Commission approved the funding in November 2018. It is anticipated that the EU grant resources will be available for the project by June 30, 2019 as joint co-financing for the Performance Transfers under component 2.1. If the EU co-financing does not materialize, the project will be restructured to adjust the targets. 14 IDA US$15.0million plus EU grant EUR23.65million Page 36 of 58 The World Bank Local Development Support Project (P163305) 13. Sub-Component 2.2 Economic Cluster Support (IDA US$8.5million). This component will pilot identification and provision of infrastructure to promote local economic development. This sub- component will support MIHAPCLG and PCs to carry out assessments to first identify economic clusters, or value chains that require further investments across the geographical boundaries of several LGAs. Provincial authorities will select and invest in key infrastructure required to develop these local economic clusters. Investments under this sub-component will be selected based on three broad criteria (all three criteria must be met): (i) supports economic activity in the selected value chain; (ii) supports the economic activities of local residents and (iii) climate resilience. The type of infrastructure that will be considered will include, but not be limited to, roads with drainage, irrigation canals, markets, storage facilities, etc. Climate change resilience (reduced flooding, improved accessibility, reliable water supply, ensuring continued economic and livelihood activities, preserving perishable food item etc.) as a selection criterion in prioritizing infrastructure investments will help protect beneficiaries from climate change impacts. Only public goods will be provided under this component. 14. Analysis to identify both local growth clusters and value chains will be done in the first few months of project implementation, and based on such analysis, financial resources will be allocated for prioritized economic infrastructure. The process for the identification and selection on the economic infrastructure investments will be detailed in the POM. 15. Component 3: Institutional Development (US$3.69million) This component will finance (i) Information and awareness campaigns; (ii) institutional development and capacity building of LGAs; (iii) training of trainer’s (TOT) program for SLILG and MDTI in participatory approaches, resource and asset mapping, local and area based planning, public expenditure and financial management, etc.; (iv) development of an M&E/MIS system15 using Smart mobile technology; v) improving the training capacity and facilities of SLILG; and vi) technical assistance, training and capacity development of the MIHAPCLG, the FC and other relevant institutions. 16. Capacity building. An Institutional Assessment of 107 participating LGAs was carried in Northern, Eastern and Uva Provinces to analyze the existing capacities of LGAs to carry out mandated functions, review accountability relations and map spaces for citizen engagement. A further assessment of 27 LGAs in the North Central province (that were added later in the project preparation) will be carried out prior to effectiveness using PPA to determine the capacity Tier they belong to. Seven key domains for assessment were identified based on the role, mandate and critical capacity requirement of LGAs. Based on the analyzed primary data set of LGA capacities, the 107 LGAs were then categorized into three Tiers - Tier 1-good Capacity, Tier 2- medium capacity, and Tier 3-low capacity clusters. Table 6: Indicators used to measure the LA capacity Key Domains Sub-Indicator 1. Provision of Common Services (1) Availability of Critical Assets & Machinery; (2) Staff Strength; (3) 15The introduction of a web-based monitoring system would replace the existing manual system of book keeping and accounting, asset mapping and management, data accumulation and preparation of analytical reports required at various levels of Provincial and LA administration. Page 37 of 58 The World Bank Local Development Support Project (P163305) Good Practices in Office Management; (4) Service Coverage 2. Provision of Regulatory Services (1) Service Coverage; (2) Innovation in Service Provision 3. Provision of Social Development Services (1) Service Coverage; (2) Allocation for Social Development Services (2016); (3) Expenditure for Social Development Services (2016) 4. Administration & Financial Management (1) Human Resources; (2) Use of ICT; (3) Legal Compliance in Financial Management; (4) Innovative Practices in Financial Management 5. Revenue Management Capacity (1) Key Budget Indicators (2016 Budget); (2) Revenue Collection Efficiency in 2016; (3) Expenditure Efficiency in 2016 6. Institutional Capacity (1) Planning Capacity; (2) Procurement Capacity; (3) Social Protection Capacity; (4) Environment Management Capacity 7. Governance (1) Community Participation (Staff capacity); (2) Community Participation (Process followed); (3) Information Dissemination (Disclosure practices); (4) Grievance Redress Mechanisms (Practices); (5) Inclusive Infrastructure; (6) Partnership (Multi stakeholder engagement) Categorization of LGAs: Based on the institutional assessment scores, LGAs were categorized into three Tiers as indicated in Table 7 below. Table 7: Number of LGAs per Province per Tier East North Uva Total Tier 1 1 2 3 6 Tier 2 27 16 8 51 Tier 3 17 16 17 50 Total 45 34 28 10716 17. Strategy for Institutional Strengthening of LGAs and Ward Councilors: The project will provide customized capacity building programs for each Tier and it will consist of a combination of i) staff training, ii) on-the job training, and iii) strengthening in-house technical and governance resources and tools, in areas such financial management, budget management, procurement, M&E, legal compliance, environmental and social safeguards compliance; O&M; service improvements, business planning, asset inventory systems, revenue collection, ward planning and LAPDP processes; community consultation, grievance redressal etc. Training will be provided by SLILG and MDTIs and contracted vendors as required. 18. Finally, the project will also improve the capacity and facilities of SLILG. Currently, the content, systems, facility and delivery modalities as well as capacities of personnel of SLILG are outdated and their abilities to provide relevant capacity building services to PCs and LGAs are limited. With project support, these will be modernized. The benefits of this will extend not only to SLILG but also to all the LG officials in PCs and LGAs nationwide. Alongside capacity building to LGAs, the project will also support training to all newly elected Ward Councilors in the participating provinces, with 16Assessment of additional 27 LAs in the North Central Province will be carried out prior to Project Effectiveness and prior to PTs are released in the 2nd year of project implementation. Page 38 of 58 The World Bank Local Development Support Project (P163305) particularly attention to empowering women councilors into leadership positions. Table 8: Number of Elected Ward Councilors per Province Name of Province Total Ward Councilors Number of Women Northern Province 762 135 Eastern Province 876 164 North Central Province 586 128 Uva Province 604 133 Total 2828 560 19. Monitoring and Evaluation: The project will finance the establishment of a GIS enhanced Management Information System (MIS) and M&E Central Unit in MIHAPCLG and in each Province. To ensure sustainability MIHAPCLG and PCs will have to assign or hire at least one regular M&E government staff to manage the MIS/M&E units, while the project will finance consultants to support these units. The MIS will be synched with a Smart Android based APP that will have a user- friendly interface for tracking sub-project progress, safeguards, procurement and FM with different accessibility rights for stakeholders (MIHAPCLG/PCU, CLGs/ LGAs/ WB/ Citizens). TA support to Finance Commission (FC). The project will provide Technical Assistance to the FC to support reviews of the BTs and PTs under the project, as well as technical studies to support reforms. PCU will coordinate with the Department of Project Management and Monitoring on M&E. 20. Component 4: Project Management (US$8.23 million): This component will finance two subcomponents: (i) Project Management, and (ii) Audits. 21. Sub-Component 4.1: Project Management support will be provided via establishment of a PCU at the central level, PIUs at Provincial Levels and consultant support to existing staff in the PIUs and LGAs if deemed necessary. CLGs and LGAs will rely on existing staff to implement the project as part of their regular staff duties and mandates. Implementation support will be provided to PCU and PIUs for preparation of consolidated annual work programs and related budget requirements, fiduciary management, annual procurement plans, procurement of goods and services, semi-annual progress reports, process disbursement of project funds, review fund utilization and accountability, quality assurance of annual performance audits, oversee review meetings, supervise project staff and consultancy assignments, and other such work as solicited by MIHAPCLG from time to time. A Grievance Redress Mechanism will be put in place and operated by the PCU. The PCU will also appoint full-time Financial Management, Procurement, Environmental and Social Safeguard Specialists. 22. Sub-Component 4.2: Audits: This sub component would finance consultancy costs for (i) annual statutory audits; (ii) Internal Audits; (iii) third party procurement and safeguards audits; (iv) annual performance assessments of LGAs; and (v) training and capacity building of Supreme Audit Institution (SAI) staff for future performance audits. The firm selected for the LGA Performance Assessments shall be an accredited firm. Semi-annual financial performance assessments will be undertaken to monitor LGA performance and will be augmented by community monitoring that will enhance transparency. The project will provide financial support to enhance the capacity of the National Audit Office and internal audit units of the MIHAPCLG and PCs to carry out audits specific to the project requirements. Page 39 of 58 The World Bank Local Development Support Project (P163305) 23. Component 5: Contingent Emergency Response Component (US$0.0 million): This component will allow for rapid reallocation of project proceeds in the event of a natural or man-made disaster or crisis that has caused or is likely to imminently cause a major adverse economic and/or social impact. To trigger this component, the GoSL would need to declare an emergency, a state of a disaster or provide a statement of fact justifying the request for the activation of the use of emergency funding. To allocate funds to this component the GoSL may request the World Bank to re-allocate project funds to support response and reconstruction. Table 9: Project Cost by Component and IDA Financing (US$ million) Component Description WB fin. GoSL EU Total in 1 Strengthening Local Governance Systems US$ Community Engagement Updating/preparation and approval of LAPDP; Consultancy for Training and Capacity Building for strengthening a 1.50 0.00 0.00 1.50 participatory planning approaches of LGAs in-prioritizing subprojects under LAPDPs Sub Total of Component-1 1.50 0.00 0.00 1.50 Improving Local Service Delivery Basic Grant 39.50 0.00 0.00 39.50 Performance Grant (total) 15.00 0.00 23.65 38.65 2 - World Bank financed 15.00 0.00 0.00 15.00 - European Union (EU) financed 0.00 0.00 23.65 23.65 Enhance Economic Infrastructure Support 8.50 0.00 0.00 8.50 Sub Total of Component-2 63.00 0.00 23.65 86.65 Institutional Development Smart MIS+ M&E systems 0.50 0.00 0.00 0.50 Computerization of accounting software, training, capacity 0.50 0.00 0.00 0.50 building and rollout of the new accounting system 3 Training of TOT SLILG, MDTU, newly elected 0.39 0.00 0.00 0.39 representatives, etc. Strengthening SLILG 1.00 0.00 0.00 1.00 Technical assistance to MIHPCLG , Fin. Commission, 0.40 0.00 0.00 0.40 Strengthening of GGRCs for M&E 0.30 0.00 0.00 0.30 Information & awareness Campaign 0.60 0.00 0.00 0.60 Sub Total of Component-3 3.69 0.00 0.00 3.69 4 Project Management Project management a PCU & PIUs staff 0.00 7.00 0.00 7.00 Individual Consultants/specialists for PCU+3 PIUs 0.40 0.00 0.00 0.40 Incremental costs of PCU/PIU 0.40 0.00 0.00 0.40 Audits b Fiduciary agency for EU compliance 0.00 0.00 0.00 0.00 Annual Performance audit consultancy * 0.43 0.00 0.00 0.43 Page 40 of 58 The World Bank Local Development Support Project (P163305) Sub Total of Component-4 1.23 7.00 0.00 8.23 5 Contingent Emergency Response 0.00 0.00 0.00 0.00 Project Preparatory Advance 0.41 0.00 0.00 0.41 Front end fees 0.175 0.00 0.00 0.175 Project Operational Support by World Bank 0.00 0.00 0.00 0.00 Grand total of all Components 70.00 7.00 23.65 100.65 Page 41 of 58 The World Bank Local Development Support Project (P163305) ANNEX 2: IMPLEMENTATION ARRANGEMENTS COUNTRY: Sri Lanka Local Development Support Project IMPLEMENTATION ARRANGEMENTS Project Oversight. 24. The MIHAPCLG is the implementing entity and will have the primary responsibility for project implementation and ensuring that the project development objectives are met. The MIHAPCLG will establish a Project Coordination Unit (PCU) with the overall responsibility for project implementation. Project Implementation Units (PIUs) will be established in each PCs and will be responsible for ensuring implementation of activities under Component 1 and 2 though the respective beneficiary LGAs. 25. A National Project Steering Committee (NPSC) will be established under the project for (i) providing policy guidance and review institutional performance; (ii) inter-ministerial coordination and linkages with other line ministries to support integration of development activities at Divisional levels, to achieve the PDOs; and (iii) approve annual budgets, expenditures and audit reports of the project 26. NPSC will be chaired by the Secretary, MIHAPCLG, and members will be senior officers from other line Ministries of Finance and Mass Media, National Policies and Economic Affairs, Finance Commission (FC) and other relevant agencies. Other members shall include Chief Secretaries and CLGs from the project provinces and representatives/chairpersons of 4 participating LGAs (one each from each project Province, on rotational basis), to ensure adequate representation. The National Project Coordinator, LDSP shall be the convener of NPSC. 27. A Provincial Project Steering Committee (PPSC) will be established in each participating Province and will report to the NPSC periodically on progress achieved. It will be Chaired by the Provincial Chief Secretary. 28. Implementation arrangements for Project Components: The project is carried out at both national (through MIHAPCLG), provincial levels (through the PC) and LGAs that are beneficiaries of BTs and PTs. The PCs through the PIU will have responsibility for implementing Component 1 – Strengthen Local Government Planning Systems and will ensure that communities are consulted to prepare Ward Development Plans and LGA level LAPDPs. CDOs will support LGAs to extend their outreach within the community. Awareness raising, and training will be provided to ward councilors and the community. 29. Under Component 2 – Improving Local Services and Economic Infrastructure, BTs and/or PTs will be made available to eligible LGAs in accordance with eligibility criteria and procedures set out in the Page 42 of 58 The World Bank Local Development Support Project (P163305) sub-manual in the POM. The LGA will be responsible for carrying out activities/sub-projects supported under Component 2 according to an approved and prioritized LAPDP, with due diligence and efficiency. Component 2.2 economic infrastructure will be implemented by PCs via the PIUs. 30. Component 3 – Institutional Development. The PCU will be responsible for strengthening capacity of SLILG, Training-of-Trainers (TOT) at SLILG and MDTU and will ensure that LGAs, ward councilors, SACs and CLGs receive the capacity building and training support required. PCU will also ensure that capacity build activities or studies support the FC. Overall M&E supported by GIS and SMART mobile apps/ tools will be centrally managed by the PCU with decentralized centers established in the PCs through GGRCs. 31. Component 4 – Project Management will be implemented by the PCU to provide oversight of project implementation and ensure activities carried out under each component by the relevant agency meets the Project Development Objectives. 32. Project Management Structures. The PCU will be headed by a National Project Coordinator assigned by MIHAPCLG, reporting to the Secretary, MIHAPCLG, and will be supported by CLGs from the respective project PCs. The PCU will take the lead role in planning, coordination and monitoring of the project performance in line with the project implementation schedule, facilitate day to day decisions for implementation of various components of the project, and ensure inter-institutional coordination, both at the central and PC levels. The PCU shall ensure timely execution of annual financial and performance audits of the PCU, PIUs, and LGAs, MCs, UCs, PSs. 33. Other responsibilities include, but are not limited to, the preparation of consolidated annual work programs and related budget requirements, fiduciary management, annual procurement plans, procurement of goods and services, semi-annual progress reports, process disbursement of project funds, review fund utilization and accountability, quality assurance of annual performance audits, overseeing review meetings, supervising project staff and consultancy assignments, and other such work as solicited by MIHAPCLG from time to time. The PCU will be staffed with at least the following: (i) Project Accountant; (ii) Public finance management specialist, (iii) Procurement Specialist; (iv) Environmental Safeguard Specialist (v) a Social Safeguard Specialist; (vi) Accounts assistant; (vii) Capacity Building Specialist; (viii) Monitoring and Evaluation Specialist; (ix) IT or MIS Specialists/team of specialists; (x) Support Staff ; (xi) Local Government Grant Specialist; and other specialists as required from time to time. 34. Provincial Council: Four PIUs will be established – one in each in the four PCs (i.e. Northern, Eastern, North-Central and Uva Provinces) identified for project execution, under the administration of CLGs who will be designated as the Provincial Project Director. Each CLG will be supported by an Assistant Commissioner of Local Government (ACLG) who will coordinate with the LGAs and oversee project implementation. The PIUs will be staffed with the following: (i) Accounts Officer (ii) Procurement Officer (iii) Engineer (Civil); (iv) Environmental and Social Safeguards Officer; (v) Training & Capacity Building Officer; (vi) IT Specialists; (vii) Data entry operators; and (viii) Support Staff and other Page 43 of 58 The World Bank Local Development Support Project (P163305) officers/specialists/consultants, their titles and levels will be elaborated in the POM with endorsement of the NPSC as required, to support project implementation and supervision of LGAs and units under the LGA. 35. At the LGA level – There will be no special implementation arrangements at the LGA level, but the LGA staff and respective stakeholder agencies will implement the project in communities using resources from the project. The LGA Secretary or Commissioner shall be responsible for the project with support from staff and may at his and Council’s discretion engage specialists for implementation. Separate funds will not be allocated from Component 4 for this purpose. The Secretary is supported by the following: (i) Technical Officer (TO); (ii) CDO; (iii) Accounts Officer; and (iv) Procurement Officer, in addition to the elected wards members who are representatives of each ward, to support implementation of specific project components and sub-components under the overall direction of the CLG. 36. Ward level – the Ward Level Planning committee shall with the assistance of CDOs ensure community participation in the preparation of ward development plans. The CDO shall ensure participation of the representatives of LGA and Divisional Secretariat in these planning meetings. These will then be aggregated at the LGA level to update and inform the LAPDPs. FINANCIAL MANAGEMENT 37. The primary responsibility for FM rests with the PCU, and includes: (i) ensuring compliance with all financial covenants in the legal agreement; (ii) obtaining funds from the Bank and managing such funds in an efficient, effective and transparent manner; (iii) providing financial reports and project audit reports to the Bank; and (iv) overall management of payments and accounting functions of the project (v) managing the internal & external audit process & audit issues follow up, and any other requests relating to FM made by the Bank. 38. FM staffing. The FM unit of the PCU will be headed by a qualified and experienced Finance Manager. The Finance Manager will work for the project on a full-time basis, to ensure that FM arrangements are implemented to the satisfaction of the GoSL and the World Bank. The Finance Manager will be responsible for project budgeting, disbursement planning and forecasting, operation of the Designated Account (DA) including claiming replenishments, disbursement of project funds, making project payments, maintaining books and records for project financial transactions, submission of quarterly interim financial reports to the Bank, preparation of annual project financial statements and interacting with project internal/external auditors on audit issues and their follow up. Any additional staff may be recruited by the project as required. Other FM support staff will work under the Finance Manager to handle routine accounting and FM activities of the project. At the PC/CLG (PIU) level and the LGA level, there will be staff assigned to handle the FM requirements pertaining to the project. Such staff will work closely with the PCU to ensure that acceptable FM arrangements are maintained. 39. Budgeting. MIHAPCLG will prepare overall forecasts & the budget. All the forecasts need to be compiled by the MIHAPCLG and incorporated in the Ministry budget which is then sent to the Page 44 of 58 The World Bank Local Development Support Project (P163305) Ministry of Finance and Mass Media. PCU will prepare a detailed implementation plan in line with the detailed project budget, and clearly specify the funding requirement for each activity. The PCU can implement activities agreed under the IDA Credit by using the budgetary provision for the project under foreign funds. Separately, the participating PCs may also be required to allocate budget line & provision for the project interventions in their own PC budgets, taking into consideration the amount allocated for each PC. Accordingly, the PC level treasuries shall also establish a separate sub-budget line for receipt of funds from MIHAPCLG for onward disbursements to PIUs, and LGAs. 40. As per the World Bank and EU Framework Agreement 2016, the EU will cover taxes for the intended EU joint co-financing amounting of USD 23.65million equivalent for the Component 2 of the project. The WB FM arrangements designed under the project would apply to the EU funds as well. 41. Funds Flow and Disbursement Arrangements. For WB funds, it is proposed to open a separate dedicated DA for the project, which will be denominated in USD, at the Central Bank of Sri Lanka (CBSL) in the name of Deputy Secretary to the Treasury (DST) with a unique sub ledger number. It is agreed that for EU funds the project will have a separate DA subject to establishment of the EU Trust Fund and upon signing of the EU Grant Agreement. The two DAs will be operated and managed by the PCU. Advances from both the WB and EU will be deposited in the respective DAs and these will be solely used to finance eligible expenditure specifically related to the project. The ceiling to the advance to DAs will be variable and the advances will be made on the basis of the six-month projected expenditure. The disbursements will be report based. Quarterly Interim Unaudited Financial reports (IUFR) will be submitted to the Bank by PCU within 45 days of end of each quarter. The Bank will advance funds to the DAs in adequate amounts to meet project expenditures for a forecast of 6 months, as reflected in the quarterly IUFRs. Two Withdrawal Applications (WAs) will be prepared by the PCU and replenishments to the DAs will be based on the IUFRs approved by the Bank. The formats of IUFRs, designed in accordance with the guidelines issued by the Bank, will be agreed during negotiations and the agreed formats will be attached to the Disbursement and Financial Information Letter (DFIL). Two IUFRs will be prepared by the PCU for both WB & EU funds. PCU will be responsible for reconciling DAs and preparing WAs for re-imbursement and advance of project funds with due approvals and submitting the same to WB. Copies of DA bank statements would need to be obtained by PCU from CBSL & these would need to be attached to IUFRs & WAs. The entire disbursement process would be handled by using the WB disbursement mechanism/system for EU funds too. 42. The PCU will open a separate, dedicated, Sri Lanka Rupee (LKR) account that will be operated by the PCU to make payments for eligible project expenditures. This account will operate to track payments being made using WB/EU finances. The PCU will maintain separate books of accounts for project activities. Exchange losses arising due to transfers from DA to LKR account will not be considered as eligible expenditure and will not be absorbed by the WB loan. The project has the option of requesting a direct payment to the supplier by: (a) Central Bank using the proceeds in the DA; (b) the WB against the loan for large payments. 43. Each PC treasury and the PIUs of the respective provinces will be required to open separate project bank account to receive funds from the PCU/Provincial Treasury and manage such funds Page 45 of 58 The World Bank Local Development Support Project (P163305) appropriately. Also, separate LKR project accounts will be maintained to manage project funds at all selected LGAs. This will ensure transparency in the project fund flows and will facilitate the tracking of project expenditure during supervision. 44. WB Loan and EU Grant proceed will be used to finance eligible expenditures necessary to meet the development objectives of the project with due attention to efficiency and cost-effectiveness. If the Bank determines that the loan has been used to finance ineligible expenditures, the amounts used for such expenditures shall be refunded to the Bank by the GoSL. It is agreed that all fund transfers would be between bank accounts and that no cash transfers would take place. 45. Details of funds flow & expenditure recognition for each component. Funds flow under component 1: Implementation of activities for component 1 will be mainly at the PCU/CLG level. The PCU would transfer required funds to the PIU. PCU & PIU would be the spending & the procuring agency. PCU & PIUs would handle payments/procurements under component 1 activities & CLG would report actual use of funds to the PCU to be captured in the consolidated IUFR that the PCU has to prepare and submit to the Bank. Hence the reporting for component 1 would be based on the actual expenditure incurred at the PCU/CLG level. 46. Funds flow under sub component 2.1: the project will remit BTs/PTs to participating LGAs. The PCU will transfer required funds for the LGAs under each PC to the separate project account in the Provincial Treasuries under the designated sub-budget line. Upon receipt of request/direction of the CLG, the PC treasury will transfer funds to the bank accounts of the LGAs listed in the disbursement requests to the PC treasury by CLG. LGAs will be eligible to receive funds from the BTs/PTs, if they are assessed by the PCU along with a third-party verification/audit to have met agreed criteria. The detailed eligibility criteria, and the process of assessment & performance evaluation will be set out in the Grant Manual which will be part of the POM. Once the LGAs receive their transfers from the CLG, the funds so transferred will be recognized as advances. The LGAs will prepare and send quarterly expenditure reports showing the aggregate utilization of funds at LGA level to the PCU for the reporting purpose of the IUFR by the PCU. Any advance received by LGA for project activities that are not fully utilized by the closing date of the project will be refunded to WB However, eligibility criteria will be established for each tranche to ensure that funds are utilized and LGAs have used the funds for the purposes intended. 47. Funds flow under sub Component 2.2: The project will remit funds required for economic cluster support to CLGs. The PCU will transfer the required funds under the designated sub-budget line upon receipt of requests from CLGs, to a separate project bank account, maintained by the PIU under the CLGs. CLGs will handle payments/procurements activities under this component and will report on actual use of funds to the PCU, to be captured in the consolidated IUFR that the PCU prepares and submits to the Bank on a quarterly basis. Hence, the reporting for component 2.2 would be based on the actual expenditure incurred at the CLG level. 48. Fund flow under Component 3: Funds required for institutional development will be spent at the PCU and the CLG levels. The PCU will spend funds directly for activities they carry out themselves under this component, and transfer funds to the separate, project bank account maintained by CLGs for the activities carried out at CLG level. CLGs will report on the expenditure incurred under this Page 46 of 58 The World Bank Local Development Support Project (P163305) component to the PCU, and this will be captured in the consolidated IUFR that the PCU submits to the Bank. 49. Funds flow under Component 4: Funds under this component will be spent by PCU and CLGs and shall be based on the actual expenses incurred by each spending units. 50. The internal audit and external audit will cover a sample of transactions pertaining to all components in the project, to ensure that due process has been followed in the utilization of the funds provided to PCUs, CLGs & LGAs. 51. Accounting Policies and Procedures. The PCU will have overall responsibility for managing all project expenditures, accounting and reporting on the financial and physical progress of the project. The PCU and all other spending entities will maintain books of accounts and will comply with the government financial regulations and other applicable circulars issued from time to time pertaining to financial management of projects. Separate accounting records will be maintained for the project by PCU/PC/PIUs/LGAs, and they shall enter the data into the accounting system as and when the same is installed and rolled out by GoSL. Bank accounts will be reconciled, and trial balances and financial statements will be prepared on monthly basis to facilitate financial monitoring of the project. 52. Accounting System. An accounting system that will facilitate generation of expenditure reports by budget classification thus enabling comparison with the budget and effective monitoring of expenditure will be maintained. It is advised that a separate chart of accounts be established for the proposed project that enables separate accounting and reporting. 53. Internal Audit. In addition to the annual financial statements audit, the project will be subjected to an internal audit. It is envisaged that the internal audit of the proposed project will be carried out by the internal auditors attached to MIHAPCLG/PCs. The findings of the internal audit team will be reviewed by the Audit and Management Committee(AMC) of the MIHAPCLG. The internal auditors will assess whether the funds have been disbursed on a timely basis and used effectively and efficiently for the intended purposes. The internal audit will also examine the physical and qualitative aspects of the assets constructed or procured under the project. The PCU will share the internal audit reports with the Bank within 60 days of end of each quarter. 54. External Audit. The annual financial statements of the project will be prepared by the PCU and audited by the National Audit Office of Sri Lanka. This is the supreme audit institution of the country and ensures full transparency and provides reasonable assurance to all the stakeholders on the use of project funds. The external audit will cover project activities carried out by all agencies and all payments made from the various project accounts. The external audit will be conducted every financial year, and the final audit report will be submitted within 6 months of the end of the financial year. The PCU is responsible for the timely submission of the annual audited financial statements to the Bank. Page 47 of 58 The World Bank Local Development Support Project (P163305) 55. Audit Reports. The following audit report will be monitored in the Bank’s Audit Reports Compliance System in PRIMA. According to the Bank’s Access to Information Policy, the audit reports received by the Bank for the project will be disclosed in the Bank’s external Website for public access. Table 1: Audit Report Implementing Agency Audit Report Auditor Date PCU Project Annual Financial Statements Auditor General June 30 each year 56. Financial Covenants. The Financial covenants are: (i) Audited annual project financial statements to be submitted to the Bank no later than six months of the following fiscal year; and (ii) two consolidated project IUFRs to be submitted to the WB no later than 45 days following the end of the reporting quarter. 57. Disbursement Categories. WB will finance 100 percent of WB eligible expenditures including taxes for goods, works, non-consulting services, consulting services, training and workshops, incremental operating costs of the project, including BT and PT. The GoSL will be expected to fund the salaries and salary top ups of its civil servants who will be working for the project, in addition to the costs of certain sub-components under Component 1 and 4 as detailed in the cost table in Annex 1. 58. Project closing: The closing date of the project is December 30, 2022. All project activities need to be completed and eligible expenditure incurred on or before closing date of December 30, 2022. Hence, all goods need to be delivered, all services need to be rendered and all works need to be completed by this date. The project has a disbursement grace period of four months after closing date until April 30, 2023 to make any payments and claim re-imbursements from WB for eligible expenditures incurred on or before closing date. PROCUREMENT 59. Procurement under the Project will be carried out under the World Bank’s Procurement Regulations for Investment Project Financing (IPF) Borrowers of July 2016, revised November 2017. As per the requirement of the Procurement Guidelines and given that project does not involve high value and complex contracts, a short form of Project Procurement Strategy for Development (PPSD) has been prepared by GoSL. The PPSD describes the overall project operational context, market situations, implementing agencies capacity and possible procurement risks. The Procurement Plan will lay out the selection methods to be followed by the Borrower during project implementation in the procurement of goods, works, and non-consulting and consulting services financed by the World Bank. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 60. A procurement assessment of the procuring entity, the MIHAPCLG PCU was carried out. The PCU has hired a Procurement Specialist who has previous experience of having worked on the NELSIP project. The strategy identifies key contracts and proposes strategies and where necessary Page 48 of 58 The World Bank Local Development Support Project (P163305) mitigations for high risk procurements. It also draws on experience with smaller sub projects under NELSIP to devise a simplified manual for implementation of procurement under the P Grants. Finally, a Procurement Plan has been prepared for the implementation of the project. 61. The PCU in the MIHAPCLG will be responsible for most of the procurements, while some procurements, consisting mainly of Consulting Services, will be carried out at CLG level. There is adequate experience of carrying out procurement at this level, under the GoSL Procurement Guidelines which are well understood. The POM contains chapter on procurement, that is adequate to guide the procurement at this level and a similar document was used for NELSIP. Procurement Risk analysis 62. Procurement Risks and Procurement strategy: The main procurement risks that can be perceived at this stage were identified based on the review pf procurement system of the country and the assessment carried out. Key findings are: (i) Procurement of goods, works and consulting services has normal fiduciary risks of transparency and fairness (ii) There are gaps in developing right specifications, identifying right market, inability to influence the market in receiving appropriate pricing and delivery commitments (iii) Inadequate record keeping (iv) Absence of an operating grievance/complaint monitoring system (v) There are gaps in the dispute resolution procedures and lack of established system of public disclosure of information on procurement actions (vi) Deficiencies in planning, monitoring, evaluation and reporting (vii) Risk of collusive practices in procurement of works The table below summarizes key procurement activities, their market approaches and methods. Page 49 of 58 The World Bank Local Development Support Project (P163305) Table 2: Procurement Strategy No Contract Title, Description and Category Bank Procurement Approach/ Eval. Over Competition: Method sight Related National/ International/ Criteria Open/ Limited/ Direct/ Sole (VfM) Source/ QCBS/QBS etc. Lowest /Negotiation/ BAFO Eva.ted Cost (LEC) 1 Procurement of Consultancy Services for Base Line Prior QCBS/Open /National LEC Surveying & Impact Assessment 2 Procurement of Consultancy for establishment of MIS Prior QCBS/ Open/ ICB LEC to support day to day administration for MIHAPCLG and Local Authorities 3 Procurement of Consultancy for annual performance Prior QCBS/Open /National LEC audits 4 Procurement of Consultancy service for design & Prior QCBS/Open /National LEC supervision of SLILG Building 5 Procurement of individual consultant / Specialist for Prior National /Limited LEC PCU, PIU (North-Eastern, North Central , Uva ) 6 Procurement of individual consultants for four Prior National /Limited LEC provinces to carry out Community Mobilization, Validation, Planning, Monitoring and Ensure sustainability of Maintenance & Business Plan 7 Procurement of Computers equipment and 01 servers Prior Open / National/Single Stage LEC to fix the MIS & Computers for 40 LGA s in /North Central & Uva Province 8 Procurement of Contractor for construction of SLILG Prior NCB/Open / Single Stage Two LEC Building (Stage 1) envelop 63. Methods of procurement: The approaches, methods and the prior review thresholds that shall be used for procurement under the project appear in the procurement plan in the Bank’s STEP system. 64. Post Review by the Bank: All contracts not covered under prior review will be subject to post review during supervision missions, and/or review by consultants to be appointed by the by Bank. ENVIRONMENTAL AND SOCIAL (INCLUDING SAFEGUARDS) 65. The project will finance physical interventions associated with improvements to existing LGA owned infrastructure and new infrastructure that will support LGA service delivery. It is expected that these activities will take place on existing public lands, owned by the LGAs, but private land acquisition may also be required in some instances. Further, the activities supported under the Project are not likely to have large-scale, significant or other irreversible impacts, and any potential impacts can be managed and mitigated in a manner consistent with the Bank social and environmental safeguards policies. Therefore, the project has been classified as a Category B project for safeguards purposes. As the civil works and other types of work to improve local infrastructure may have environmental and social impacts, the following social and environmental safeguard policies are triggered: Environmental Assessment OP/BP 4.01; Natural Habitats OP/BP 4.04; Physical Cultural Resources Page 50 of 58 The World Bank Local Development Support Project (P163305) OP/BP 4.11; and Involuntary Resettlement OP/BP 4.12. Given the exact locations and types of works financed by the project will only be known during the project implementation, the environmental and social impacts will be managed and mitigated following the guidelines set out under the ESMF and the RPF and site-specific environmental assessments (EAs), environmental management plans (EMPs), and resettlement action plans (ARAPs/RAPs). Additionally, the ESMF and the RPF also seeks to strengthen the overall capacity of local governance systems to manage social risks and impacts associated with its functions in the long-run. 66. The PCU, through its Environmental Safeguards Specialist and Social Development Specialist, will take the lead role in planning, coordinating, monitoring and providing oversight of safeguards performance in line with the ESMF and the RPF prepared under the project. At the level of Provincial Council, the Environmental Officer and a Community Development Officer at the PIUs will be responsible for supporting the implementation and supervision of safeguards issues through the LGAs, while at the LGA-level, the Community Development Officer (CDO) and Technical Officer will be responsible for the day-to-day management of safeguards issues, including the screening of activities and preparation of due diligence reports. For sub-projects that require impact assessments (e.g., SIA, EIA) and preparation of safeguards management plans (e.g., A/RAPs, EMPs, etc), the responsibility would rest with the PCU. In addition, the specialists at the PCU will ensure that suitable mechanisms are mobilized to ensure the implementation and monitoring of the EMPs. During the EA/EMP, ARAP/RAP, preparation consultations will be held with key stakeholders and beneficiaries and such consultations will be documented as part of the respective EA/EMP, RAP/ARAP. The implementation of the EAs/EMPs will be the responsibility of the contractors selected. The supervisory consultants and PCU Environmental and Social Specialists will ensure compliance through continuous monitoring and will take appropriate and timely remedial actions to address any shortcomings. They will also be responsible for reporting on the progress of implementing EMPs, ARAPs/RAPs and any other safeguards requirements. 67. World Bank’s clearance of the EAs/EMPs, ARAP/RAP is a prerequisite for disbursement of funds for the civil works. The prescriptions detailed in the EMP are mandatory and would be contractually binding as it would form a part of the contract. Further, as per the National Environmental Act of Sri Lanka, administered by the Central Environmental Authority (CEA), an agreement has been reached with the PCU that all activities financed under this project that may lead to potential adverse environmental impacts that fall under the classifications as defined by the Act, would be required to undertake an EA, and a detailed Environmental Management Plan would be prepared that would be included for implementation as part of the civil works contract documents. 68. The ESMF and the RPF were cleared by the World Bank and disclosed in-country on World Bank’s external website on March 7, 2018. Following changes in project design, these instruments were revised and re-disclosed on MIHAPCLG website (http://www.lgpc.gov.lk) on September 13, 2018 and through the Bank’s external website. Translation of the executive summary of the ESMF and RPF to Sinhalese and Tamil languages were also completed and hard copies have been disseminated to the provinces. MONITORING AND EVALUATION & MANAGEMENT INFORMATION SYSTEM 69. Establishment of a GIS-enhanced, web-based Monitoring Information (MIS) system. The Page 51 of 58 The World Bank Local Development Support Project (P163305) introduction of a web-based monitoring system will replace the existing manual system of book keeping and accounting, asset mapping and management, data accumulation and preparation of analytical reports required at various levels of Provincial and LGA administration. The proposed system would serve the monitoring requirement of all the administration and project stakeholders in a single window, resulting in time-saving, since the automated analysis will ensure that customized reports are available instantly. 70. The project will finance the establishment of a GIS enhanced Management Information System (MIS) and M&E Central Unit in MIHAPCLG and its decentralized units at the Good Governance Resource Centers established under NELSIP in each District. To ensure sustainability MIHAPCLG and PCs will have to assign or hire at least one regular M&E government staff to manage the MIS/M&E units, while the project will finance consultants to support these units. The MIS will be synched with a Smart Android based APP that will have a user-friendly interface for tracking sub-project progress, safeguards, procurement and FM with different accessibility rights for stakeholders (MIHAPCLG/PCU, CLGs/ LGAs/ WB/ Citizens). Safeguards or fiduciary alerts that are identified in the APP would require detailed offline documentation that can be uploaded in the MIS manually. In addition, a tool to measure citizen engagement will be introduced in the MIS/Mobile APP. The PCU will furnish to GoSL and the Bank semi-annual progress reports based on this project management data. Page 52 of 58 The World Bank Local Development Support Project (P163305) ANNEX 3: IMPLEMENTATION SUPPORT PLAN COUNTRY: Sri Lanka Local Development Support Project Strategy and Approach for Implementation Support 71. The strategy and approach for the implementation support plan has been developed based on the risk assessment for the project. The overall risk for the project is considered Substantial, based on current political and governance realities, sector and sector policies and the technical design of the project. The strategies incorporated in the project design to mitigate risks identified are summarized below. 72. Capacity. The project supports an approach to local services delivery that will strengthen the capacity of PCs, CLGs and LGAs. BTs will be allocated with a view to equalizing the capabilities of LGAs across the four provinces. In the second year of implementation, LGAs will gain access to PTs, based upon agreed criteria and independent assessments. The project is given the risk rating of “Substantial” from a FM perspective. A substantial portion of the supervision activities will consist of: desk reviews of internal and external audit reports including verifying the adequacy of the resolution of major audit observations, reviewing quarterly financial reports, supplemented by dialogue with the project staff as needed, especially in the initial years. The supervision activities will include an FM supervision mission at least once every six months. 73. Delivery Monitoring and Sustainability. The project proposes to strengthen country systems for financing service delivery at the local level. The project will be implemented by GoSL with implementation support provided by the World Bank. The EU will be invited to join supervision missions covering review of the implementation progress of the PTs. Semi-annual implementation reviews will be carried out jointly by the Bank, EU and the GoSL. A Mid-term Review will be carried out in late 2020 to evaluate progress and make necessary adjustments. Within six months of the closing of the project, the MIHAPCLG will prepare an Implementation Completion Report (ICR) for submission to the World Bank and GoSL. Implementation Support Plan and Resource Requirements Time Focus Skills Needed Resource Estimate Partner Role Country office staff Community mobilization, LAPDP Technical (safeguards, updates, MIS/Smart app development, (community procurement, and economic cluster assessments and development, First six FM) identification of economic fiscal transfers) N/A months HQ based infrastructure investments and ensure Safeguard technical staff disbursement of FM (urban/social) visit Transfer of basic transfers Procurement three times a year 6-48 months Continued capacity building of LGAs and Technical Country office staff European Union Page 53 of 58 The World Bank Local Development Support Project (P163305) communities. (community (safeguards, Introduction of performance grant development, procurement, and system. Continuation of Basic Transfers. fiscal transfers) FM) implementation of economic Safeguard HQ based infrastructure investments FM technical staff Procurement (urban/social) visit three times a year Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments 3 trips+ 3 weeks per Urban Development (TTL) 1 staff member, 18 weeks project year 3 trips+ 3 weeks per Social Development (TTL) 1 staff member, 12 weeks project year Local Governance/Fiscal 2 trips+ 2 weeks per 1 staff member, 8weeks transfers project year 2 trips+ 2 weeks per Monitoring and Evaluation 1 staff member, 8 weeks project year Extended Term Consultant Urban Development Multiple Field Trips per 1 country office staff member hired in Colombo for EU Specialist project year grant support Partners Name Institution/Country Role Co-Financing European Commission EU Mission Sri Lanka Partner Page 54 of 58 The World Bank Local Development Support Project (P163305) ANNEX 4: ECONOMIC AND FINANCIAL ANALYSIS COUNTRY: Sri Lanka Local Development Support Project ECONOMIC ANALYSIS 74. Sri Lanka’s national level poverty head count rate was 4.1% in 2016. However, headcount poverty rates in the Northern, Eastern, Uva and North Central provinces were 7.7%, 7.3%, 6.5% and 3.3% respectively. While the Northern and Eastern have somewhat recovered from the long years of conflict, poverty remains persistent in pockets — for example, the four war-affected districts of Kilinochchi, Mullativu, Mannar and Batticaloa have some of the highest poverty rates in the country — while vulnerability is high for specific demographic and socioeconomic groups, such as female- headed households, youth, and so forth. In Uva, the breakdown of the plantation sector has led to increasing poverty and deprivation, especially for specific vulnerable groups such as Estate workers, who may have relatively low levels of monetary poverty, but is severely disadvantaged in terms of alternative welfare indicators such as access to education and healthcare, the quality of diet and the condition of housing. Monragala district in Uva is one of the poorest district in Sri Lanka, with a poverty rate of 5.8%. Meanwhile, the North Central Province, which is heavily dependent on agriculture, faces a unique set of challenges relating to dry climatic conditions and the failure of farmers to diversify crops. With the four provinces contributing to nearly 40% of the country’s poverty, strengthening local government institutions and making investments towards poverty reduction and job creation are likely to have an outsized national impact. 75. The project has several economic benefits which justify the investments in the local government sector. Tangible benefits are the investments that the LGAs will undertake in local infrastructure and services. At a broader level, the project contributes to several areas of GoSL‘s fiscal and economic reforms: (i) improving efficiency and effectiveness of public expenditures at the local level through integrated planning, (ii) strengthening a rational and predictable fiscal transfer system to LGAs that emphasizes equalization at the provincial level and strengthens poverty targeting at the LGA level, (iii) rolling out a robust performance grant system for LGAs focusing on improved public expenditure outputs and outcomes and incentivizing local revenue mobilization, and (iv) introduction of a technology-enabled MIS and M&E system that allows improved tracking of investments and more judicious allocation of O&M expenditures. 76. Economic Efficiency of Basic and Performance Transfers to LGAs : Since the spending choices of LGAs cannot be determined a priori, a framework approach will be adopted to estimate the economic efficiency of investments financed by the BTs to LGAs. The LDSP will conduct economic analysis of LGA implemented subprojects such as roads, solid waste management, drainage channels, rehabilitation of markets and investments in cluster development on a sample basis and compare the economic efficiency of LGA implemented subprojects with similar subprojects implemented by central agencies. Smaller investments (<$200,000), which form bulk of PS expenditures, will be subject to standard cost effectiveness analysis, while larger ones (>$200,000), mostly undertaken by MCs and UCs, will be sampled for cost-benefit analysis. The project will also examine if LGAs are making better allocative choices which respond to their constituent priorities by tracking citizen satisfaction with LGA services and by matching citizen preference for particular Page 55 of 58 The World Bank Local Development Support Project (P163305) investments with actual LGA expenditure patterns. Finally, the project will collect data on local revenue mobilization to examine if reforms to the IGFS and the measures to strengthen LGA capacities have led to improved own source revenues. 77. The results of the economic and financial analysis of NELSIP at completion showed positive economic returns for water supply (between 5 and 29 percent), electricity (55 percent), markets (between 9 and 36 percent), and drainage (9 percent). The weighted average return using investment amounts was 21% for public markets, 12% for water supply sub-projects, 55% for power supply sub-projects, and 9% for drainage sub-projects. At completion, the level of efficiency of individual sub-projects within selected categories was also investigated. Public markets were expected to recover the cost of O&M at a level of 1.2 to 3.5 times from rents collected from shopkeepers and stallholders. Using increase in the income of shopkeepers and stallholders as a proxy for economic benefits, the investments yield a return from 9% to 36%. For water supply and electricity subprojects, the utility fees are expected to recover the costs of O&M. Forecasts using a willingness-to-pay methodology for water supply and electricity sub-projects yielded a positive EIRR above 5%. For non-revenue generating sub-projects such as drainage, sufficient data was not available for quantifying EIRR. One drainage sub-project was investigated and yielded an EIRR of 9%. Roads accounted for almost 65 percent of all sub-projects under NELSIP. Technical designs were appropriate and cost effective, selecting the least cost solution of metallic tarring over concrete (US$ 50,800/ LKR 7.9 million vs US$ 70,100 /LKR 10.9 million per kilometer). Roads had suffered major damage during the conflict, and the rehabilitated roads reduced travel time, increased all- season accessibility, and provided connections to income-generating opportunities. Beneficiaries rated the roadworks very positively. Geo-referencing analysis confirmed the reduction in travel time compared to the shortest alternative route and calculated the number of direct beneficiaries. Based on other World Bank-funded rural road projects in Sri Lanka, the EIRR was expected to be around 20 percent. 78. NELSIP beneficiaries were surveyed on the major sectoral investments made in their communities. These included: roads, drainage, parks and playgrounds, and water supply and sanitation. The survey results indicate that beneficiaries were most content with the direct benefits of roadworks, such as reduction of travel times (89%) and accident rates (65%), and enhancement of travel comfort (97%). They were also very satisfied with the indirect benefits, including increased land value (96%), reduced vehicle maintenance (78%), access to employment and education (87%), and improved access to inputs (88%) and education (87%). Beneficiaries also rated their satisfaction of drainage works. The main benefits of this were listed as improved road conditions (97%), reduction in mosquito levels (93%), and reduction in incidence of floods (88%). Many beneficiaries were also satisfied with the construction of parks and playgrounds, indicating their improvement of social connections (90%) and improved mental health (95%). The improvement of water supply and sanitation systems was popular for its reduction of incidence of water borne diseases (89%). 79. Sustainability of sub-project investments to produce economic benefits in the future relies partly on LGAs fiscal capacity to operate and maintain assets implemented. At completion, NELSIP’s fiscal impact on local government was assessed for three participating LGAs. It showed that the project had an overall positive fiscal impact after covering the O&M costs of sub-projects. The LGAs had implemented revenue generation sub-projects such as markets. The LGAs affordability of sub- Page 56 of 58 The World Bank Local Development Support Project (P163305) projects’ maintenance costs supports the sustainability of the investments made and increases the capability of providing economic benefits after project closure. 80. Improved Local Government Capacity: Elsewhere, similar projects have contributed to establishment of better local government capacity and the rates of return on realized investments have been estimated in range of 12% and 20% in Uganda and Tanzania respectively. Under the recently completed Local Governance Support Project in Bangladesh, more than 70% of male and female beneficiaries confirm that the Union Parishads (UPs) were meeting local priorities; that the sub-project selection process was fully transparent; participation of the citizens in selection and implementation of subprojects reflected the needs of the communities; and about 85% of the sub- projects — based on a survey of 200 UPs — were completed within the stipulated time without major cost overruns. The processes followed under the project encouraged sound investment planning and efficient use of block and performance grants, which were released on a transparent, timely and predictable basis. Further, the UPs were preparing and submitting their budgets in a timely fashion. The performance score of UPs nationally (based on a 12-point scale), which formed the basis of the performance grants, exceeded the targets set at appraisal. The project also targeted to increase UP own source revenues by 33% nationally over the project period. The actual target achieved was almost 69%. These improvements led to broad increases in economic, social, cultural and educational activities within the UPs and contributed to improved fiscal condition of UPs. 81. The sub-component on Economic Cluster Support will pilot identification and provision of infrastructure to promote local economic development. PCs will first identify economic clusters, or value chains, that require investments across the geographical boundaries of several LGAs for this sub-component. With relatively dispersed populations in Uva and North Central Provinces, large- scale durable infrastructure is likely to yield low economic returns. Instead, the mainstay of connectivity policies should be to enhance labor mobility. And in Northern and Eastern provinces, with domestic divisions having limited the movement of labor and exchange of products, the area’s economic potential should be grounded in improving the use and transfer of agrarian land, with complementary targeted efforts to help farmers develop market linkages. Analysis to identify both local growth clusters and value chains will be done in the first few months of project implementation, to identify possible infrastructure investments to be supported under this sub- component. 82. Continued World Bank support is critical to ensuring the gains of NELSIP are embedded within government systems and processes. Systemic reforms to the local government system, building on NELSIP foundation and based on good practices in other countries, will ensure more efficient fiscal systems, more transparent fiduciary systems, improved returns to investments and greater sustainability of public expenditures. In particular, Bank’s support will be vital in the following areas: (i) establishing a performance transfer system for LGAs, which will incentivize them to improve outcomes on investments and enhance own source revenues; (ii) reforming the equalization system with focus on targeting the most vulnerable populations; and (iii) strengthening public accounts and fiduciary practices through capacity building of subnational public financial management systems. Page 57 of 58 The World Bank Local Development Support Project (P163305) ANNEX 5: Map COUNTRY: Sri Lanka Local Development Support Project Page 58 of 58